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N.N. Ananthanarayana Iyer and ors. Vs. Agricultural Income Tax and Sales Tax Officer and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberO.P. Nos. 424 of 1957 and 1, 30, 31, 61, 68, 183, 320 and 418 of 1958
Judge
Reported inAIR1959Ker182
ActsConstitution of India - Articles 14, 245, 246 and 372(3); States Reorganisation Act, 1956 - Sections 120; Travancore Agricultural Income Tax Act, 1950 - Sections 1, 2, 2(10), 3, 3(4) and 4; Travancore Agricultural Income Tax (Amendment) Act, 1957; Taxing Law
AppellantN.N. Ananthanarayana Iyer and ors.
RespondentAgricultural Income Tax and Sales Tax Officer and ors.
Appellant Advocate T.S. Venkiteswara Iyer,; C.S. Ananthakrishna Iyer,; N. S
Respondent Advocate K.V. Surianarayana Iyer, Adv. General
Cases ReferredRamajilal v. Income
Excerpt:
direct taxation - levy of tax - articles 14, 245, 246 and 372 (3) of constitution of india, section 120 of states reorganisation act, 1956, sections 1, 2, 3 and 4 of travancore agricultural income tax act, 1950 and travancore agricultural income tax (amendment) act, 1957 - petition against income tax assessment whereby department attempted to include agricultural income derived from land situated in malabar - whether act of 1950 had effectively and validly authorised levy of agricultural income-tax for assessment year 1957-58 on income derived from land situated in malabar and received by petitioners during previous year - assessment for financial year 1957-58 cannot validly take in any portion of income derived from land in malabar area during period before 01.11.1956 when it stood.....varadaraja iyengar, j.1. these nine original petitions arise out of nine separate assessments of the respective petitioners for the financial year 1957-58 under the travancore-cochin agricultural income-tax act, 22 of 1950 as amended by act 8 of 1957. by virtue of the amendment, the principal act had been extended on 6-8-1957 to the whole of kerala including the former malabar district but with effect from. 1-4-1957. the income-tax officers concerned required the various petitioners to include in their returns their agricultural income derived from land situated in malabar and received by them during their previous year, i.e. the year ending on 31-3-1957 or on any day anterior to it but within that year as the case may be.now the former malabar district was dis-integrated from the madras.....
Judgment:

Varadaraja Iyengar, J.

1. These nine Original Petitions arise out of nine separate assessments of the respective Petitioners for the financial year 1957-58 under the Travancore-Cochin Agricultural Income-tax Act, 22 of 1950 as amended by Act 8 of 1957. By virtue of the amendment, the principal Act had been extended on 6-8-1957 to the whole of Kerala including the former Malabar District but with effect from. 1-4-1957. The Income-tax Officers concerned required the various Petitioners to include in their returns their agricultural income derived from land situated in Malabar and received by them during their previous year, i.e. the year ending on 31-3-1957 or on any day anterior to it but within that year as the case may be.

Now the former Malabar District was dis-integrated from the Madras State and became part of Kerala only as and from 1-11-1956. The income of the 'previous year' directed to be returned as above and sought to be made liable comprised therefore to major extent or in whole, the income accrued and received in Malabar while still that area was not part of Kerala and that by force of later Kerala Legislation. This, according to the Petitioners was not allowable. The common complaint accordingly arose as to whether the Travancore-Cochin Agricultural Income-tax Act, 22 of 1950, as amended by Act 8 of 1957 hereinafter called the Act, has effectively and validly authorised the levy of agricultural Income-tax for the assessment year 1957-58 on the income derived from land situated in Malabar and received by the Petitioners during the 'previous year.' Hence these Petitions. In view to the importance of the question and the possibility of its recurrence, the Petitions were directed to be heard together and disposed of by a Full Bench and so they have come before us and are being disposed of by this single Judgment.

2. There are two respondents in each of these Petitions viz., the Kerala State and the Agricultural Income-tax Officer concerned, though they are not uniformly arrayed as the first or second respondent. In the case or the petitioners in three of the Petitions viz. O. P. Nos. 424 of 1957, 1 and 418 of 1958, the assessments have only just commenced. In all the rest the assessments are over and in one of them, viz., O.P. No. 30 of 1958 an appeal also has been taken and is pending.

