1. The question referred to us in this reference under section 256(1) of the Income-tax Act, 1961, is as follows :
'Whether, on the facts and in the circumstances of the case, the levy and charge under the Industrial Tax Rules, 1927, which had the force of law in the erstwhile Holkar State of Indore amounted to income-tax or super-tax or tax on profits of business ?'
2. The facts : Hukumchand Mills Ltd., the assessee, is a company incorporated in the year 1915 under the Companies Act in force in the then Holkar State of Indore (referred to hereinafter as 'the Holkar State') as a public limited company having its registered office at Indore. The principal object of the company was the manufacture and sale of cloth. The assessee owns a textile mill at Indore. Up to the accounting period relevant to the assessment year 1949-50, the assessee was being assessed in British India as a non-resident, except in 1948-49 when it was assessed as a resident. The assessee became liable to be assessed as a resident from the assessment year 1950-51. One of the questions which arose in respect of the assessment of the assessee for the years following the assessment year 1950-51 was in respect of the determination in the assessment of the proper written down value of the buildings, machinery, etc., of the assessee for calculating the depreciation allowance under section 10(2)(vi) of the Indian Income-tax Act, 1922 (referred to hereinafter as 'the Act of 1922'). The assessee relied upon section 10(5)(b) of the Act of 1922 and contended that the original cost of the machinery, etc., should be taken into account for calculation of depreciation in the first assessment year in which the assessee was regularly assessed as a resident in India, namely, 1950-51, and depreciation should be calculated on that footing for that assessment year with appropriate adjustments in the succeeding assessment years. It was contended by the assessee that as the assessee had not been allowed any depreciation under the Act of 1922, it was the original cost of machinery, etc., which had to be taken as basis for allowing depreciation without taking into consideration the number of years during which the machinery had been working, the depreciation it had suffered or the written down value entered in the books. The Revenue contended that the said depreciation in the earlier years should be taken into account and the written down value arrived at. The Income-tax Officer concerned came to the conclusion that such depreciation as was allowed under the Industrial Tax Rules in force in the Holkar State would have to be deducted, the written down value of the machinery arrived at after such deduction and depreciation under the Act of 1922 ought to be calculated on the footing of such written down value. The assessee appealed to the Appellate Assistant Commissioner who took the view that since the Industrial Tax Rules relied upon by the Revenue did not relate to income-tax, super-tax or any other law relating to tax on profits of business and as no double taxation relief had been allowed in respect of the same, the contention of the assessee must be upheld. The Revenue appealed to the Income-tax Appellate Tribunal which dismissed the appeal and upheld the view of the Appellate Assistant Commissioner. The Tribunal has pointed out that the background relating to the enactment of the Industrial Tax Rules is that prior to May 1, 1926, a cotton excise duty was in force in the Holkar State. That duty was an indirect tax on the production of cloth by various cloth mills. There was no tax on income as such levied in that State at all. There were representations by various cloth mills that the excise duty levied as aforesaid caused considerable hardship and it was with a view to obviate such hardship that from May 1, 1926, the levy of excise duty on cotton cloth was abolished and in replacement of that levy, the Industrial Tax Rules came into force. In this regard, we find that a notification was issued on May 3, 1926, and published on May 10, 1926, setting out that the then Government of the Holkar State was pleased to order :
'(1) That cotton excise duty at 3.5% ad valorem now in force in the Holkar State be abolished from May 1, 1926.
(2) That a tax, to be called an industrial tax, may be levied on the cotton mills in the Holkar State from the same date (viz., May 1, 1926) at the following rates :
(a) On all incomes up to Rs. 50,000 - annas 1.5 (one and a half annas per rupee).
(b) On all incomes above Rs. 50,000 - annas 2.5 (two and a half annas per rupee).....'
