K.T. Desai, C.J.
1. The petitioner in this case is the Chief of Bajana. Bajana was a fourth class State situate in Saurashtra. On 15th August 1947 the Indian Independence Act of 1947 was passed and the Dominion of India was constituted. After the Constitution of the Dominion of India an Instrument of Accession was executed by the Chief of Bajana acceding to the Dominion of India and transferring to the Dominion of India rights in respect of certain matters including defence external affairs and communications. On or about 23rd January 1948 the Rulers of Kathiawar States including the Chief of Bajana entered into a Covenant for the formation of the United State of Kathiawar. Article X of the Covenant provides as under:
(1) The Ruler of each Covenanting State shall be entitled to receive annually from the revenue of the United State for his privy purse the amount specified against that Covenanting State in Schedule I.
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The State of Bajana appears in Part B of Schedule I under item 10 and the amount of privy purse receivable by the Ruler of the State of Bajana is stated to be Rs. 65 0 By Clause (2) of the aforesaid Article it is provided that the aforesaid amount was intended to cover all the expenses of the Ruler and his family including expenses on account of his personal staff maintenance of his residences marriages and other ceremonies etc. and would neither be increased nor reduced for any reason whatsoever.
By Clause (3) of the said Article it is provided that the Raj Pramukh would cause the said amount to be paid to the Ruler in four equal instalments al the beginning of each quarter in advance. Clause (4) of the said Article runs as follows:
The said amount shall be free of all taxes whether imposed by the Government of the United State of Kathiawar or by the Government of India.
The Covenant is signed by the Rulers of the Kathiawar States. After the signatures of all the Rulers on the Covenant the following statement appears:
The Government of India hereby concur in the above Covenani and guarantee all its provisions. In confirmation whereof Mr. Vapal Pangunni Menon secretary to the Government of India in the Ministry of States appends his signature on behalf and with the authority of the Government of India.
The aforesaid statement is signed by Mr. Menon as Secretary to the Government of India Ministry of States. There were three supplementary Covenants entered into by the Rulers of all the aforesaid Kathiawar States. Each one of these supplementary Covenants is signed by the Rulers and underneath each Covenant also appears the signature of the Secretary to the Government of India Ministry of States appended on behalf and with the authority of the Government of India preceded by a statement that the Government of India thereby concurred in the Covenant and guaranteed all its provisions. Under one of the supplementary Covenants the name of the United State of Kathiawar constituted under the main Covenant was changed into the United State of Saurashtra. By the last supplementary Covenant it has been provided that the Constitution of India that was shortly to be adopted by the Constituent Assembly of India would be the Constitution for Saurashtra and would be enforced as such in accordance with the tenor of its provisions. By article II of that Covenant it was further provided that references in the earlier Articles to the Constitution framed thereunder would be construed as references to the Constitution of India.
Thereafter the Constitution of India came into force. By Article 291 thereof it is provided as under:
Where under any covenant or agreement entered into by the Ruler of any Indian State before the commencement of this Constitution the payment of any sums free of tax has been guaranteed or assured by the Government of the Dominion of India to any Ruler of such State as privy purse
(a) such sums shall be charged on and paid out of the Consolidated Fund of India; and
(b) the sums so paid to any Ruler shall be exempt from all taxes on income.
2. Thereafter the Central Government enacted the Expenditure-Tax Act 1957 The provisions of that Act were sought to be enforced against the petitioner in connection with the expenditure made by him out of the amount of privy purse paid to him. The petitioner has thereupon come before us praying that the Expenditure-Tax Act of 1957 in so far as it subjected to tax the privy purse of the petitioner be declared ultra vires the Covenant and/or Ordinance 1 of 1948 promulgated by the Raj Pramukh and/or Articles 291 and 295 of the Constitution of India and that the Expenditure-Tax Officer and the Union of India who are respondents to the present petition may be ordered by a writ of prohibition or by a suitable writ or order not to subject the expenses incurred by the petitioner out of privy purse amount received by him to the expenditure tax under the Expenditure-Tax Act 1957.
3. The learned Advocate General who appears for the respondents has raised a preliminary objection to the maintainability of the petition. He contends that the application made by the petitioner is barred under the provisions of Article 363 of the Constitution of India. Article 363 of the Constitution provides as under:
(1) Notwithstanding anything in this Constitution but subject to the provisions of Article 143 neither the Supreme Court nor any other Court shall have jurisdiction in any dispute arising out of any provision of a treaty agreement covenant engagement, sanad or other similar instrument which was entered into or executed before the commencement of this Constitution by any Ruler of an Indian State and to which the Government of the Dominion of India or any of its predecessor Governments was a party and which has or has been continued in operation after such commencement or in any dispute in respect of any right accruing under or any liability or obligation arising out of any of the provisions of this Constitution relating to any such treaty agreement covenant engagement sanad or other similar instrument.
