Gopalan Nambiyar, C.J.
1. These writ petitions attack the constitutional validity of Section 2(6), 2(7)(e) and Part IV of the 1st Schedule of the Finance Act, 1973 ; and also Sections 2(2), 2(7)(b)(ii), 2(8)(e) and Part IV of the Finance Act, 1974. Section 2(6) and 2(7)(e) of the Finance Act, 1973, provides as follows :
'2. (6) In the cases to which Sub-Paragraph I or Sub-Paragraph II of Paragraph A of Part III of the First Schedule applies, where the assessee has, in the previous year or, if by virtue of any provision of the Income-tax Act income-tax is to be charged in respect of the income of a period other than the previous year, in such other period, any net agricultural income, in addition to total income, and the total income exceeds five thousand rupees, then, in calculating income-tax under the first proviso to Sub-section (5) of Section 132 of the Income-tax Act or in charging income-tax under Sub-section (2) of Section 174 or Section 175 or Sub-section (2) of Section 176 of the said Act or in computing the 'advance tax' payable under Chapter XVII-C of the said Act, at the rate or rates in force,--
(a) the net agricultural income shall be taken into account, in the manner provided in Clause (b) (that is to say, as if the net agriculturalincome were comprised in the total income after the first five thousand rupees of the total income but without being liable to tax), only for the purpose of calculating, charging or computing such income-tax or, as the case may be, 'advance tax' in respect of the total income; and
(b) such income-tax or, as the case may be, 'advance tax' shall be so calculated, charged or computed as follows:--
(i) the total income and the net agricultural income shall be aggregated and the amount of income-tax or 'advance tax' shall be determined in respect of the aggregate income at the rates specified in Sub-Paragraph I or, as the case may be, Sub-Paragraph II of the said Paragraph A ; as if such aggregate income were the total income ;
(ii) the net agricultural income shall be increased by a sum of five thousand rupees and the amount of income-tax or 'advance tax' shall be determined in respect of the net agricultural income as so increased at the rates specified in Sub-Paragraph I or, as the case may be, Sub-Paragraph II of the said Paragraph A, as if the net agricultural income as so increased were the total income ;
(iii) the amount by which income-tax or, as the case may be, 'advance tax' determined in accordance with Sub-clause (i) exceeds the amount of income-tax or 'advance tax' determined in accordance with Sub-clause (ii) shall be the income or 'advance tax' in respect of the total income:
Provided that in cases where Sub-Paragraph I of the said Paragraph A applies,--
(A) where the aggregate income referred to in Sub-clause (i) exceeds fifteen thousand rupees but does not exceed fifteen thousand one hundred and eighty rupees, the provisions of that Sub-Paragraph relating to surcharge on income-tax shall, for the purposes of determining the amount of income-tax or 'advance tax' under Sub-clause (ii), apply subject to the modifications that such surcharge shall be calculated at the rate arrived at by dividing the amount of surcharge on income-tax calculated in respect of the aggregate income by the amount of income-tax (excluding surcharge) calculated in respect of the aggregate income and that the provisions of the proviso at the end of that Sub-Paragraph shall not apply ;...'
'(7)(e) 'net agricultural income', in relation to a person, means the total amount of agricultual income, from whatever source derived, of that person computed in accordance with the rules contained in Part IV of the First Schedule... '
2. Mutatis Mutandis, the impugned provisions of the Finance Act of 1 974, practically repeat the same provisions. In brief, these sections of the two Acts allow the agricultural income of an assessee to be combined with his non-agricultural income for the limited purpose provided by thesections. That is to say, the agricultural income may be aggregated with the non-agricultural income for the limited purpose of evolving a higher slab or rate of tax. Roughly, and broadly put, that is the scheme of the provisions. This has been objected to. The provisions of the Finance Act providing for this mode of aggregation of agricultural and non-agricultural incomes came into force from the assessment year 1974-75. The provision thus made for aggregation of the two types of income is carried out also into the provisions of the I.T. Act dealing with the payment of advance tax. Section 207 of the I.T. Act provides for liability to pay advance tax, and Sections 208 - 219 regulate the mode and manner of payment of advance tax. Section 2, Clause (6) of the Finance Act, 1973, provides that the rate of advance tax under Section 208 of the I.T. Act is to be computed with reference to the aggregated income. Part IV of the Schedule provides for computation of the net agricultural income. These provisions should highlight the scope of the attack mounted by the petitioners.