These variations have not affected our approach. They call only for adjustment of. the relief to be afforded in particular cases. Again, in two of the Petitions, O. P. Nos. 68 and 320 of 1958, a further question has arisen viz., as to the propriety of treating a family governed by the Madras Nambudiri Act, 21 of 1933 as an undivided Hindu family for purpose of Sub-clause 4 of the charging Section 3 at the Act. This question also we will be dealing with but after. answering the common question, (3) It will be convenient before we go further to extract the relevant statutory provisions on the subject. Section 3(1) of the Act providing for the charge of agricultural income-tax says:

'3 (1) Agricultural income-tax at the rate or rates specified in the Schedule to this Act shall be charged for each financial year in accordance with and subject to the provisions of this Act, on the total agricultural income of the previous year of every person.'

Section 2(s) defines total agricultural income as follows:

'2 (s) 'Total Agricultural Income' means the segregate of all agricultural income mentioned in Section 4 computed in accordance with the provisions of Section 5 and includes all income of the description specified in Section 9 and all receipts of the description specified in Clauses (a) to (d) of Section 10.'

Section 4 referring to 'total agricultural income' provides:

'4. Subject to the provisions of this Act, the total agricultural income of any previous year of any person comprises all agricultural income derived from land situated within the State and received by him within or without the State, but does not include-- (a) any agricultural income derived from land situated without the State.'

Clause (b) and the explanation to the Section are not necessary for our purpose and are therefore omitted. Section 2(o) defines the expression 'Previous year' as follows:

'2 (o) 'Previous year' means-- (1) the twelve months ending on the 31st day of March preceding the year for which the assessment is to be made or, if the accounts of the assessee have been made up to a date within the said twelve months in respect of any year ending on any date other than the said 31st day of March, then at the option of the assessee the year ending on the day to which his accounts have so been made up.'

There is a proviso to which it is unnecessary to refer.

4. We may also notice at this stage that the former Malabar area, while it was part of the Madras State was, like the rest of that State area, not subject to any general law relating to Agricultural Income-tax. It was only income from plantations as defined in the Madras Plantations Agricultural Income-tax Act V of 1955 that was subject to such tax. A system of land revenue including cesses and enhanced by surcharge and additional surcharges was on the other hand prevalent there.

But following its disintegration from the Madras State, and simultaneously with the extension to it of the agricultural income-tax, the Malabar arm was relieved of this tax burden. Per, it was on one and the same day 6-8-1957 that the T. C. Agricultural Income-tax (Amendment) Act 8 of 1957 and T. C; Land Tax (Amendment) Act 10 of 1957 were passed. Only, the latter Act came into effect on 1-9-1957 while as we saw, the former Act was made retroactive from 1-4-1957. Under this latter Act, a basic tax of 2 naya paise per cent of land was alone imposed.

5. The Petitioners took various grounds in their Petitions in support of their complaint. But the main argument urged before us on all their behalf was twofold. Firstly that under Section 3 of the Act, as under the corresponding Section 3 of the Indian Income-tax Act, 1922, the subject of charge is theincome of the previous year and not the income ofthe assessment year. Such previous year's incomewas according to Section 4, to be derived from land situated within the State though received by the assesseewithin or without the State. The combined effectof Sections 3 and 4 was therefore to insist that the incomeassessed for particular year was not alone to navereference to the previous year but must also bederived from land situated within the State duringthat previous year.

The assessment here being for the financial year 1957-1958 cannot on the above basis validly take in any portion of the income derived from the land in the Malabar area during the period before 1-11-1956 when it stood outside the State of Kerala. Such however was the result of making the Travancore-Cochin Agricultural Income-tax (Amendment) Act retroactive as and from 1-4-1957. To this extent necessarily the Act was ultra vires the Kerala Legislature. And even as regards the income derived after 1-11-1956 the period covered, viz., up till 31-3-1957 fell below the unit of 12 months called for by the definition of previous year under Section 2(o) of the Act.

The instant proceedings as for the assessment year 1957-58 were therefore illegal in entirety and had to be struck down altogether. Secondly, that the lands of the Petitioners in the Malabar area had, during the previous year, been already subjected to heavy land tax in contrast to the basic tax levied; in the Travancore-Cochin area. To impose income-tax under the Act on the income derived from the lands during the same period, would in the circumstances be violative of the fundamental right of the Petitioners under Article 14 of the Constitution. On this ground also the instant assessment for 1957-58 had to fail. A point was also raised during the course of the argument that notwithstanding the manifest object of the Kerala Legislature to extend the Act to the Malabar area under and by virtue of the Amendment Act 8 of 1957 they had, by some oversight, failed to carry out their purpose.

6. Learned Advocate General, appearing for the respondents, strongly questioned the premise fundamental to the contention of the Petitioners that the situation of the Malabar area inside the Madras State during the previous year with reference to the assessment year 1957-58, to major or full extent, raised any question of vires at all. In his submission it was enough that it was part of Kerala at the commencement of the assessment year, viz., on 1-4-1957. This would according to him constitute sufficient nexus for the State to competently legislate in respect of the income derived from the lands in the area during any anterior period (i. e.) even while it was part of Madras State. He denied that Article 14 of the Constitution applied to the Petitioners or that any question of non-applicability of the Act arose in the case.