3. The rest of the notification shows that rules and regulations for the recovery of the tax referred to in the notification were to be framed and sanctioned. On November 18/19, 1926, another Notification was issued to the effect that the Cabinet of the Holkar State in their Resolution No. 3085 dated November 17, 1926, had approved and accorded sanction to the Rules for recovery of industrial tax levied on cotton mills appended thereto. The concluding portion of the said notification runs thus :
'Under Cabinet Resolution No. 373 dated the 22nd March 1926, Holkar Government having decided to levy a tax called the 'Industrial Tax' on the cotton mills in the State, the following Rules have been framed for the levy of the tax and for the ascertainment and determination of the income of the cotton mills for the said purpose.'
4. The said Notification was published in the Gazette of November 29, 1926. By a notification dated December 6, 1927, it was notified that the Cabinet had approved of certain revised rules for recovery of industrial tax levied on cotton mills. The said Industrial Tax Rules, 1927, were framed and enforced under the aforesaid notifications. In the opening portion of the said Rules, it is stated that the said Rules have been framed for the levy of 'the tax' and for the ascertainment and determination of the income of the cotton mills for the said purpose. It was directed that these Rules would have retrospective effect from May 1, 1926. Rule 1 provides that the industrial tax shall be payable once a year on the basis of the income, profits and gains of the said period. Rule 3(1) provides that the industrial tax shall be payable by an assessee in respect of the profits or gains of any cotton mills industry carried on by him in the Holkar State. Rule 3(2) provides for allowances to be given in the computation of the profits and gains. Suffice it to say that all the allowances or deductions provided are in respect of expenses incurred in connection with the industry of cotton textile mills manufacturing cloth. Rule 6 provides that the industrial tax shall be levied on all cotton mills in the Holkar State at the rates specified therein. These rates are the same as set out in the Notification dated May 3, 1926, referred to above. Rule 8 provides for the form in which the return of income under the Rules should be submitted. The industrial tax being a tax calculated with reference to profits and gains, the form of the return does bear similarity to returns in respect of taxes on income. The only other feature of the form to be noted is that in the amounts to be added back out of the amounts debited in the books of account of an assessee is an item, namely, item No. 5, which runs as follows :
'5. Income-tax or super-tax or industrial tax.'
5. The Tribunal agreed with the conclusion of the Appellate Assistant Commissioner that the industrial tax levied in the Holkar State was a tax not on income and profits of textile mills but was a tax on textile mills calculated with reference to the income or profits of those mills. The Tribunal accepted the contention of the assessee that the depreciation given under the Industrial Tax Rules, 1927 (referred to hereinafter as 'the Industrial Tax Rules'), could not be taken into account in arriving at the value of machinery, plants, etc., for the purpose of determination of depreciation under the Act of 1922.
6. The contention of Mr. Jetly, learned counsel for the Revenue, is that if the true nature of the tax levied under the Industrial Tax Rules is taken into account, it is a tax not on a particular business or industry but it is a tax on profits or income.
7. In order to examine the correctness of this contention, it is necessary to take note of certain statutory provisions and historical background. Sub-section (2) of section 10 of the Act of 1922 provides for allowances to be made in computing the profits or gains of the profession, business or vocation of an assessee for the purposes of levy of income-tax under that Act. Clause (vi) of sub-section (2) which deals with depreciation on buildings, machinery, plant or furniture referred to in the said section, inter alia, provides for an allowance at the appropriate percentage on the written down value thereof. It is not necessary to deal with the provisions of sub-section (2) of section 10 in further detail in this connection, because it is an admitted position that if the depreciation allowed to the assessee prior to the assessment year 1950-51 under the Industrial Tax Rules was depreciation allowed under a law or rule of a Part B State relating to income-tax or super-tax or any law relating to tax on profits of business, it would have to be taken into account in arriving at the written down value, but if the depreciation was allowed under any other kind of law or rule, that depreciation was not to be taken into account. The Holkar State was one of the native Indian States in British India. In 1948, it merged in the then State of Madhya Bharat. On the coming into force of the Constitution of India, on January 26, 1950, Madhya Bharat became Madhya Pradesh and was given the status of a Part B State. Under the Finance Act of 1950, the Act of 1922 was made applicable to Part B States with effect from April 1, 1950. In view of certain difficulties arising in giving effect to the provisions of the Act of 1922 and the Payment of Taxes (Transfer of Property) Act, 1949, the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was passed. The relevant portion of para 2 of that Order runs as follows :
'In making any assessment under the Indian Income-tax Act, 1922, all depreciation actually allowed under any laws or rules of a Part B State relating to income-tax and super-tax, or any law relating to tax on profits of business, shall be taken into account in computing the aggregate depreciation allowance referred to in sub-clause (c) of the proviso to clause (vi) of sub-section (2) and the written down value under clause (b) of sub-section (5) of section 10 of the said Act.'