3. The petitioners have alleged in these writ petitions that if the two modes of income are to be aggregated and income-tax charged as provided by the Finance Acts of 1973 and 1974 there is a vast difference in the incidence as well as the operation of the tax (see for instance para. 4 of O.P. No. 3265 of 1974). The provisions have been attacked on three grounds: that the provision for aggregation is violative of the scheme of taxation sanctioned by Section 4 of the I.T. Act and the other sections ; that, if the impugned provisions can be fitted into the framework of the provisions of the I.T. Act, they are beyond the legislative competence of Parliament, as relating directly or indirectly, to agricultural income, which is within the purview of the State legislature and beyond the legislative competence of Parliament ; and finally, that the provisions are discriminatory, in so far as they single out for differential treatment and higher taxation, persons having agricultural income by subjecting them to a higher rate of tax.
4. Section 4 of the I.T. Act enacts, inter alia, that income is to be charged 'in respect of total income of the previous year or previous years as the case may be of every person'. Under Sub-section (2), in respect of the income chargeable under Sub-section (1) deduction at source or payment in advance have been directed. The succeeding sections provide for computation of the total income. Among these, Section 10 provides for the type of income that shall not be included in the reckoning. The first of these, is agricultural income. Section 66 enacts that in computing the total income of an assessee there shall be included all income on which no income-tax is payable, under Chapter VII. Chapter VII provides for incomes forming part of total income on which no tax is payable. This Chapter originally contained Sections 81 to 85(c). Sections 81 to 85 were deleted by the Finance Act No. 2 of 1967. Sections 86 and 86A are the sections now retained in this Chapter. Section 110 of the Act provides that where there is included in the total income of the assessee any income on which no income tax is payable under the provisions of the Act, the assessee shall be entitled to a deduction from the amount of income tax which is chargeable on his total income, of an amount equal to 'the income-tax calculated at the average rate of income-tax on the amount for which no tax is payable. Attention was called to the definition of 'total income' in Section 2(45) of the Act as :
''Total income' means the total amount of income referred to in Section 5, computed in the manner laid down in this Act.'
5. The 'total income' referred to in Section 5 is computed in the manner laid down in the Act. With respect to these provisions the argument was that 'agricultural income' is not now included in the total income :--vide Section 10(1) of the I.T. Act; and, therefore, when, under Section 4 the charge can be levied only on the total income, agricultural income cannot enter into the reckoning at all. This was emphasised with reference to the definition of 'net agricultural income' in Section 2(7), Sub-section (e) of the Finance Act, 1973, and of Part IV of Schedule! of the Act, and, in particular, of Rule 11 thereof. These provisions, it was claimed, were quite inadequate to achieve the purpose of merging the agricultural income with the total income under the I.T. Act, for the purpose of subjecting the latter to tax; or to enter into the reckoning even for computation of the rate of tax. Reliance was placed on the decision of the 'Bombay High Court in CIT v. N.M. Raiji  17 ITR 180. There, the assessee was a partner in the firm of S.B. Billimoria & Co. from 1928. The partnership was dissolved by a consent decree of the High Court of Bombay from the 9th October, 1942, and the assessee ceased to be a partner from that date. For the assessment year 1943-44, the assessee showed a personal income of, Rs. 6,535. The share of the assessee in the firm from 1st January, 1942, to 9th October, 1942, was determined as Rs. 41,000. By reason of Section 25(4) of the Indian I.T. Act, 1922, the firm of Billimoria & Co. was not charged to any tax in respect of the period from 1st January, 1942 to 9th October, 1942. It was conceded that no tax was payable on the sum of Rs. 41,000 received by the assessee ; but the department contended that Rs. 41,000 must be included in the total income of the assessee for 1943-44, in order to ascertain the rate at which income-tax is payable by him. Proceeding to deal with that question, Chagla C.J., who spoke for the court, observed that the total income is to be computed and determined upon the various provisions of the Act as a whole. Observed the learned Chief Justice (p. 185) :
'The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total income. Not only is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate. When the legislature intends that certain sums, although not liable to tax, should be included in the total income, it expressly so provides, as it is done in Section 16, and, therefore, prima facie, when we come to Section 25(4) and when we find that the assessee is not liable to pay tax on the sum received by him as his share of the partnership, that sum cannot and does not form part of his total income. Mr. Joshi has not succeeded in pointing out to us any provision in the Act whereby this particular sum covered by Section 25(4) has been made a part of the total income of the assessee. Therefore, in my opinion, the share of the profit of the assessee in the firm of S.B. Billimoria & Co., in the accounting year 1942 cannot be included in the total income of the assessee for ascertaining the rate of income-tax.'