7. We take up first the question as to whether the Act has not been effectively extended to the Malabar area as that is more or less in the nature of a preliminary objection to the assessment proceedings here in question. Mr. T.K. Lekshmana Iyer learned counsel appearing for one of the Petitioners and who indeed raised the question before us was willing to concede that if the existing law at date of the amendatory Act 8 of 1957 betaken to be the T.C. Agricultural Income-tax Act 22 of 1950 as it stood on the date of the Kerala Adaptation of Laws Order 1956, there would be no point in his objection.

However according to him, and it also appears to be true, that certain adaptations and modifications had been directed by the Schedule to the Order and similarly certain substitutions had been made as per the Table specified under that Order so far as the principal Act 22 of 1950 was concerned. Vide Ss, 3 and 4 of the Order. But these adaptations, modifications and substitutions had been totally ignored by the Legislative draftsman when he framed the Amendment Act 8 of 1957. It was no doubt true that the object of the Order was only to facilitate the application of the existing laws in relation to the State of Kerala as contemplated by Section 120 of the States Reorganisation Act 37 of 1956. But, said learned counsel, the result of ignoring the Order and what it brought about was to leave the vital Section 4 of the Act as extracted by us, with the substitution of the expression 'State' wherever it occurs in it by the expression State of Kerala excluding the Malabar District,' so as to provide that the assessments under the Act were not to take in the income from the Malabar area even though the Act has otherwise been made applicable to the whole of Kerala.

8. Learned Advocate General sought to meet the contention as above by saying that amendatory legislation concerning adapted or modified Act as here need have reference only to the original law, viz., apart from the adaptations or modifications to which it had been subject and there was accordingly nothing wrong with the procedure adopted by the draftsmen of the Amendment Act 8 of 1957. In this connection he contrasted the saving provision in Article 372(3)(b) as regards the power of competent Legislature or other authority to repeal or amend 'Any law adapted or modified by the President under the Constitution', with the words in Section 120 of the States Reorganisation Act under which the existing law was to be given effect to 'subject to the adaptations and modifications so made until altered, repealed or amended by a competent legislature or other competent authority' and he urged that the reference to the law as adapted' or 'modified' in the former made all the difference.

We fail however to see any distinction, seeing that it is the exercise of legislative power in the one case by the President and in the other by the Government of a State, alike under the authority of Parliament. The law as adapted or modified occupied the field for purpose of future amendments equally effectively in both cases. The absence of emphasis on the law as adapted or modified in connection with the subsequent amendments in Section 120 of the States Reorganisation Act would not therefore seem to matter.

The question still is as to whether the failure to provide in the Amendment Act 8 of 1957 consequential amendments with reference to the adaptations and modifications introduced by the Kerala Adaptation of Laws Order 1956, is such a fatal defect as learned counsel would contend for.

This would depend on the intention of the Kerala Legislature which passed the Amendment Act 8 of 1957. Was it to extend the principal Act to the whole of Kerala including the Malabar District as deduced from the words used, the subject-matter with respect to which they were used and the object in view? See Direct U. S. Cable Co. v. Anglo American Telegraph Co. (1877) 2 A.C. 394, at p. 412. Now the words of the Statute arc themselves precise and unambiguous, e. g. Section 2 provides for the substitution of the words 'Travancore-Cochin' in the Long Title and Preamble of the principal Act by the words 'State of Kerala' and similarly Section 3 provides for the omission of the expression 'Travancore-Cochin' from the words Travancore-Cochin Agricultural Income-tax Act in Section 1 (1) of the principal Act and further that Section 1(2) of the principal Act be amended so as to substitute the words 'It extends to the whole of 'State of Kerala' in place of the original words 'It extends to the whole of Travancore-Cochin'.

No more is necessary to say that the legislative intention underlying the Act is clearly for the extension. Indeed the position is not disputed by the other side. The function of this Court as a court of construction is then only to endeavour to harmonise the provisions covered by the 'adaptations' and 'modifications' as above. Having done so we are prepared to say that the former as expressing the intent of the law makers should control and there is in effect a repeal of the earlier 'adaptations' and 'modifications' by implication. As stated in Crawford on Construction of Statutes, Section 308 at page 628;

'And usually one of two questions will arise; (1) whether the new law is intended as a substitute for the old; or (2) whether the new is irreconcilably inconsistent with the old, so that the former is thereby terminated. In brief, the problem will be simply to determine what is the legislative intention -- whether the old law shall cease or whether it shall be supplemented'.

