01 November 1954
Supreme Court


Case number: Appeal (civil) 194 of 1952






DATE OF JUDGMENT: 01/11/1954


CITATION:  1955 AIR   58            1955 SCR  (1) 829  CITATOR INFO :  F          1958 SC 560  (10)  R          1959 SC 459  (13)  R          1959 SC 582  (7)  RF         1960 SC 424  (11)  R          1960 SC 751  (4)  R          1960 SC1073  (10)  RF         1961 SC 652  (10)  R          1962 SC1563  (10)  R          1963 SC1241  (68)  RF         1964 SC 572  (8)  R          1965 SC1375  (9,22,24,25,27,35,36)  RF         1965 SC1387  (12)  MV         1966 SC1089  (55)  R          1967 SC1373  (40)  E          1968 SC1286  (6)  R          1971 SC 792  (4)  R          1972 SC 425  (30)  D          1978 SC 449  (26,41,42)  F          1978 SC 771  (58)  R          1981 SC 907  (10,13)  R          1984 SC 981  (8)  RF         1986 SC1272  (79)  RF         1990 SC 781  (13)  E          1990 SC1637  (16-A,38)  E          1990 SC1664  (6)

ACT: Indian  Income-tax  Act (XI of 1922) s.  12-B-Government  of India Act, 1935 (26 Geo. 5 CH. 2) Seventh Schedule, List  I, Item 54-Tax on capital gains, if ultra vires--Capital gains, if  income  -Legislative practice-Interpretation  of  words- Words used in Constitution Act.

HEADNOTE: Section 12-B of the Indian Income-tax Act, 1922 (inserted by Act  XXII of 1947) which imposed tax on ’Capital  gains’  is not ultra vires the Government of India Act, 1935.  The term ’Capital 106 830



gains’  comes well within the meaning of the  word  ’income’ used in item No. 54 of List I of the Seventh Schedule to the Government of India Act, 1935. It  is incorrect to say that income cannot signify  ’Capital gains’ and it is equally an incorrect approach to hold  that there  is  a legislative practice which recognises  a  clear line  of  demarcation between income and capital.   What  is relied on here as a legislative practice is nothing but  the judicial  interpretation given to the word ’income’ as  used in the income-tax and fiscal statutes.  Such  interpretation does  not necessarily cut down the ordinary natural  meaning of the word ’income’ as used in item No. 54 of List I of the Seventh Schedule to the Government of India Act, 1935. Cardinal rule of interpretation is that the words should  be read in their ordinary natural and grammatical meaning.  But the   words   in  a  constitutional   enactment   conferring legislative   powers  should  however  be   construed   most liberally and in their widest amplitude, Commissioner  of Income-tax v. Shaw Wallace & Co.  (L.R.  59 I.A.  206); Ryall v. Hoare and Ryall v. Honeywill  (1923)  8 T.C. 521; Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 T.C. 159; Wallace Brothers & Co. Ltd.  v. Commissioner of Income-tax [L.R. 75 I.A. 86: (1948) F.C.R. 1 :  16  I.T.R  2401 ; Croft v. Dunphy  L.R.  1933  A.C.  156; Kamakshya  Narain Singh v. Commissioner of Income-tax  [L.R. 70  I.A.  180:  (1943) 11 I.T.R. 513] ; In  re  The  Central Provinces  and Berar Act No. -XIV of 1938 (1939) F.C.R.  18; United Provinces v. Atiqa Begum (1940) F.C.R. 110; State  of Bombay  and  Another v. F. N. Balsara (1951) S.C.R.   682  ; Eisner v. Macomber (252 U.S. 189 : 64 L. Ed. 521) Merchant’s Loan & Trust Co. v. Smietanka (255 U.S. 509: 65 L. Ed.  751) ;  United States v. Stewart (311 U.S. 60: 85 L. Ed. 40)  and Resch  v. Federal Commissioner of Taxation (66 C.L.R.  198), referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 194 of 1952. Appeal  from  the Judgment and Order, dated the 7th  day  of September,  1951, of the High Court of Judicature at  Bombay in Income-tax Reference No. 46 of 1950. S.Mitra  (R.  J. Kolah and 1. N. Shroff, with him)  for  the appellant. M.C.  Setalvad,  Attorney-General for India (G.   N.  Joshi, with him) for the respondent. 1954.   November 1. The Judgment of the Court was  delivered by DAS J. 831 DAS   J.-This  appeal  is  directed  against  the   judgment pronounced on the 7th September, 1951, by the High Court  of Judicature at Bombay on a reference made at the instance  of the  appellant under section 66(1) of the Indian  Income-tax Act,  1922.  By an, assessment order dated the  31st  March, 1948, the appellant was assessed by the Income-tax  Officer, Bombay, for the assessment year 1947-1948 on a total  income of   Rs.   19,66,782  including  a  sum  of   Rs.   9,38,011 representing  capital  gains assessed in the  hands  of  the appellant under section 12-B of the Act.  The said amount of capital  gains was earned by the appellant in the  following circumstances.   The  assessee had a half share  in  certain immovable  properties situate in Bombay which were  sold  by the assessee and his coowners during the relevant accounting year  which  was  the  calendar  year  ending  on  the  31st December,  1946,  to  a private  limited  company  known  as