6. The above observations expound the legislative device of deeming a certain income for all or for certain purposes as the income of the assessee.
7. In Panna Sanjay Trust v. CIT : 74ITR396(Guj) , Bhagwati C.J. and Divan J. of the Gujarat High Court had to consider a case involving the construction of Section 164 of the I.T. Act, 1961. The trust, the assessment of which came in question was Panna Sanjay Trust. It was constituted by Kasturbhai Lalbhai by a document of trust for the benefit of the wife, children and grandchildren, of his son, Shrenik. The period of distribution of the trust estate was 30 years from the date of the deed (18th March, 1961). Till that date, the income of the trust was to be applied at the sole discretion of the trustees for the benefit of the wife, children and grandchildren of Shrenik. The year of account was 1961-62 (assessment year 1962-63). Out of the income of Rs. 6,977 earned for that year, Rs. 3,000 was paid to one of the beneficiaries under the trust, namely, Kalpana. The income from other sources of Kalpana amounted to Rs. 35,973. The ITO thought that it would be very beneficial to the revenue to tax the sum of Rs. 3,000 received by Kalpana under the trust in her hands rather than in the hands of the trust and proceeded to assess on that basis, that is, Rs. 3,000 in the hands of Kalpana and Rs. 3,977 in the hands of the trustees. The trustees were assessed as an 'association of persons' under Section 164 of the Act, at the rate applicable to the income of Rs. 6,977. The trustees were aggrieved by this mode of computation of the rate. Their contention was accepted on appeal by the AAC, who found that the rate liable to be charged was the rate applicable to the total income of Rs. 3,977. On appeal by the revenue, the Appellate Tribunal restored the decision of the officer. The matter thereupon came up before the High Court. Section 164 of the Act was as follows :
'164. Where any income in respect of which the persons mentioned in Clauses (iii) and (iv) of Sub-section (1) Section 160 are liable as representative assessees or any part thereof, is not specifically receivable on behalf orfor the benefit of any one person, or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable (which persons are hereinafter in this section referred to as the beneficiaries) are indeterminate or unknown, tax shall be charged as if such income or such part thereof were the total income of an association of persons, or, where such income or such part thereof is actually received by a beneficiary, then at the rate or rates applicable to the total income of the beneficiary if such course would result in a benefit to the revenue.'
8. The learned judges pointed out that the revenue had two modes of assessments open to it; one, to assess the amount received by the beneficiaries as part of the income in the handis of the representative assessee under Section 164, and the other, to assess it directly in the hands of the beneficiary including it in the total income of the beneficiary. But the revenue had to adopt either the one or the other of the methods, not both. Rs. 3,000 having been charged on Kalpana, the balances of Rs. 3,977 was held to have been rightly charged on the estate. But the question was : what was the rate at which the tax had to be worked out on the balance of Rs. 3,977. On this the learned judges observed (at p. 404):
'Wherever any income is excluded from chargeability co tax either expressly or by necessary implication arising from the scheme of the Act or its provisions, exclusion operates in the computation of the total-income not only for the purpose of liability to tax but also for the purpose of determination of rate. If the intention of the legislature is to exclude such income from the computation of the total income only for the purpose of chargeability to tax and not for the purpose of determination of rate, the legislature makes a specific provision in that behalf and unless such specific provision is found in the statute, exclusion of such income from the total income for the purpose of chargeability to tax must be held to carry with it exclusion from total income for the purpose of determination of rate. Once income goes out from the total income for the purpose of liability to tax, it would also go out for determination of rate unless there is a specific Provision in the statute providing the contrary.'
9. The words underlined are significant and furnish the clue to the correct approach to the question. The 'contrary' provision indicated by the learned judges in the passage cited, is made in the instant case by the provisions of the Finance Act of 1973, which we have quoted, namely, Section 2(6)(a), The decision, therefore, is of no assistance to the assessee.