The same purpose is achieved by the application of the rule of construction stated by Maxwell, 10th Edn. page 229 by which courts are entitled to modify the language to meet the intention.

'Tin's may be done by departing from the rules of grammar by giving an unusual meaning to particular words, by altering their collocation, or by rejecting them altogether, under the influence, no doubt, of an irresistible conviction that the legislature could not possibly have intended what its words signify, and that the modifications thus made are mere corrections of careless language and really give the true meaning. Where the main object and intention of a statute are clear, it must not be reduced to a nullity by the draftsman's unskilfulness or ignorance of the law except in a case of necessity, or the absolute intractability of the language used.'

9. The substitution of the expression ,'State' in Section 4 of the Act by the expression State of Kerala excluding the District of Malabar' which learned counsel referred to as left still unaffected and as therefore creating an impasse is, it is also to be noted, not absolute. For the substitution is not to be made, in terms of Section 4 of the Kerala Adaptation of Laws Order

'Except where the subject or context otherwise requires.'

This provision would appear therefore to be only a rule of construction and that is perhaps why Section 4 docs not contain any provision for subsequent amendment in contrast to Section 3 dealing with 'adaptations' and modifications'. Obviously there is no scope for such rule once the Amendment Act 8 of 1957 has as we saw specifically extended the principal Act to the whole of Kerala. We therefore overrule the objection raised on behalf of the Petitioners that the Act has not been properly extended to the Malabar area of Kerala.

10. We take up now the first part of the main contention of the Petitioners about the ultra vires character of the deeming provision in the T-C Agricultural Income-tax (Amendment) Act 8 of 1957 as to its coming into force on 1-4-1957. Now Section 3 of the Act is in its wording more or less identical with the corresponding Section 3 of the Indian Income-tax Act, 1922. The only difference is that the charge of agricultural income-tax is laid under the former 'on the total agricultural income' while the charge of income-tax under the latter is laid 'in respect of the total income' of the previous year.

The distinction in connotation between words 'on' and 'in respect of occurring in the two sections would appear to be only a difference in the draftsmens' language and not in the substance of the two charging sections. The rule is now well settled that under Section 3 of the Indian Income-tax Act 1922, unlike under the previous Act of 1918 or in England the income of the previous year is made the subject of the charge and is not merely a measure of the income under taxation for the assessment year, that is to say the tax is levied on the income of the previous year though it is a tax for the assessment year. The facts as they existed during the previous year and not as, they had developed in the assessment year must therefore govern the assessment See Kanga, 4th Edn. Vol. 1, page 70. Applying this test to the Act a necessary condition for the levy of tax for the financial year commencing 1-4-1957 must be that the taxable territory for the purpose of the Act was in being during the whole of previous year,

11. The Indian Income-tax Act, 1922 by Section 2(14A) defined taxable territories as respects different periods so as to correspond with the successive stages of expansion of the territory of India after the Indian Independence Act 1947 was passed. Such elaborate definition was required in view of the fact that accrual or receipt of income in the taxable territories determined the question of assessability of income in many cases under Section 4 dealing with the application of that Act and further charge-ability varied with the factor of residence and residence was defined with reference to the taxable territories. The concept of taxable territory so far as the Act is concerned is by very nature of the subject matter involved simple and so without separate definition is embodied in Section 4 itself dealing with total agricultural income.

It comprises the whole of the State area, no more and no less. The taxable territory for purpose of the Art vis-a-vis the assessment year 1957-58 must therefore be confined to the State limits as they existed during the previous year. There appears therefore to be no escape from the conclusion that to the extent that the Act has been made retrospective as from 1-4-1957 so as to take in income derived from land in Malabar, viz., from outside the State to more or less extent for the purpose of the first assessment year thereunder, the legislation is subject to challenge.

12. We may refer in this connection to a decision of the Orissa High Court in Biswambar Singh v. Collector of Agricultural Income-tax (1955) 23 ITR 386. There the assessee was a zamindar owning an estate which formed part of the State of Gangpur. The Orissa Agricultural Income-tax Act, 1947 which contains provisions like ours was extended to the Gangpur State on 19th January, 1949, and the State finally merged in the province of Orissa on the 1st of August, 1949. The charging Section 3 under that Act was word for word the same as here and total agricultural income was defined under Section 2 (r) as meaning the aggregate of the amounts of agricultural income derived from land situated in the Province of Orissa and received whether within or without the Province and determined in the manner laid down in Sections 6 and 7.