4. Article 363 falls into two parts. The first part relates to disputes arising out of any provisions of a Covenant entered into or executed before the commencement of the Constitution by any Ruler of an Indian State and to which the Government of the Dominion of India or any of its predecessor Governments was a party and which has or has been continued in operation after such commencement. The second part deals with any dispute in respect of any right accruing under or any liability or obligation arising out of any of the provisions of the Constitution relating to any such Covenant. In both these cases under the Constitution this Court would have no jurisdiction to determine the same. In order that the dispute may fall within the first part it is necessary (1) that the Covenant should be entered into or executed before the commencement of the Constitution by any Ruler of an Indian State (2) that the Government of the Dominion of India should be a party to such Covenant and (3) that the same must have or have been continued in operation after the commencement of the Constitution.
5. There is no dispute as regards condition No. (1) being fulfilled. The Covenant has in fact been executed before the commencement of the Constitution by the Chief of Bajana.
6. As regards condition No. (2) it is urged on behalf of the petitioner that the Government of the Dominion of India is not a party to the Covenant. When we look at the provisions of the Covenant we find that it is stated therein as follows:
We the Rulers of certain States in Kathiawar
Being Convinced that the welfare of the people of this region can best be secured by the establishment of a state comprising the territories of the numerous States Estates and Talukas in Kathiawar with a common Executive Legislature and Judiciary
And Having resolved to entrust to a Constituent Assembly consisting of elected representatives of the people the drawing up of a democratic Constitution for that State within the framework of the Constitution of India to which we have already acceded and of this Covenant.
Do Hereby with the concurrence and guarantee of the Government ol India enter into the following Covenant.
So far the parties seem to be the Rulers of the States of Kathiawar who enter into the Covenant. They enter into the Covenant as they themselves have stated with the concurrence of the Government of India. Merely because the concurrence of the Government of India has been secured that by itself would not make the Government of India a party to the Covenant. It is further stated that the Covenant has been entered into with the guarantee of the Government of India. That implies that the Government of India agreed to guarantee the due observance of the provisions of the Covenant. The guarantee given by the Government of India would be operative as a guarantee in respect of the due discharge of the obligations sought to be imposed upon the United State of kathiawar under the various articles mentioned in the Covenant. Under Clause (1) of Article 10 the Ruler of each Covenanting State was entitled to receive annually from the revenues of the United State of Kathiawar for his privy purse the amount therein mentioned. The right to receive the amount from the revenues of the United State of Kathiawar has been guaranteed by the Government of India. By Clause (4) it is provided that the aforesaid amount shall be free from all taxes imposed by the Government of the United State of Kathiawar. The Government of India guaranteed that the amount paid would be free from all taxes imposed by the Government of the United State of Kathiawar. These obligations undertaken by the Government of India relate to acts to be performed by an authority other than the Government of India. Under Clause (4) it is further provided that the amount would be free of all taxes imposed by the Government of India. When the Government of India guaranteed the performance of this part of the Covenant in connection with the levy of taxes by the Government of India it entered into an obligation which was primarily its own. The Government of India was not guaranteeing somebody else's obligation but was itself agreeing that there would be no taxes levied by the Government of India in connection with the amount payable to the Rulers by way of privy purse. In doing so the Government of India itself was becoming a principal party to the agreement. By executing the Deed of Covenant the Government of India has become a party thereto guaranteeing the performance by other parties of their respective obligations under the Covenant and has itself undertaken not to levy any taxes in respect of the amounts of privy purse. The Government of India must be regarded as a party to the Covenant within the meaning of the same expression used in Article 363 of the Constitution of India.
