1. This is a reference under Section 162, U.P. Municipalities Act, Local Act 2 of 1916. It appears that during the hearing of an appeal under Section 160, the District Magistrate of Etawah entertained a reasonable doubt as to the principle of assessment of a tax imposed by the Notified Area of Auraiya on the Auraiya Pay Office of the Imperial Bank of India, and he has therefore drawn up a statement of the facts of the case and has referred the same to us with his own opinion for decision.
2. The tax in question is a tax under Section 128(1)(ix), that is, a tax on inhabitants assessed according to their circumstances and property. Under Section 337 the Local Government may declare a local area as a notified area after issuing a notification to that effect under Sub-section 1 and under Section 338 the Local Government may by notification, impose in the whole or a part of such area, any tax which might be imposed therein under the provisions of the Municipalities Act or any other Act if the said area were-a municipality. By a notification dated 31st March 1920 appearing in the United Provinces Gazette for 10th April 1920, the Commissioner of the Allahabad division imposed in the Notified Area of Auraiya with effect from 1st April 1920 a tax on all inhabitants within the limits of the Auraiya Notified Area to be levied according to their circumstances and property subject to a minimum of Re. 1-8-0 and a maximum of Rs. 150 on certain incomes graded in a particular manner. In the same Gazette the Commissioner promulgated rules for the assessment and collection of the above tax under Section 153 of the Act. The relevant rule is Rule 2 and it provides that the income or profits of the year ending on 31st December previous to the date of the assessment shall, when possible, be taken, as the basis of assessment.
3. In the year in question the Notified Area of Auraiya assessed the Auraiya Pay Office of the Imperial Bank of India at Rs. 99 under the above rule. The accounts submitted by the Pay Office have not been challenged, and they showed that Rupees 11,360 were realized on account of interest within the limits of the Notified Area. Out of this amount a sum of Rs. 4734 was spent on salaries, house rent, etc., and it is of some importance that the Notified Area allowed a deduction for this sum and taxed the Pay Office on the amount of Rs. 6626. The Pay Office wanted a further deduction of Rs. 4116 paid as interest to the Branch Office of the Imperial Bank of India at Btawah, and when the Notified Area did not agree to this deduction and assessed the Pay Office at Rs. 99, there was an appeal by the Auraiya Pay Office during the hearing of which the learned District Magistrate of Btawah was in doubt. He entertains the opinion that the tax should be assessed on a total sum of Rs. 6626 without making any deduction of Rs. 4116 on the head of interest paid to the Branch Office at Btawah.
4. Now the tax is leviable on the income of profits of the inhabitant. Learned Counsel for the parties have freely referred to the provisions of the Income-tax Act by way of analogy, and we might also derive some assistance therefrom. It is said by counsel for the Notified Area that 'income' in Rule 2 means 'gross income' and similarly 'profits' mean 'gross profits,' and it is said that the rule, unlike the Income-tax Act, makes no provision for any deductions. On behalf of the Auraiya Pay Office it is argued that the deductions contained in the Income-tax Act ought to guide us in construing the meaning of the word 'income' or 'profits' used in Rule 2. A somewhat similar point arose in Oudh, and a Bench of the Oudh Chief Court in Allahabad Bank Ltd. v. Municipal Board, Sitapur (1936) 28 A.I.R. Oudh 206, was of the opinion that in the case of a firm or company carrying on banking business the expression 'profits' was more appropriate than the expression 'income,' and then it went on to decide how the profits should be calculated for the purpose of assessing the tax and they said that it was reasonable to make deductions from the gross profits of expenses necessarily incurred by the bank for the purposes of carrying on the business and earning the profits and that this principle was recognized for the purpose of assessment to income-tax and therefore the same principle should be recognized for the purpose of calculating the profits which formed the basis of assessment to tax on circumstances and property. The question there related only to the expenses of establishment, etc. and not to interest paid by the inhabitant in the earning of the profits. 'Income' in one sense might mean the total receipts of the assessee and 'profits' in the same sense might mean the total profits of the assessee without any deduction whatsoever, but when we are construing a fiscal rule, which imposes a liability on a subject, we have got to give a meaning to these words which would be consistent with the principles of natural justice recognized in other similar fiscal enactments. We feel inclined to agree with the view taken in Oudh that in the case of a firm carrying on a banking business, the more appropriate expression is 'profits.' Now 'profits' has been defined in Murray's Dictionary as 'the pecuniary gain in any transaction, as the amount by which value acquired exceeds, value expended,' and in Webster's Dictionary it has been defined as 'the excess of returns over expenditure in a given transaction or series of transactions.'
5. As we mentioned before, it is of some importance that the Notified Area saw the justice of deducting Rs. 4734 spent by the Pay Office on salaries, house rent, etc. from the gross receipts, although according to the contention advanced boldly by learned Counsel for the Notified Area this sum should also not have been deducted inasmuch as the rule itself does not provide for any deduction and 'profits' might very easily be considered to be 'gross profits'. Under the Income-tax Act, when tax is to be determined on an assessee under the head 'business' under Sub-clause 2(iii) of Section 10 an allowance for the amount of interest paid is given to the assessee in respect of capital borrowed for the purpose of the business.
6. The books of the Pay Office, which are not challenged, show that a sum of Rs. 4116 was paid as interest to the Branch Office, Etawah. Here the alternative argument on behalf of the Notified Area is that this entry in the books is only a paper entry inasmuch as the Auraiya Pay Office is not a distinct entity from the Branch Office of the Imperial Bank of India at Btawah. The fact, however, remains that in order to earn profits the Auraiya Pay Office has to borrow money from the Etawah Branch of the Imperial Bank of India. It gets this money at a low rate of interest and advances the same at a high rate of interest to debtors in Auraiya. The net profit which the Pay Office makes is the balance between the interest received from debtors and the interest paid to the Branch Office at Etawah. In one sense the Auraiya Pay Office and the Branch Office at Etawah are all offshoots of the parent Bank, namely the Imperial Bank of India, but the profits earned by the various branches are noted down in the books of those branches, and the profits earned by the Imperial Bank of India itself are noted in other books, and if any legitimate taxation is leviable, it is easy for the taxing authorities to find it out. It cannot be said that the Auraiya Pay Office adopted a mischievous device in order to evade the payment of just dues. It is a system prevalent perhaps not only in this particular Pay Office but in other branches and concerns of the Imperial Bank of India, and we can see nothing pernicious in the system. For the reasons (given above, we are of the opinion that the principle of assessment in this particular lease ought to be that the Pay Office should be given an allowance for the sum of Rs. 4116 paid as interest to the Branch Office, Etawah. This is our answer to the reference. A copy of our judgment under the signature of the Registrar shall be sent to the Court of the District Magistrate of Etawah.