10. In Khatau Makanji Spinning & Weaving Co. Ltd. v. CIT : 30ITR841(Bom) , in effect and substance, what happened was that, to the previous year's income which could legitimately be subjected to tax under the Indian I.T. Act, 1922, was added an additional tax on the excess dividend declared in prior years. There was no legislative provision deeming this excess dividends in prior years to be the income of the previous year. This crucial nexus was absent; and that supplies the clue to correctly understand the decision. Chief Justice Chagla who spoke for the court observed (pp. 846, 847):
'It must be borne in mind, as has often been said, that the Income-tax Act deals with tax on income and on nothing else. Therefore, in order that the charge should be a legal charge under Section 3, it must be a tax on the income of the assessee. If the charge is a tax on anything else, then it would not be a proper or a valid charge. Now, is it possible to have an effective charge on the income of an assessee when the rate at which the tax is to be paid is fixed with regard to factors extraneous to the total income and when the rate has no relationship with the total income In order to understand the position it will be perhaps simpler and easier if one were to take one or two illustrations. Parliament may say that an assessee shall pay tax in respect of his total income, which tax shall be assessed at 50% of the wealth of the assessee, or Parliament may say that if the assessee's wealth is 5 lakhs or 10 lakhs he will pay tax at a particular rate in relation to his total income. It will be immediately apparent that in the first case the rate has no relationship to the total income. The tax to be paid is determined by a factor entirely extraneous to the total income. In the latter case, although the rate may fluctuate in relation to an extraneous factor, the rate itself is applied to the total income of the assessee. It is difficult to understand how in the first illustration the tax could be called a tax on income because the tax is paid in relation to the total wealth of the assessee and the consideration with regard to his total income is entirely irrelevant. Whether his total income is a lakh or Rs. 10,000, the tax he would pay would depend upon not what his income was but what his total wealth was. In the latter case, although the total wealth of the assessee would play an important part in determining what tax he would pay, still the tax would depend upon his total income. It would be more or less according to the total income which he earned in the previous year......
The tax is not regulated by the total income, nor is the rate fixed in relation to the total income. It may be said, as was suggested by the Advocate-General, that Section 3 gives perfect liberty to the legislature to fix any rate. So long as the charge is on the total income of the previous year, there is no limitation upon the power or the authority of Parliament to fix any rate it pleases. But there is a limitation upon the power of Parliament which is inherent in the nature of the tax which can be imposedunder Section 3. If one understands the rate to mean merely the mode of computation of the tax in relation to the total income of the assessee, then undoubtedly the power of Parliament is unlimited. But if 'rate' is understood to mean the fixing of the tax irrespective of the total income and unconnected with the total income, then in our opinion Parliament is clearly travelling outside the ambit of Section 3. It may well be asked, if that is the power of the Legislature, why have any provision in the Income-tax Act with regard to the computation of total income The Income-tax Act contains an elaborate machinery for ascertaining the total income of an assessee. Various notional incomes have to be added to the total income, various deductions have to be made, and then the total income has to be arrived at. If Parliament has the power to fix tax at a rate which has no connection with the total income, then the machinery set up under the Income-tax Act becomes entirely infructuous. In our opinion, Section 3 prescribes the subject-matter of the tax and the rate of that tax is to be prescribed by the legislature. But the rate must be such as to relate to the subject-matter of the tax. If it does not relate to the subject-matter of the tax, then the conclusion must be that Parliament is not taxing income but is taxing something else. Therefore, in our opinion, a charge in respect of total income of the previous year of an assessee can only be effective if the rate has relationship to the total income or a part thereof. As we have already pointed out, there is nothing to prevent the legislature from fixing the rate and from permitting the rate to fluctuate in relation to some outside factor, but the rate must be applied to the total income and the tax that an assessee has got to pay must be at a rate in respect of the total income.'
11. At page 848, the learned Chief Justice stated :
'The object of the legislature, in enacting this legislation is clear andit is laudable, but the court has often to ask itself in taxing statuteswhether the legislature had misfired. The legislature could have achievedthis object by one of three methods. It could have treated the excessdividend declared by the company as a notional income and made it a partof the total income of the previous year. It could have provided forrectification of the assessment of the year in which these profits werecharged at a lesser rate, and we now find that Parliament has actuallyprovided for this in the Finance Act. 1956. Or, finally, it could haveprovided for a penalty imposed upon a company which transgressed thedirection of Parliament that it should not pay dividend beyond a particularceiling, and as was pointed out in our judgment in Elphinstone Spinningand Weaving Mills Ltd. v. CIT : 28ITR811(Bom) , the provision in theFinance Act is in the nature of a penalty; the transgressing company losesthe rebate and has to pay tax at a higher rate. But it is obvious thatParliament cannot impose penalty by resorting to Section 3 and purporting to charge the total income of an assessee to income-tax. The ambit of Section 3 is clear and the ambit is that the tax to be levied must be a tax on income and the power of Parliament is equally clear and that is to fix the rate at which income-tax is to be charged upon the total income of the previous year of the assessee. In our opinion, the provision of the Finance Act travels beyond the ambit of Section 3, and if Parliament has done so then no effective charge can be made on the total income of the previous year of the assessee under the provisions of the Finance Act which deals with additional tax on excess dividend.'