The question was whether the agricultural income which accrued to the assessee during the previous year 1948-'49 was liable to be assessed to agricultural income-tax in the assessment year 1949-50 under the Orissa Agricultural Income-tax Act. The Court held in the negative on the ground

'that during the major part of the year 1948-49 Gangpur was not part of the Province of Orissa, and so was not 'taxable territory' for purpose of the assessment year 1949-'50'.

Misra, J. in delivering the judgment of the court referred with approval to Madangopal Kabra v. The Union of India, . In the latter case the Judges of the Rajasthan High Court had followed the principle

'That the income of the previous year cannot be taxed if during the previous year the territory in which the income was derived was not a taxable territory'

in holding that prior to the merger of the ex-States areas, the income derived by a person resident in those areas could not be taxed under the Indian Income-tax Act. But in doing so the learned Judges had overlooked the factor of residence of the assessee in the year of assessment whereby his income of the previous year whether received within taxable territories or without it would be liable to tax and on the ground had been overruled in appeal by the Supreme Court. Sec Union of India v. Madan Gopal Kabra : [1954]25ITR58(SC) . But the principle followed by the High Court in the case must in the result according to Misra J. be taken to be impliedly affirmed. We respectfully agree.

13. Learned Advocate General contended on the other hand that as a matter of construction all that Section 4 of the Act required for its compliance was that the income sought to be assessed must trace its source to land situated within the State but there was no 'time factor' involved in such a situation. That is to say the land concerned need not, be comprised in the State during the whole or any portion even of the previous year, it was enough it lay within the State limits during the assessment year and he relied on Puthutotam Estates v. Agricultural Income-tax Officer : (1957)2MLJ495 . That case arose under the Madras Plantations Agricultural Income-tax Act V of 1955 more or less on the same lines as the Act here.

The question was whether the sale proceeds of agricultural crops grown and gathered by an assessee from his plantation also sold by him before the commencement of the previous year but the sale proceeds of which were received by him and brought to account only subsequent to that date, viz., in the previous year could be included in the total agricultural income of previous year for purposes of assessment. Rajagopalan, J. in the course of his judgment referred to Section 4 which was word for word the same as ours and said :

'Section 4 explains what is the total agricultural income of the previous year in relation to the relevant year of assessment. Three conditions have to be satisfied: (1) The total agricultural income must be of the previous year : (2) it should be agricultural income derived from plantation situated within the state; and (3) agricultural income should have been received by the assessee, whether that receipt was within or without the State. I see no basis in the language of Section 4 for imposing the limitation of the time factor on the second of these requirements (items).

Items 3 makes receipt of income the basis of liability to tax. What constitutes receipt, especially where the system of accounting is mercantile, it is not necessary for me to discuss or decide in these proceedings. Since receipt of income is made the basis of liability to be assessed, the receipt must necessarily be in the previous year to make the income taxable as the income of this previous year; gets linked up with item 1. But there is no such limiting factor for the second item, which requires that the agricultural income must have been derived from a plantation situate within the State.'

He then quoted the observations of the Privy Council in Commr. of Income-tax, Bihar and Orissa v. Kamakhaya Narayanan Singh .

'The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered.'

and continued:

'Judged by this test, the sale proceeds of agricultural produce certainly constitute income derived from a plantation within the meaning of Section 4. The use of the expression 'derived' by itself does not postulate that the income must have been derived in the previous year in question.'

14. It is difficult to see how this decision supports the contention advanced by learned Advocate General. It may be taken to lay down that the receipt of the income and not necessarily its derivation should be in the previous year but at the same time the derivation must be from a plantation situated within the State. So when it is claimed in this case by the Department that the income was derived as also received in the previous year, the condition must also be satisfied that the land concerned lay within the State during that previous year.

15. Learned Advocate General then said that in the absence of constitutional limitation as here, the State's power to impose taxes on agricultural income was supreme or plenary and that was so whether the exercise of the power operated prospectively or even retrospectively and he referred to Fernandez v. Weiner, (1945) 326 US 340: 90 Law Ed 116 for the proposition that a tax upon the receipt of income which was earned and due before the enactment of a taxing Statute does not offend the due process. In strictness, according to him, the instant assessments for 1957-58 were not retrospective but were only prospective though in relation to acts or events in the past, viz., the derivation and receipt of agricultural income by the respective assessees in the previous year.

16. It is no doubt true that we have here a law of taxation with respect to Entry 46 in List II of the Seventh Schedule of the Constitution, viz., a topic assigned to the State Legislature which enacted it. But that is only one test of its validity. There is still another test to be satisfied, viz., that the Act does not operate to any extent beyond the State's boundaries. For a State's power of taxation however vast in its character and searching in its extent, is confined to subjects which are within its jurisdiction and the tax Laws of a State can have no extra-territorial operation. We may also concede that the law of a State relating to assessments of taxes may have a retrospective effect.