Mafatlal  Gagalbhai & Company Ltd.  The profits on the  sale of  the  said properties amounted to Rs. 18,76,023  and  the appellants  half  share  therein  came to  the  sum  of  Rs. 9,38,011 which was included in the assessment under  section 12-B. In  April, 1948, the appellant appealed from the said  order to  the  Appellate Assistant  Commissioner  contending  that section  12-B  of  the Act authorising the levy  of  tax  on capital gains was ultra vires the Central Legislature.   The Appellate Assistant Commissioner by his order dated the  5th April, 1949, dismissed the appeal.  A further appeal to  the Income-tax  Appellate  Tribunal was dismissed by  its  order dated the 30th June 1950. Being  aggrieved by the order of the Appellate Tribunal  the appellant  applied to it under section 66(1) of the Act  for raising  certain questions of law.  The  Appellate  Tribunal agreeing that certain questions of law did arise out of  its order drew up a statement of the case which was agreed to by the  parties  and referred to the High Court  the  following questions:- (1)  Whether  the  imposition  of a tax  under  the  head  " capital gains " by the Central Legislature was ultra vires 832 (2)  Whether  the imposition was in any way invalid  on  the ground  that it was done by amending the  Indian  Income-tax Act ? After  hearing the reference the High Court  following  ,its judgment  in Income-tax Reference No. 18 of 1950, Sir J.  N. Duggan  and  Lady  Jeena J. Duggan v.  The  Commissioner  of Income-tax, Bombay City, answered the first question in  the negative and expressed the opinion that it was not necessary to  answer the second question.  In that reference  the  two learned  Judges gave the same answer to the  first  question but on different grounds as elaborated in their respective judgments. The  principal question that was discussed before  the  High Court,  as  before  us,  was  whether  section  12-B   which authorised  the  imposition of a tax on  capital  gains  was invalid being ultra vires the Central Legislature.   Section 12-B  was inserted in the Act by the Indian  Income-tax  and Excess  Profits  Tax (Amendment) Act, 1947  (XXII  of  1947) which  was  a  Central  Act.   Under  section  100  of   the Government of India Act, 1935, the Central Legislature  was, empowered to make laws with respect to matters enumerated in List  I  in  the Seventh Schedule to  that  Act.   The  only entries  in  List  I on which reliance could  be  placed  to uphold the impugned Act were entries 54 and 55 which were as follows: " 54.  Taxes on income other than agricultural income. 55.  Taxes on the capital value of the  assets,exclusive  of agricultural  land, of individuals and companies, and  taxes on the capital of companies." Chagla  C.  J. held that the enactment of Act XXII  of  1947 which inserted section 12-B was well within the scope of the legislative  powers  of the Central Legislature as  it  fell within  entry 55 and was valid either as a whole or, in  any case,  to  the  extent that it applied  to  individuals  and companies.   Although  it was unnecessary  for  the  learned Chief  Justice to decide whether the Act could be  supported as a valid piece of legislation falling within the scope  of entry  54 yet in deference to the arguments advanced  before the Court 833 the  learned Chief Justice expressed the view that it  could not be so supported.  Tendolkar J., on the other hand,  held