12. Having regard to the provisions of the Finance Acts questioned herein we do not think that these provisions outrun the embankments provided by the I.T. Act, 1961.
13. The above decision of the Bombay High Court was carried up in appeal to the Supreme Court--vide CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. : 40ITR189(SC) . The Supreme Court affirmed the judgment of the High Court. Hidayatullah J. (as he then was), speaking for a three-judge-court, observed (p. 192):
'The learned Chief Justice, with respect, very rightly pointed out that the Income-tax Act puts the tax on income or something which it deems to be income. In other words, the tax deals with income and income only. It further provides that this tax shall be collected at a particular rate on the total income for which provision shall be made in an yearly Central Act. The Finance Act also follows the same scheme, and lays down the rate at which the tax is to be collected. In the Finance Act, the tax is laid on the total income, but two provisos modify the rate under certain circumstances.'
14. The court then noticed the provisions of the Finance Act; a provisionhad been made by one of the Explanations deeming excess dividends tohave been paid out of the undistributed profits of one or more yearsimmediately preceding the previous year. Adverting to this provision itwas observed (p. 194):
'This fiction, as we have already pointed out, provides only that the dividends shall be deemed to be out of the profits not of the previous year under assessment but of some other years. What the Finance Act fails to do is to make them 'total income', so as to take in the rate which is prescribed for the total income in the proviso. Unless the Finance Act stated that after the working out of the fiction the profits of the back year or years shall be deemed to be a part of the total income of the previous year under assessment, the purpose of the Act clearly fails. Income-tax is a tax on income of the previous year, and it would not cover something which is not the income of the previous year, or made fictionally so. TheFinance Act could have gone further, as pointed out by the learned Chief Justice in the extract quoted, and made the profits a part of the total income of the previous year under assessment, but it did not do so. The Finance Act could have also resorted to some other fiction, which might conceivably have met the case ; but it has failed to do so. Even if one considers the dividends as having come out of the profits of preceding years, they do not become the income of the relevant previous year, and unless the Finance Act expressly laid down that it should be taxed as part of the total income, the purpose is not achieved. Indeed, the Finance Act continues to say that the tax shall be on the total income, as defined in the Indian Income-tax Act and as determined under that Act. It is impossible to say that the additional income-tax was properly laid upon the total income, because what was actually taxed was never a part of the total income of the previous year.'
15. The principle of the decision is instructive, and has application to the case on hand, and furnishes an answer to the question raised for consideration. The impugned Finance Acts by legislative fiction deem agricultural income to be part of total income for the limited purpose of working out the rate of tax. We would accordingly reject the first of the contentions of counsel for the assessee that the impugned provisions of the Finance Acts of 1973 and 1974, outrun the embankments provided by Sections 4, 66 and 110 of the I.T. Act and the scheme of the provisions for the computation of tax.
16. We shall next deal with the argument of legislative competence. Entry 82 of List I of the 7th Schedule to the Constitution reads:
' 82. Taxes on income other than agricultural income.'
17. And entry 46 of List II provides : 'Taxes on agricultural income'. The argument with respect to these entries is that 'agricultural income' has been excluded from the field of Parliamentary legislation under List I, and is completely within the domain of State legislation under List II. Therefore, it was said, that agricultural income is totally tabooed for parliamentary legislation, whether for the purposes of computation of income, or for working out the rate of tax. There is an element of attractiveness in the argument that if the field is altogether forbidden, it makes little difference whether you saunter into it for viewing the country-round or for carrying on more predatory or desultory activities. But is the metaphor applicable in construing legislative entries An almost similar argument with respect to the W.T. Act was advanced in Union of India v. Harbhajan Singh Dhillon : 83ITR582(SC) . The divergent judicial view points would be seen reflected in the majority and dissenting judgments of a closely divided seven-judge court. The question related to the constitutional validity of Section 24 of the Finance Act, 1969, which amendedthe W.T. Act. As a result of the amendment, the capital value of agricultural land was included for the purpose of computing net wealth. Without getting into elaborate and subtle details, the arguments against the constitutional validity of the amendment were that the impugned Act was beyond the legislative competence of Parliament and fell within the province of State legislature under entry 49 of List II. Sikri C.J. who spoke for himself, Roy J. and Palekar J. upheld the validity of the Act and held Parliament was competent under Article 248 of the Constitution read with entry 97 of List I. Mitter J. agreed by a separate concurring judgment, Shelat J., Ray J. (as he then was) and Dua J. dissented. Apart from the closeness of the division--a consequence of no moment to the subordinate courts--the decision has come in for comment in academic circles. (See for instance the critical examination of the case in Seervai's Constitutional Law in India, IInd edn., Vol. II, pp. 1262 to 1265). The view has been strongly espoused that the decision requires a second look in the light of the pronouncement of the Supreme Court in Kesavananda Bharati's case, : AIR1973SC1461 . Prudence should counsel that we tread warily here.