Still it is necessarily limited to persons, property or business within the jurisdiction and further it is only such tax as could have been authorised originally that could be levied retrospectively. Finally it may be possible to accept the suggestion of learned Advocate General that the Act is prospective and not retrospective in its operation. Sea Queen v. St. Mary Whitechapel, (1848) 12 QB 120: 116 ER 811, where it was observed that a Statute is not properly called retrospective because a part of the requisites for its action is drawn from time antecedent to its passing'.

But however viewed, whether as operating retrospectively or prospectively, the Act as made operative from 1-4-1957 purports to levy for the first assessment year under it, tax on income which is foreign both as derived and as received. This certainly is overstepping the limits of extra-territoriality and retrospectivity as understood above and the tax must to that extent be bad. The American case referred to, by the learned Advocate General is in the context, not of much help. That was any how a case of inheritance taxes which are said to be excise taxes and involve also certain peculiarities. See Willis' Constitutional Law, page 698 and again the question involved was one of due process.

17. Learned Advocate General then attempted to get over the attack on the ground of extraterritoriality by reliance on the nexus supplied by the existence of the Malabar area as part of the State at time of the legislation on 6-8-'57. And he referred to the principle of 'territorial nexus' as applied to a gaming law in State of Bombay V. R.M.D. Chamarbaugwala, (S) : [1957]1SCR874 and to sales-tax legislation in Tata Iron and Steel Co. v. State of Bihar, AIR 1958 SC 452. He referred also to C. P. Appanna v. State of Coorg, AIR 1958 Mys 102 where the principle was taken for granted in its application to agricultural Income-tax legislation. Now the general principle is well settled that a territorial nexus or connection may be enough to save extra territorial legislation and; as stated in the first of the cases referred to above : [1957]1SCR874 ,

'Sufficiency of the territorial connection involved a consideration of two elements, namely (a) the connection must be real and not illusory, and (b) the liability sought to be imposed must be pertinent to that connection. It is of no importance on the question of validity that the liability imposed is or may be altogether disproportionate to the territorial connection. In other words, if the connection is sufficient in the sense mentioned above, the extent of connection affects merely the policy and not the validity of the legislation. The question whether in a given case there is sufficient territorial nexus is essentially one of fact'.

18. In much the same way has the principle-been stated in earlier cases under the Indian Income-tax Act, 1992. See Kanga, 4th Edn. Vol. I, p. 8. Thus in Wallace Bros, and Co. Ltd. v. I. T. Commr., Bombay the Privy Council had occasion to consider the validity of Section 4A of the Indian Income-tax Act, 1922 under which the foreign income of a Company which was incorporated in the United Kingdom and had also its control and management of affairs exclusively in that country was sought to be charged. In the course of the Judgment their Lordships stated :

'The result is that the validity of the legislation in question depends on the sufficiency for the purpose for which it is used of the territorial connection set forth in the impugned portion of the statutory test. Their Lordships propose to confine themselves to that short point and do not propose to lay down any general formula defining what territorial connection is necessary. In their view, the derivation from British India of the major part of its income for a year gives to a company as regards that year a territorial connection sufficient to justify the company being treated as at home in British India for all purposes relating to taxation on its income for that year from whatever source that income may be derived. If it is so at home in British India it is a person properly subject to the jurisdiction of the Central Indian Legislature'.

The test of territorial nexus should thus be satisfied in respect of every year for which the taxation is proposed. So understood there will be no territorial connection established in this case unless the statutory test laid down in Section 4 of the Act is satisfied by the situation within the State and during the year concerned of the land yielding the income sought to be assessed. In fact the fetter of extra-territoriality can never be got over because the legislation here is in essence territorial.

19. It was next contended by the learned Advocate General that the instant assessments may be saved to the extent at least that the taxing power of the State can extend as discussed above, viz., as regards the income derived from the lands concerned after their inclusion in the Kerala State on 1-11-1956. Even otherwise the period is less than the 12 months required to constitute a previous year under the definition in Section 2 (o) of the Act and no assessments under the Act could be validly had, for the income during such period. See Commr. of I. T. v. K. Srinivasan : [1953]32ITR87(SC) and Haridas Achratlal v. Commr. of I. T., (S) AIR 1955 Bom 338.