that  Act  XXII of 1947 was wholly intra vires  the  Central Legislature  as it fell within entry 54 and in this view  of the  matter  he  did not consider it  necessary  to  discuss whether the legislation was covered by entry 55 in List I of the  Seventh  Schedule.  In our opinion the  view  taken  by Tendolkar  J. with respect to entry 54 is correct and  well- founded. In  the course of a lucid argument advanced with  his  usual ability  and skill Mr. Kolah submitted that entry  54  which deals  with  "taxes on income" does not embrace  within  its scope  tax  on capital gains.  "Income", according  to  him, does  not  signify  capital gains either  according  to  its natural  import  or common usage or  according  to  judicial interpretation  of relevant legislation both in England  and in  India.  He submitted that the learned Chief Justice  was entirely  right in the view that there was a clear  line  of demarcation that had always been observed by English lawyers and  English  jurists between income and capital,  that  the English  legislative  practice had  always  recognised  this difference  and  that  as the word had  come  to  acquire  a certain meaning and a certain -connotation by reason of such legislative  practice  in England,  the  British  Parliament which  enacted  the Government of India Act, 1935,  must  be regarded as having understood and used that word " income  " in entry 54 in that sense.  Our attention has not,  however, been drawn to any enactment other than fiscal statutes  like the  Finance  Act  and the Income-tax  Act  where  the  word "income" has been used and, therefore, it is not possible to say  that  the  critical word had  acquired  any  particular meaning  by reason of any legislative  practice.   Reference has  been made to several cases where the word "income"  has been construed by the Court.  What is, therefore,  described as   legislative   practice   is   nothing   but    judicial interpretations  of the word " income " as appearing in  the fiscal  statutes  mentioned above.  A perusal of  the  those cases,  however,  will reveal at once that  those  decisions were concerned with ascertaining the meaning of that word in the context of the Income-tax 834 legislation.  Thus the observation of their Lordships of the Privy Council in Commissioner of Income- tax v. Shaw Wallace & Co.(1), laid down the connotation of the word "income"  as used  "in this Act." The passage in the judgment of  Rowlatt J.  in Ryall v. Hoare and Ryall v. Honeywill(2),  quoted  by the  learned  Chief  Justice in his  judgment  and  strongly relied on by Mr. Kolah, refers to profits or gains "as  used in these Acts." In Californian Copper Syndicate (Limited and Reduced)  v.  Harris(3), Lord Justice Clerk  refers  to  the enhanced  price realised on sale of certain things over  the cost  price  thereof as not being profits "in the  sense  of Schedule  D  of the Income Tax Act of 1842."  These  guarded observations quite clearly indicate that they relate to  the term  "income"  or "Profit" as used in the  Income-tax  Act. There  is no warrant for saying that these observations  out down  the  natural  meaning of  the  ordinary  English  word "income" in any way.  The truth of the matter is that  while Income-tax legislation adopts an inclusive definition of the word "income" the scheme of such legislation is to bring  to charge  only  such income as falls under  certain  specified heads (e.g., the 5 Schedules of the English Act of 1918  and our  section  6  read with the following  sections)  and  as arises  or accrues or is received or is deemed to  arise  or accrue  or to be received as mentioned in the statute.   The Courts  have  striven to ascertain the meaning of  the  word "income" in the context of this scheme.  There is no  reason