18. This aspect of the matter apart, we should think that certain well-settled principles should assist in affording a solution to the problem of legislative competence. In H.R.S. Murthy v. Collector of Chittoor : 6SCR666 , the question arose as to the meaning of the expression 'royalty' with reference to Section 79(1) of the Madras District Boards Act of 1920. That section specifically referred to the lease amount as one of the components for computation of the annual rental value. Royalty followed immediately after the expression 'lease amount' in the section. It was held that it normally connotes payments made for materials or minerals won from the land. The argument was that Section 78 of the Madras District Boards Act imposing land cess as royalty under mining leases cannot be held to have been repealed by the Mines and Minerals Regulation and Development Act, 1948, or, in any event, by the Mines and Minerals Regulation and Development Act, 1957--both enactments by Parliament; so that, after these Acts, the land cess that could be levied under the Madras Act would only be exclusive of royalty. It was ruled that there was no overlapping between the Central Acts and the Madras Act, and that the Madras Act was in no way concerned with mines and minerals. It was further ruled that the land cess under the Madras Act is a ' tax on land ' under entry 49 of the State List of the Government of India Act, 1935. The court observed (pp. 181, 182):
'When a question arises as to the precise head of legislative power under which a taxing statute has been passed, the subject for enquiry is what in truth and substance is the nature of the tax. No doubt; in a sense, but in a very remote sense it has relationship to mining as also tothe mineral won from the mine under a contract by which royalty is payable on the quantity of mineral extracted. But that does not stamp it as a tax on either the extraction of the mineral or on the mineral right. It is unnecessary for the purpose of this case to examine the question as to what exactly is a tax on mineral rights seeing that such a tax is not leviable by Parliament but only by the State and the sole limitation on the State's power to levy the tax is that it must not interfere with a law made by Parliament as regards mineral development. Our attention was not invited to the provision of any such law enacted by Parliament. In the context of sections 78 and 79 and the scheme of those provisions it is clear that the land cess is in truth a 'tax on lands' within entry 49 of the State List.'
19. In Second GTO v. D.H. Nazareth : 76ITR713(SC) , while considering the validity of the G.T. Act, it was pointed out that the legislative entries are likely to overlap occasionally, and it is useful to examine the 'pith and substance' of the legislation in order to determine to which entry a particular legislation can be substantially related, notwithstanding its slight connection with another entry in a different legislative list. It was held that the 'pith and substance' of the G.T. Act was to place a tax on the gift of property, which may include lands and buildings. That however, would not make the tax a tax on lands and buildings within entry 49 of List II; in pith and substance, the measure was held to be a measure of taxation under entry 97 of List I read with art, 248 of the Constitution.
20. In Ratta Ram v. Province of East Punjab , the court was concerned with the validity of Punjab Urban Immovable Property Tax Act. The appellant before the Federal Court was the owner of a shop in Amritsar. He was called upon to pay a sum of Rs. 67-8-0 as property tax in respect of the shop. He claimed refund of the tax on the ground that the levy was beyond the province of the Punjab legislature. The relevant entries in Lists I and II of Seventh Schedule of the Government of India Act with respect to which the legislative jurisdiction had to be resolved were item 54 of List I, viz., 'Taxes on income other than agricultural income', and item 42 of List II, 'taxes on lands and buildings, hearths and windows'. In para. 12 the court stressed the following principle of construction (at p. 85).