8. The Act referred to is the Act of 1922. There is a proviso to clause 2 of the said Order which is not material for our purposes.
9. It was the submission of Mr. Jetly that the tax imposed under the Industrial Tax Rules was really a tax on income or profits of a particular business, namely, the business of textile industry. It was urged by him that the said industrial tax was really in the nature of an income-tax or super-tax or a tax on profits of business and hence, under the provisions of clause 2 of the aforesaid Taxation Laws Order of 1950, the depreciation granted under those Rules would have to be taken into account in arriving at the written down value for the purpose of calculating depreciation under the Indian Income-tax Act of 1922. It was urged by him that the nomenclature as an industrial tax was not material and the true nature of the tax shows that it was levied on the income or profits. The circumstance that it was levied on the income or profits of a particular industry was not material.
10. We find it difficult to accept this argument. It is true that the historical background in which the tax is imposed is not decisive or of primary importance in determining the true nature of the tax. But it would certainly not be improper to keep it in mind. In this regard, it is significant that, as found by the Tribunal, there was no tax on income as such in the Holkar State. Even when the industrial tax was levied, no tax was levied on the income or profits of any other industry or business. The notifications to which we have referred earlier clearly show that the industrial tax was levied in place of the cotton cloth excise duty which was abolished because of the hardships pointed out by the traders concerned. Although the Industrial Tax Rules undoubtedly had the force of law in the Holkar State, it is significant that the legal enforceability of these Rules was the result of the notifications to which we have referred earlier. A perusal of the Notification dated May 3, 1926, shows that the order of the Government of the Ruler of the Holkar State was that a tax to be called industrial tax should be levied on cotton mills and the rates at which that levy was to be made was on the basis of income. The concluding portion of the Notification dated November 18/19, 1926, clearly shows that the decision of the Holkar Government was to levy a tax called 'the Industrial Tax' on cotton mills and the Industrial Tax Rules were framed for the levy of that tax and for ascertainment and determination of the income of cotton mills for that purpose. These two notifications read together would clearly show that the decision of the Holkar State was to levy an industrial tax on cotton mills and the said Industrial Tax Rules were framed really for the ascertainment and determination of the income of the cotton mills on which the industrial tax was to be levied for the purpose of calculation of the tax payable. It is the Notification dated December 6, 1927, which gives effect to the Industrial Tax Rules. As far as the said Rules themselves are concerned, the opening portion shows that the said Rules have been framed for the levy of the industrial tax and for ascertainment and determination of the income of cotton mills for that purpose. Rule 1 again shows that the industrial tax was payable on the basis of income, profits and gains for the period referred to therein. Sub-rule (1) of rule 3 undoubtedly talks of the industrial tax being payable by an assessee in respect of profits or gains of any cotton mills industry carried on in the Holkar State. But that by no means can be taken as a conclusive indication that the tax was on the profits or gains of cotton mills. Rule 6 clearly states that the industrial tax shall be levied on all cotton mills at the rates referred to therein, which rates are based on the income of the cotton mills concerned. Considering these Rules together, which Rules have the characteristics of charging provisions, the only fair conclusion which we can arrive at is that the tax was levied on cotton mills and the calculation of the amount of tax payable by a cotton mill was with reference to its income or profits. Mr. Jetly relied on rule 8 which prescribes the form of return of income under the Rules. It was urged by him that the form of the return shows similarity with the form prescribed in this connection under the Act of 1922. We are of the view that the form of return cannot be of much importance in determining the true nature of the tax. As we have already pointed out, although the tax was on cotton mills, the amount of tax payable was to be determined with reference to the income of the cotton mills, and hence the return prescribed was bound to have some similarities with the returns prescribed under the Act of 1922. But that would not make a difference to the true nature of the tax. Moreover, even if the form of return is to be looked at, it is significant that industrial tax has been referred to separately from income-tax and super-tax in item No. 5 