to  suppose that the interpretation placed by the Courts  on the  word in question was intended to be exhaustive  of  the connotation  of  the word "income"  outside  the  particular statute.   If  we  hold, as we are asked  to  do,  that  the meaning of the word "income" has become rigidly crystallized by  reason  of  the judicial  interpretation  of  that  word appearing   in   the  Income-tax  Act  then   logically   no enlargement of the scope of the Income-tax Act, by amendment or  otherwise, will be permissible in future.  A  conclusion so  extravagant and astounding can scarcely be  contemplated or (1)  (1932) L.R. 59 I.A. 206 at page 212. (2)  (1923) 8 T.C. 521 at page 525. (3)  (1904) 5 T.C. 159 at page 165. 835 countenanced.  We are satisfied that the cases relied on  by Mr.  Kolah  and referred to in the judgment of  the  learned Chief  Justice do not, as we read-them, establish the  broad proposition  that  the ordinary English  word  "income"  has acquired  a particularly restricted. meaning.  The  case  of Wallace Brothers & Co. Ltd. v. Commissioner of Income-tax(1) was not concerned with ascertaining the meaning of the  word "income" at all.  The problem there was whether the  foreign income  of an English company which was a partner in a  firm carrying  on business in Bombay and whose Indian income  was greater  than  its  foreign income could  be  treated  as  a resident within the meaning of section 4-A.  It was in  that context said in that case that in determining the scope  and meaning  of  the legislative power regard was to be  had  to what was ordinarily treated as embraced within that topic in the legislative practice of the United Kingdom.  The problem there was not to ascertain the meaning of the word  "income" so much as to ascertain the extent of the application of the Act  to  the foreign income.  That case, clearly,  does  not establish that the word "income" had acquired any special or narrow meaning.  The same remarks apply to the case of Croft v. Dunphy(1), referred to by Lord Uthwatt in delivering  the judgment  of  the  Privy Council in  Wallace  Brothers  case (supra).   In  Kamakshya  Narain Singh  v.  Commissioner  of Income-tax(,), Lord Wright observed :- "  Income,  it  is true, is a  word  difficult  and  perhaps impossible to define in any precise general formula.  It  is a word of the broadest connotation.  " After making the above observation his Lordship referred  to the  observations of Sir George Lowndes in  Commissioner  of Income-tax,  Bengal v. Shaw Wallace & Co. (supra), where  an attempt  was  made to indicate the connotation of  the  word "income" as used "in this Act." It is, therefore, clear that none  of  the authorities relied on by Mr.  Kolah  establish what  may  be called a legislative practice  indicating  the connotation of the (1)  (1948)  L.R.  75 I.A. 86; [1948] F.C.R. 1 ;  16  I.T.R. 240. (2)  L.R. [1933] A.C. 156. (3)  (1943) L.R. 70 I.A. 180; [1943] 11 I.T.R. 513. 836 term  "income", apart from the Income-tax statute.   In  our view,  it  will be wrong to interpret the word  "income"  in entry  54 in the light of any supposed  English  legislative practice as contended for by Mr. Kolah.  It ,is  interesting to note that in the English Income Tax Act of 1945 (8 and  9 Geo.  VI, C. 32, sections 37 and 38) capital gains have been included as taxable income. In should be remembered that the question before us  relates to  the  correct  interpretation of a word  appearing  in  a