'12. The proper approach to a question such as the one we have before us has been aptly denned by Lord Atkin in Gallagher v. Lynn  AC 863 in these words:
'It is well established that you are to look at the 'true nature and character of the legislation...' Russell v. Queen [188.2] 7 A C 829 , '...the pith and substance of the legislation'. If on the view of the statuteas a whole, you find that the substance of the legislation is within the express powers, then it is not invalidated if incidentally it affects matters which are outside the authorised field. The legislation must not under the guise of dealing with one matter in fact encroach uppn the forbidden field; Nor are you to look only at the object of the legislator. An Act may have a perfectly lawful object, e.g., to promote the health of the inhabitants, but may seek to achieve that object by invalid methods, e.g., direct prohibition of any trade with a foreign country. In other words, you may certainly consider the clauses of an Act to see whether they are passed 'in respect of' the forbidden subject.' The Punjab Act purports to tax property which prima facie the provincial legislature is allowed to do under item 42 of List II, Government of India Act. But if it appears that the impugned tax, in the guise of dealing with property, is in fact and in substance a tax on the income of the owner of property, then, undoubtedly, the Act is not a valid one. It is argued on behalf of the appellant that the moment it is seen that the basis of the tax is the annual value of property, which is the very basis used by the I.T. Act for assessing income from property, it should be held that it is in substance a 'tax on income' which is a subject outside the authorised field of the provincial legislature. The argument appears at first sight to be quite plausible one, but, on closer examination, the conclusion suggested does not seem to follow so readily from the premises enunciated, as is assumed. If the annual value of house property represented in every case the actual income of the owner from the property, the question would not have presented so much difficulty. But that is not so. In many cases, the annual value may approximate to actual income, but, in quite a number of cases, it may not. It is evident that in many cases, there may be a great divergence between the annual value of property and the actual profits derived or received by the owner from it. It is also possible to conceive of cases in which the property to be taxed does not actually yield any income whatsoever, though every property must have some notional annual value. As has been pointed out in treatises on income-tax, many of the rules framed under the Income-tax Act are highly artificial, so that
'income calculated for purposes of income-tax does not by any means necessarily correspond with the income actually received in the year which can be spent or saved. One of these artificial rules is the rule of estimating income from property. This was conceded in In re a reference under the Government of Ireland Act, 1920 : In re S. 3, Finance Act (Northern Ireland), 1934  AC 352 ;  2 All ER 111, where it was stated that 'the method of assessing income derived by ownership or occupation of property is somewhat arbitrarily based on the annual value and not the actual income'. Similarly, Kennedy L.J. observed in Rex v. Special Commissioners of Income-tax: Essex Hall, Ex parte  2 KB 434 (cited in ILR  Bom 58 at p. 80--Byramjee Jeejeebhoy v. Province of Bombay).
'An assessment upon 'annual value' may, for certain purposes be treated, in applying the Income Tax Acts, as an equivalent for an assessment upon 'gains and profits'; but they are not simply synonymous or interchangeable expressions.' 13. Now once it is realised that the annual value is not necessarily actual income, but is only a standard by which income may be measured, much of the difficulty which appears on the surface is removed. In our opinion, the crucial question to be answered is whether merely because the Income-tax Act has adopted the annual value as the standard for determining the income, it must necessarily follow that, if the same standard is employed as a measure for any other tax, that tax becomes a tax on income If the answer to this question is to be given in the affirmative, then certain taxes which cannot possibly be described as income-tax must be held to be so. A case in point is to be found in In re A reference under the Government of Ireland Act, 1920 : In re S. 3, Finance Act (Northern Ireland), 1934  AC 352 ;  2 All ER 111 . The question which arose in that case was whether the provisions of Section 3, Finance Act (Northern Ireland), 1934, were beyond the powers of the Parliament of Northern Ireland. Section 3 of the Act of 1934 imposed a tax on the council of every county and county borough, and the tax was computed on the basis of the rateable value of the county council or county borough. There was no dispute in that case that the 'rateable value corresponded to the annual value' as understood in the Income-tax Act, but it was held that the mere fact that the basis of the tax was rateable on annual value was not enough to make it a tax on income. Lord Thankerton, who delivered the judgment in that case, pointed out that' it is the essential character of the particular tax charged that is to be regarded, and the nature of the machinery, often complicated, by which the tax is to be assessed is not of assistance except in so far as it may throw light on the general character of the tax'. The tax was not held, to be a tax on income, because it was payable by an occupier, and the distinctive feature of the case was described in these words: '...the poor rate is levied in respect of the occupation of hereditaments, irrespective of a person's income generally, and irrespective of whether the rate payer is in fact deriving profits or gains from such occupation. A dwelling-house is a burden, not a source of profit, for the occupier who pays rent for it. He is rated on the value of the burden, while he remains unrated in respect of his whole profits, be they from business or frominvestments. In their Lordships' opinion, this marks the essential difference in character between income-tax and rates, and it is unnecessary to consider other and less important differences between them.' This case demolishes the broad contention that wherever the annual value is the basis of a tax, that tax becomes a tax on income. It shows that there are other factors to be taken into consideration and that it is the essential nature of the tax charged and not the nature of the machinery which is to be looked at.'