20. The conclusion as above may render it unnecessary for us to discuss the second limb of the main contention of the Petitioners based on discrimination under Article 14 of the Constitution. However in reference to the strenuous arguments addressed by learned counsel we will deal with that also. Now the only basis on which the complaint is rested is that the petitioners had, under the system prevailing in the Madras State already paid heavy land tax in respect of the lands in the Malabar area during the previous year in contrast to the nominal basic tax paid by the land-holders in the Travancore-Cochin area for that period. The charging as against them of agricultural income-tax as here, though uniformly with the Travancore-Cochin area, would therefore be to impose an unequal additional burden.

The contention of the State in reply was that the default was not on the law impugned which admittedly was equal and uniform but arose out of the extraneous circumstances due to the integration on the 1st November, 1956. Anyhow the differential result arising in its application to the area in question can be supported on the principle of geographical classification which was not inadmissible under Article 14. Indeed according to the learned Advocate General, the anomaly herein was inevitable during the early stage after the integration but it had been obviated by the early steps taken by the State to introduce the system of basic tax as well to the area. We may say at once this contention is right and should be accepted.

21. It is no doubt true that the principle of equality before the law and equal protection of law extends to taxing laws as well. This does not mean that every person should be taxed equally but that Persons under the same circumstances or property of the same character should be taxed by the same standard and inequality in fact in the result is no test. The law is summarised in 51 American Jurisprudence, Taxation, Article 180, p. 240.

'The principle appears to be deducible from the decisions that discrimination due to fortuitous circumstances arising out of the peculiar situation in which one or some particular tax payers find themselves are generally not invalid under requirements as to equality and uniformity in taxation, where it appears that such tax payer or tax payers are not singled out for special treatment and not taxed by. method which is not uniformly applied to other tax payers of the same class.'

As observed in Frank J. Bowman v. Edward A. Lewis (1880) 101 U. Section 22,

'If a Mexican State should be acquired by treaty and to an adjoining State or part of a State, in the United States, and the two should be created into a new State, it cannot be doubted that such new State might allow the Mexican Laws and judicature to continue unchanged in the one portion, and the common law and its corresponding judicature in the other portion. Such an arrangement would not be prohibited by any fair construction of the 14th Amendment. It would not be based on any respect of persons or classes, but on municipal considerations alone, and a regard to the welfare of all classes within the particular territory of jurisdiction.'

22. The principle was applied in Ramajilal v. Income-tax Officer, Mohindar Garh : [1951]19ITR174(SC) in the following circumstances. There was no Income-Tax Act in the Nabha State prior to its inclusion in the Pepsu Union. But there was such an Act in force in the Kapurthala State. At the formation of the Union (Pepsu), a provision was made that assessees whose cases were then pending should be assessed at the old rates that were applicable to them according to the Acts in force previously in their respective States. As a result of this provision, the people of Nabha became subject to a higher rate of income-tax under the Patiala Act which was applied to the whole of the Union, than was applicable to the assessees of Kapurthala whose cases were pending at the time of Union. On the question whether there was an infringement of Article 14 the Supreme Court held:

'The discrimination, if any, was not brought by the two Ordinances, but by the circumstances that there was no Income Tax Act in Nabha and consequently there was no case of assessment pending against any Nabha assessees. In any case the provision that pending proceedings should be concluded according to the law applicable at the time when the rights or liabilities accrued and the proceedings commenced is a reasonable law founded upon a reasonable classification of the assessees which is permissible under the equal protection clause and to which no exception can be taken. In our opinion the grievance of the alleged infringement of fundamental rights under Article 14 is not well founded at all'.

23. Of geographical classification as regards taxation, Wills Constitutional Law, P. 590.

'A State if it desires, levy taxes over the entire State and thus make the State the unit: but if the State desires, it may establish taxing districts or other sub-divisions, like a city or territory within a city. In such cases all that is required is the same basis of classification within the district or sub-division. Inequality of apportionment between the State as a whole and such district or sub-division will not invalidate the tax.'

24. It is without doubt the chance incidence of the prior taxation under the Madras State law that brought about the inequality here if at all, And to the extent fiat that situation was uniform throughout the Malabar area, there can be nothing for the petitioners to complain. The contention on ground of Article 14 of the Constitution accordingly failed. But this does not affect the conclusion in favour of the petitioner, we have already arrived at.

25. We now take up the further question raised by the petitioners in O. P. Nos. 68 and 320 of 1958 (who represented two Malabar Nambudiri families governed by the Madras Nambudiri Act, 21 of 1933) as to the legality of their being classified among Hindu families and charged under Section 3(4) of the Act. Now, Section 3(1) of the Act it will be recalled levied the charge of agricultural income tax at the rate or rates specified in the schedule to the Act on the total agricultural income of the previous year of every person. The expression 'person' was defined in Section 2 (m) to mean any individual or association of individuals and also to include among others

'an undivided Hindu Mitakshara family, an Aliyasanthana family or branch, a Marumakkathayam tarwad or tavazhi, possessing separate properties, or a Nambudiri, Moothathu or other family to which the rule of impartibility applies.'