Constitution  Act  which,  as has been  said,  must  not  be construed  in any narrow and pedantic sense.  Gwyer C.J.  in In  re  The  Central  Provinces and Berar  Act  No.  XIV  of 1938(1), observed at pages 36-37 that the rules which  apply to the interpretation of other statutes apply equally to the interpretation of a constitutional enactment subject to this reservation   that   their  application  is   of   necessity conditioned by the subject-matter of the enactment itself It should  be  remembered  that the problem  before  us  is  to construe  a  word appearing in entry 54 which is a  head  of legislative  power.   As pointed out by Gwyer  C.J.  in  The United  Provinces v. Atiqa Begum(2) at page 134 none of  the items  in the Lists is to be read in a narrow or  restricted sense and that each general word should be held to extend to all  ancillary  or subsidiary matters which can  fairly  and reasonably    be   said   to   be   comprehended   in    it. Itis,therefore,clear-anditisacknowledged  by  Chief  Justice Chagla-that  in  construing an entry in  a  List  conferring legislative   powers   the  widest   possible   construction according  to  their ordinary meaning must be put  upon  the words  used therein.  Reference to legislative practice  may be  admissible  for cutting down the meaning of  a  word  in order  to  reconcile  two  conflicting  provisions  in   two legislative  Lists  as was done in The C. P. and  Berar  Act case (supra), or to enlarge their ordinary meaning as in The State  of  Bombay  and Another v.  F.  N.  Balsara(3).   The cardinal  rule  of interpretation, however,  is  that  words should  be read in their ordinary, natural  and  grammatical meaning subject to this rider that in (I)  [1939] F.C.R. 18. (2)  [1940] F.C. R. 110.                   (3) [1951] S.C. R. 682. 837 construing  words in a constitutional  enactment  conferring legislative  power the most liberal construction  should  be put upon the words so that the same may have effect in their widest amplitude. What,  then,  is the ordinary. natural  and  grammati-:  cal meaning  of the word "income" ? According to the  dictionary it  means "a thing that comes in". (See  Oxford  Dictionary, Vol.   11, page 162; Stroud, Vol. 11, pages 14-16).  In  the United States of America and in Australia both of which also are   English  speaking  countries  the  word  "income"   is understood in a wide sense so as to include a capital  gain. Reference  may be made to Eisner v. Macomber(1),  Merchants’ Loan  &  Trust  Co. v. Smietanka(2), and  United  States  v. Stewart(3),  and Resch v. Federal Commissioner of  Taxation( 4).   In each of these cases very wide meaning was  ascribed to  the word "income" as its natural meaning.  The  relevant observations  of learned Judges deciding those  cases  which have  been  quoted  in the judgment of  Tendolkar  J.  quite clearly  indicate  that such wide meaning was put  upon  the word  "income"  not because of  any  particular  legislative practice either in the United States or in the  Commonwealth of  Australia  but because such was the normal  concept  and connotation  of  the  ordinary English  word  "income."  Its natural  meaning  embraces  any  profit  or  gain  which  is actually   received.   This  is  in  consonance   with   the observations  of Lord Wright to which reference has  already been  made.   Mr. Kolah concedes that the word  "income"  is understood  in the United States and Australia in  the  wide sense  contended for by the learned Attorney-General but  he maintains  that  the  law  in  England  is  different   and, therefore, entry 54 which occurs in a Parliamentary  statute should be construed according to the law of England.  We are



again  brought  back  to the same argument as  to  the  word having  acquired a restricted meaning by reason of what  has been called the legislative practice (1)  (1920) 252 U.S. 189; 64 L. Ed. 521. (2)  (1925) 255 U.S. 509 ; 65 L. Ed. 75 1 (3)  (1940) 311 U.S. 60 ; 85 L. Ed. 40. (4)  (1942) 66 C.L.R. 198. 107 838 in England an argument which we have already discarded.  The argument  founded on an assumed legislative  practice  being thus out of the way, there can be no difficulty in  applying its natural and grammatical meaning to the ordinary  English word "income." As already observed, the word should be given it widest connotation in view of the fact that it occurs  in a legislative head conferring legislative power. For reasons stated above we are of opinion that Act XXII  of 1947  which amended the Indian Income-tax Act  by  enlarging the  definition  of the term income in  section  2(6-C)  and introducing a new head of income in section 6 and  inserting the  new  section  12-B is intra vires  the  powers  of  the Central  Legislature acting under entry 54 in List I of  the Seventh  Schedule of the Government of India Act, 1935.   In this view of the matter it is unnecessary for us to consider or express any opinion as to the meaning, scope and ambit of entry 55 in that List.  The appeal is accordingly  dismissed with costs. Appeal dismissed.