21. The court quoted the classic observation of Gwyer C.J. in Subramanian Chettiar v. Muttuswami Goundan and summarised its conclusion thus:
'19. The principles deducible from these pronouncements are, (1) that where there is an apparent conflict between an Act of the Federal Legislature and an Act of the Provincial Legislature,, we must try to ascertain the pith and substance or the true nature and character of the conflicting provisions, and (2) that, before an Act is declared ultra vires, there should be an attempt to reconcile the two conflicting jurisdictions, and, only if such a reconciliation should prove impossible, the impugned Act should be declared invalid.'
22. The principle of the decision of the Federal Court in Ralla Ram v. Province of East Punjab , was followed by the Supreme Court in Sudhir Chandra Nawn v. WTO : 69ITR897(SC) . The classic passage from the judgment of Sir Maurice Gwyer C.J. in Subramanian Chettiar v. Muttuswami Goundan , regarding the applicability of the doctrine of pith and substance was cited and followed. In the light of the above principles and decisions we are of the opinion that the impugned provisions in pith and substance are within the legislative competence of Parliament under Entry 82 of List I, and are, therefore, fully valid.
23. We turn last to the argument based on discrimination. We do not think there is any substance in the plea. The charge of tax is still on non-agricultural income. No part of the agricultural income is subjected to tax. For the purposes of determining the rate at which non-agricultural income is to be taxed, the agricultural income is taken into account. Such taking into account and the differential rates are based on the different sources of income available to the persons concerned. It is only in respect of persons who have agricultural income in addition to non-agricultural income that the mode of computation of the rate of tax as provided by the impugned provisions is adopted. We think the classification is reasonable and based on intelligible differentia. We think too that it is not unconnected with the objects of the taxing statute. We are not satisfied that the impugned provisions are discriminatory.
24. The Additional Solicitor-General who appeared for the Union of India invited our attention to the Report of the Committee on Taxation of Agricultural Wealth and Income (Raj Committee Report), whose recommendations were implemented by Parliament by the impugned provisions. We quote paras. 4.5 and 4.6 an 4.9 :
'4.5. The temptation to dress up large chunks of taxable income as agricultural in origin would be curbed to a considerable extent if the tax liability in respect of non-agricultural income is linked in some way with the aggregate income of an assessee comprising the receipts from both agricultural and non-agricultural sources. In other words, evasion through the device of camouflaging taxable income as gains from agriculture would cease to be paying if the disclosure of agricultural incomes entails a heavier burden of tax on non-agricultural incomes. We, therefore, propose that both the agricultural and non-agricultural components of a tax-payer's income be aggregated and the tax on the non-agricultural portion be levied as if it were placed in the top slabs of the aggregate income. A simple way of securing this objective would be to make a suitable provision in the Income-tax Act, 1961. Losses reported in agriculture need be permitted to be set off against only the gains reported from it in subsequent years.
4.6. Under the arrangement we propose, integration of agricultural and non-agricultural incomes for deriving the rate of tax on the latter would take effect only if an assessee has income exceeding the minimum amount laid down as the exemption limit for the levy of the Central income-tax. This initial exemption limit (which is now Rs. 5,000) is only in respect of non-agricultural income. In addition the income from agriculture, though it is to be included as part of total income, is not itself taxable by the Centre. Both have therefore to be first allowed for before non-agricultural income above the exemption limit of Rs. 5,000 is distributed over the different slabs and taxed at appropriate rates....
4.9. To clear all doubts on the matter we sought the advice of the Law Commission. In a unanimous report on this subject forwarded to us by the Ministry of Law, the Commission has stated that 'the inclusion of agricultural income within the scope of total income for the limited purpose of computing the rate of tax, is only a method of computation of tax, and does not amount to the levying of a tax on the income so included'. It adds that 'the power of the Union to tax non-agricultural income includes the power to take into account agricultural income for the purpose of determining the rate of tax, if it is found to be necessary for the efficient exercise of that power'.'
25. In the result, we reject the contentions raised against the validity of the impugned provisions of the Finance Act of 1973 and of 1974 viz.: Section 2(6), 2(7)(e) and Part IV of the 1st Schedule of the Finance Act, 1973;and Section 2(2), 2(7)(b)(ii) and 2(8)(e) and Part IV of Schedule I to the Finance Act, 1974. We dismiss the writ petitions but without costs.
26. We record our thanks to the counsel for the petitioners and to thelearned Additional Solicitor-General for the assistance offered to us bytheir able arguments.