Family groups were thus under the inclusive definition of 'person', constituted distinct entities or units of assessment just like individuals. But this rigour of the law was mitigated by certain exemptions not necessary to detail here besides a maximum rate of charge as provided in Clauses 3 and 4 of Section 3.

'3 (3). In the case of an Aliyasanthana family or branch or undivided Marumakkathayam tarwad including a Nambudiri family or a family like that of the Moothathu or any other class governed by the law applicable to Nambudiris consisting of more than five members and whose agricultural income exceeds six thousands rupees, the tax shall be assessed at the average rate applicable to the share of the agricultural income due to five members of the family or to six thousand rupees, whichever is higher. (4) In the case of an undivided Hindu family consisting of brothers only or of a brother, or brothers and the sons or sons of a brother or brothers and whose agricultural income exceeds six thousand rupees, the tax shall be assessed at the average rate applicable to the share of income due to a brother or to six thousand rupees, whichever is higher.

Explanation for the purpose of this sub-section the expression 'share of income due to a brother' means the portion of the total agricultural income of the family which would have accrued to a brother, if a partition of the assets had been effected according to law on the day before the assessment is made.'

And by Clause (kk) in Section 2, it was also provided :

'2 (kk) 'Hindu undivided family' includes a family governed by the Madras Nambudiri Act 1932 (Madras Act XXI of 1933)'

And it should be added that the inclusion of Aliyasanthana family in Section 3 (3) and again the provision in Section 2 (kk) assimilating Malabar Nambudiri family to undivided Hindu families came in by way of amendments under the Amendment Act 8 of 1957.

26. It was in the light of Section 2 (kk) as above that the Income Tax Officers concerned had proceeded to assess the petitioners in O. P. Nos. 68 and 320 of 1958 under Section 3 (4) of the Act. The petitioners apparently stood to fare better if Section 3(3) rather than Section 3(4) had been applied to them. So they raised the contention in their petitions that the denial to them of the concession as to rate of tax under Section 3 (3) along with the other croups covered thereby was a violation of their fundamental right under Article 14 of the Constitution. Mr. V.K.K. Menon learned counsel appearing for them before us frankly conceded that there was no question of Article 14 involved but he said that as a matter of construction it was Section 3 (3) alone that applied and as both parties desired to have per decision on this matter it was allowed to be raised.

27. The scheme of the Act as we saw was to treat certain family groups as units of assessment but with varying concessions as to rate of chargeability attached and dividing them for the purpose broadly into two categories, viz.,

(i) those governed by Aliyasanthana law or Marumakkathayam law or simply the rule of impartibility, e. g. Nambudiries of Travancore and Cochin, Moothathus etc.,

and (ii) Hindu undivided families consisting of brothers only or brothers and their branches.

Why it was thought necessary to accept a division based on personal law as above and indeed to grant concessions at all to the family groups, is not for us to enquire. The only question is whether by virtue of Section 2 (kk) Nambudiri families of Malabar comprising those of the petitioners in O.P. Nos. 68 and 320 of 1958 to whom the rule of impartibility did not apply, were properly fitted into the second category. Learned counsel is unable to say what other purpose that clause could have been intended to subserve. In fact the problem before the Legislature at the time of the extension of the Act to the whole of Kerala was to assign to one or other of the two categories already there under Section 2 (m), two new family groups, viz, those governed by Aliyasanthana law and Nambudiris governed by the Madras Nambudiri Act 21 of 1933.

They achieved this by amending the definition in Section 2 (m) so as to admit the former and introducing fresh Clause 2 (kk) to get in the latter. The argument of learned counsel based on certain similarities in the details of the personal law governing the Nambudiris and Marumakkathayees cannot, in our opinion, affect the question. We therefore hold that the assessment of the petitioners in O. P. Nos. 68 and 320 of 1958 as under Section 3(4) of the Act is not in any way wanting in validity.

28. We wish to make clear before closing that apart from the common questions we have dealt with above we are not disposing on the merits any other contention raised by the petitioner by way of objection to the proposed or completed assessments concerned.

29. In the result we grant declaration infavour of all the petitioners that no part of the income derived from lands situated in Malabar andfor periods before the formation of Kerala can bethe subject of a valid charge under the Act and further that the assessments against them for 1957-58could not sustain to the extent they comprise suchexcluded income to any extent. In the circumstances we direct the parties to bear their costs. TheOriginal Petitions herein are allowed to the aboveextent and dismissed otherwise.


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