7. The next point for consideration is whether the Covenant has or has been continued in operation after the commencement of the Constitution. For the purpose of considering whether the Covenant has been continued after the commencement of the Constitution it will be necessary to refer to some of the provisions of the Constitution itself. The obligations that had been undertaken by the Government of India by virtue of its signature under the Covenant were the obligations undertaken by the Government of the Dominion of the India as it existed at the time when the Covenant was entered into. By Article 294 (b) it has been provided that all rights liabilities and obligations of the Government of the Dominion of India whether arising out of any contract or otherwise would be the rights liabilities and obligations of the Government of India as it existed on the Constitution coming into force. By virtue of the operation of this provision of the Constitution the obligations imposed under the Covenant so far as the Government of the Dominion of India is concerned have been continued and have become the obligations of the Government of India under the Constitution of India. By Article 295 (b) it has been provided that as from the commencement of the Constitution all rights liabilities and obligations of the Government of any Indian State corresponding to a State specified in part B of the First Schedule to the Constitution whether arising out of any contract or otherwise would be the rights liabilities and obligations of the Government of India if the purposes for which such rights were acquired or liabilities or obligations were incurred before such commencement would thereafter be purposes of the Government of India relating to any of the matters enumerated in the Union List subject to any agreement entered into in that behalf by the Government of India with the Government of that State. The State of Saurashtra is one of the States specified in Part B of the First Schedule. The State of Saurashtra was under an obligation to carry out the terms of the Covenant aforesaid. The obligations of the Government of Saurashtra in connection with the liabilities and obligations under the Covenant have devolved on the Government of India in respect of the payment of the amount of the privy purse. By virtue of the operation of Articles 294 and 295 of the Constitution the provisions of the Covenant have been kept alive and have been continued in operation after the commencement of the Constitution and the obligations thereunder have devolved upon the Government of India. It has been urged by Mr. Modi the learned Advocate for the petitioner that the obligation which his client seeks to enforce is not merely an obligation arising under the Covenant but is an obligation which has been imposed upon the Government of India by virtue of the provisions contained in Articles 291 294 and 295 of the Constitution and he urges that when he seeks to enforce such an obligation his case cannot be said to fall within the ambit of the first part of Article 363 of the Constitution. By Article 291 (1) it is provided as under:
291(1) Where under any Covenant or agreement entered into by the Ruler of any Indian State before the commencement of this Constitution the payment of any sums free of tax has been guaranteed or assured by the Government of the Dominion of India to any Ruler of such State as privy purse
(a) such sums shall be charged on and paid out of the Consolidated Fund of India; and
(b)the sums so paid to any Ruler shall be exempt from all taxes on income.
8. Mr. Modi is right when he contends that this obligation to pay the amount of the privy purse out of the Consolidated Fund of India and the charge created on the Consolidated Fund of India for payment thereof and the exemption given for all taxes on income under Article 291 have been brought into being by reason of the provisions of Article 291. Mr. Modi is further right when he contends that when he seeks to enforce the obligation which arises under Article 291 he is seeking to exercise a right conferred upon him under the Constitution itself and that the reference to the Covenant is necessary only for the purpose of elucidating explaining and understanding what is provided for under Article 291. He is further right when he contends that he is seeking to enforce his right against the Government of India and to the extent that the Government of India under the Constitution is different from the Government of the Dominion of India as it existed at the time of the commencement of the Constitution the obligations which he seeks to enforce are obligations which arise under the Constitution. When Mr. Modi by making these submissions tries to get out of the ambit of the first part of the provisions of Article 363 he immediately falls within the ambit of the second part of Article 363 of the Constitution. The second part provides that the Supreme Court or any other Court would have no Jurisdiction in any dispute in respect of any right accruing under or any liability or obligation arising out of any of the provisions of the Constitution relating to any such covenant agreement or other similar instrument. The provisions contained in Articles 291 294 and 295 on which reliance has been placed relate infer alia to rights liabilities and obligations arising under the Covenant or agreement referred to above and the provisions of Article 363 extend thereto with the result that the disputes sought to be raised by the present petition are disputes which are not justiciable in this Court or before the Supreme Court. In connection with this aspect of the matter our attention has been drawn by the learned Advocate General to a decision of the Supreme Court reported in : 2SCR474 in the case of State of Seraikella and Ors. v. Unions of India and Anr. In dealing with Article 363 of the Constitution it has been stated in that case that the opening words of that Article in terms over-ride all provisions of the Constitution subject only to the provisions of Article 143 which enable the President to consult the Supreme Court on matters referred to it. In that case the Supreme Court held that those all-embracing opening words of Article 363 clearly over-ride the operation of Article 374(2) which they were the considering. In the present case we can with equal force say that those all-embracing opening words of Article 363 clearly over-ride the operation of Articles 291 294 and 295 with the result that in connection with the enforcement of any rights arising under any Covenant or under the provisions of the Constitution in collection with any Covenant the jurisdiction of the Supreme Court as well as the High Court is taken away except as regards the Supreme Court to the extent provided in Article 143. A reference was also made to the case of Maharaj Umeg Sing and Ors. v. State of Bombay and Ors. reported in : 2SCR164 In that case also the Supreme Court considered the bar imposed by Article 363 of the Constitution. The petitioners in that case