of that form which relates to the amounts debited in the accounts which had to be added back for determination of income, profits or gains. This would definitely suggest that the authorities which framed the said Rules treated industrial tax as different from income-tax and super-tax. In our view, a fair analysis of the said notifications and the said Industrial Tax Rules shows that the industrial tax was not a tax on income or profits of a business but was a tax on a particular business, namely, that of the cotton mills industry. This conclusion finds support from the circumstance that a State, if it wanted to levy a tax on income, would not normally choose to levy tax only on the income of a particular type of activity, unless there was some special reason for doing so. It is also significant that in the calculation of the income for the purposes of industrial tax, no deduction or allowance is allowed in respect of losses incurred by the assessee in running the cotton mills in respect of any other business. If the idea was to tax the income of a person or an organisation running a cotton mill, one would expect that deductions would be provided in respect of business losses made by such person or organisation in other businesses which might go to reduce that income. These factors again go to show that the tax imposed was not a tax on income or profits as such but a tax on cotton mills.
11. We find some support for the conclusion which we have arrived at from the decision of a Full Bench of this court in Sir Byramjt Jeejeebhoy v. Province of Bombay : 7ITR670(Bom) . The facts in that case were that the Provincial Legislature of Bombay enacted the Bombay Finance Act, 1939, adding some sections to the Bombay Finance Act, 1932. One of these sections provided for the levy of a tax on buildings and lands called the 'Urban Immovable Property Tax' at 10 per cent. of the annual letting value of such buildings or lands. There was a proviso that the tax shall be levied and paid at the rate of 5 per cent. of the annual letting value in the City of Bombay on the buildings and lands the annual value of which did not exceed Rs. 2,000 and buildings and lands the annual letting of which did not exceed Rs. 500 were exempt from tax. The validity of that provision was challenged on the ground that the tax imposed was a tax on income and, hence, the Provincial Legislature had no legislative authority to levy the said tax. It was held that the impugned tax was a 'tax on lands and buildings' within the scope of item No. 42 of the Provincial Legislative List of the Government of India Act, 1935, and was not a 'tax on income' falling within item No. 54 or a 'tax on the capital value of assets' falling within item No. 55 of the Federal Legislative List and hence, the impugned enactment was not ultra vires the Provincial Legislature. Beaumont C.J., in the course of his judgment, has pointed out that in a statute imposing income-tax, that is, a tax on total income, the tax relating to land is none the less income-tax because it is assessed on the annual value of the land and not on the actual income. But it does no follow from that proposition that every statute which charges a tax in relation to annual value of land is charging a tax on income. Kania J. (as he then was), in the course of his concurring judgment, observed as follow (at p. 691) :
'The adoption of the annual letting value as the standard for fixing the rate may be one which is convenient and does not necessarily make the tax income-tax. Although it may not be overlooked that the same standard is adopted for income-tax purposes, it does not necessarily follow that the nature of the tax is also the same.'
12. Mr. Jetly tried to distinguish this judgment on the ground that that judgment was based on the doctrine of 'pith and substance' which, according to him, only applies in connection with the constitutional validity of statutes and in such a case, where the competence of a Legislature to enact a law is called in question, the judicial approach adopted is to give a broad interpretation to the relevant entry or entries in the relevant legislative list; and hence, according to him, the judgment is not of any assistance in the present case. He referred to the observations of Broomfield J., in his concurring judgment (p. 682), to the effect that the court had to discover what was the essential character of the tax, what it was 'in pith and substance'. We are at a loss to understand this argument. The very observation relied on by Mr. Jetly shows that what was meant by 'pith and substance' was really the essential character of the tax and what we have to determine in the present case is as to what was the true or essential character of the industrial tax, namely, whether it was a tax on a particular industry or business or whether it was a tax on income or profits. We fail to see how this judgment can be distinguished as submitted by Mr. Jetly. As we have already observed, this judgment lends some support to the view which we have taken.
13. Mr. Jetly relied on the decision of the Supreme Court in Hukumchand Mills Ltd. v. State of Madhya Pradesh : 52ITR583(SC) . In that case, the question before the Supreme Court was whether the right of appeal given to an assessee under the Indore Industrial Tax Rules, 1927, the very rules in question before us, was taken away after those rules ceased to be operative on the coming into force of the Constitution of India. The validity of the Madhya Bharat Taxes on Income (Validation) Act, 1954, was challenged before the Supreme Court. It was held in the said decision that the said Act was not ultra vires. It was further held that the right of appeal conferred under the said Rules was not taken away. In connection with this question, the Supreme Court recited the events which had led to the enactment of the Madhya Bharat Taxes on Income (Validation) Act, 1954, by Parliament and, in setting out that historical background, the Supreme Court observed, inter alia, as follows (at p. 586) :
'Then came the Constitution of India on January 26, 1950, and the State of Madhya Bharat became one of Part B States. In the Finance Act No. 25 of 1950, which came into force on April 1, 1950, and applied to Madhya Bharat also, a provision was made that any law relating to income-tax or super-tax or tax on profits of business in any Part B State shall cease to have effect except for the purpose of levy, assessment and collection of income-tax and super-tax.... The effect of this was that the Tax Rules came to be repealed from after the accounting year ending on March 31, 1949, and assessment could only be made under the Tax Rules up to the end of the accounting period ending on or before March 31, 1949.'
14. The Tax Rules referred to by the Supreme Court are the Industrial Tax Rules which we have discussed earlier. It was submitted by Mr. Jetly that this observation amounted to a decision or, in any event, an obiter dicta of the Supreme Court to the effect that the said Rules levied a tax in the nature of income-tax or super-tax or tax on profits of business and, hence, the question raised before us was concluded against the assessee. It was pointed out by him that obiter dicta of the Supreme Court is binding on us. The question, however, is whether the observations can be considered to be the ratio of the Supreme Court judgment or even obiter dicta. In our view, it can be regarded as neither. It is an admitted position that the question as to the true nature of the said Industrial Tax Rules was not in question before the Supreme Court at all. There is nothing to show that there was even a discussion as to what was the true nature of these Rules or the tax levied thereunder nor is there anything to suggest that the Supreme Court even applied its mind to that question. The observation relied on so strongly by Mr. Jetly is merely an observation in the recital of the facts which constituted the background to the enactment of the Madhya Bharat Taxes on Income (Validation) Act, 1954, and it cannot be regarded as anything but a casual observation which was never intended to have any binding effect. It appears that both the parties in that case probably proceeded on an assumption that the tax levied under the said Industrial Tax Rules was a tax relating to income or profits of business and the Supreme Court incorporated that assumption in the recital of facts, or, in any event, the Supreme Court made such an assumption in the recital of facts.
15. Before parting with the matter, we may mention that it was contended by Mr. Palkhivala that the question as to whether the tax levied under the said Industrial Tax Rules was a tax relating to income or profits of business or a tax on cotton mills is a question which relates to the interpretation of the said Industrial Tax Rules and the notifications under which those Rules were framed. It was submitted by him that the said notification and the said Rules constitute foreign law. Foreign law has to be proved as a fact and the construction of foreign law and the determination of the true nature of foreign law are also questions of fact just like the existence of foreign law itself. It was submitted by him that the Tribunal had taken the view that the said Rules levied a tax on cotton mills and not on income or profits of business and that finding was a finding of fact of which the Tribunal Was the final judge. In our view, we are not required to consider or determine this question at all in view of what We have already decided. We, therefore, do not wish to go into this controversy.
16. In the result, the question referred to us is answered in the negative and against the Revenue. The applicant to pay to the respondent the costs of the reference.