were Jagirdars and relations of the Rulers of the erstwhile States which had merged in Bombay. They challenged the vires of the Bombay Merged Territories and Areas (Jagirs Abolition) Act 1953 where under they were deprived of their jagirs. They contended that by reason of Clause 5 of the letters of guarantee which had been obtained by the Rulers of the erstwhile State from the Dominion Government the Slate Legislature had no power to enact the aforesaid Act so as to deprive the petitioners of their jagirs the ownership whereof had been guaranteed under Clause 5 of the letters of guarantee. By Clause 5 the Government of the Dominion of India had given a guarantee in connection with the enjoyment of the ownership inter alia of Jagirs existing on the 1st April 1948. The Supreme Court in that case came to the conclusion that Article 363 constituted a bar to the maintainability of the applications. The learned Advocate General referred us to a much later decision of the Supreme Court reported in : 41ITR743(SC) in the case of Sudhansusekhar Singh Deo and Anr. v. The State of Orissa and Anr. In that case the Supreme Court had occasion to consider the provisions of Articles 291 and of Article 363. In the course of its judgment the Supreme Court in that case has observed at page 199 as under:
Article 291 of the Constitution deals with the privy purse of the Rulers under any covenant or agreement entered into by the Ruler of any Indian Slate before the commencement of the Constitution payment whereof is free from tax as has been granted or assured by the Government of the Dominion of India. Article 362 recommends to the Parliament and the State Legislature in making laws after the Constitution to have due regard to the guarantee or assurance given under any covenant or agreement. Even though Article 362 is not restricted in its recommendation to agreements relating to the privy purse and covers all agreements and covenants entered into by the Rulers of Indian States before the commencement of the Constitution whereby the personal rights privileges and dignities of the Ruler of an Indian State were guaranteed it does not import any legal obligation enforceable at the instance of the erstwhile Ruler of a former Indian State. If despite the recommendation that due regard shall be had to the guarantee or assurance given under the covenant or agreement the Parliament or the Legislature of a State makes laws inconsistent with the Personal rights privileges and dignities of the Ruler of an Indian State exercise of the legislative authority cannot relying upon the agreement or covenant be questioned in any Court and that is so expressly provided by Article 363 of the Constitution.
9. In our view when an obligation which arises out of any liability or obligation under the provisions of the Constitution relating to any covenant is sought to be enforced the same is unenforceable in a Court of law. In the present case the right conferred upon the Ruler which is sought to be given effect to and the liability or obligation of the Government of India which is sought to be enforced arise out of the provisions of the Constitution relating to such covenant and clearly fall within the ambit of Article 363 of the Constitution and the petitioners are not entitled to claim any relief at our hands. This by itself is sufficient to dispose of the petition. There are however some other points which arise in the petition and as the same have been argued at some length and with some emphasis we will shortly deal with the same. It was urged by the learned Advocate General that the rights which have been conferred under Article 10 of the Covenant and which have been guaranteed by the Government of India arise by virtue of an act of State and that the obligations in connection therewith are not enforceable in the municipal Courts of the land. Reliance was placed in this connection upon a decision reported in : 34ITR514(SC) in the case of M/s Dalmia Dudri Cement Co. Ltd. v. Commissioner of Income-tax. In that case one Shanti Prasad Jain who was a promoter of the Dalmia Dadri Cement Co. Ltd. had obtained certain concessions from the Ruler of Jind under an agreement. Under Clause (1) of that agreement Shanti Prasad Jain was given the sole and exclusive monopoly right of manufacturing cement in the Jind State. One of the terms of the said agreement provided for a public limited company being floated to work the concessions. It was further provided that the Company would be assessed to income-tax in accordance with the State procedure but the rate of income-tax would always be four per cent upio a limit of the income of rupees five lacs and Eve per cent, on such income as was in excess of rupees five lacs. After the Dominion of India came into being on August 15 1947 the Ruler of Jind amongst others entered into a Covenant with the Government of India for the merger of the territories of that Ruler into one State called the Patiala and East Punjab States Union and by the Covenant all duties and obligations of the Ruler appertaining or incidental to the Government of the Covenanting State were to devolve on the Union and would be discharged by it. It was urged in that case that the act of entering into such a covenant was an act of State and as it constituted an act of State any obligation arising under the covenant was not enforceable in the municipal Courts of the land. In dealing with what constitutes an act of State the Supreme Court in that case observes as under:
When the sovereign of a State-meaning by that expression the authority in which the sovereignty of the State is vested-enacts a law which creates declares or recognizes rights in the subjects any infraction of those rights would be actionable in the Courts of that State even when that infraction is by the State acting through its officers It would be no defence to that action that the act complained of is an act of State because as between the sovereign and this subjects there is no such thing as an act of State and it is incumbent on his officers to show that their action which is under challenge is within the authority conferred on them by law. Altogether different considerations arise when the act of the sovereign has reference not to the rights of his subjects but to acquisition of territories belonging to another sovereign. That is a matter between independent sovereigns and any dispute arising therefrom must be settled by recourse not to municipal law of either States but to diplomatic action and that failing to force. That is an act of State pure and simple and that is its character until the process of acquisition is completed by conquest or cession. The status of the residents of the territories which are thus acquired is that until acquisition is completed as aforesaid they are the subjects of the ex-sovereign of those territories and thereafter they become the subjects of the new sovereign In the new set up these residents do not carry with them the rights which they possessed as subjects of the ex-sovereign and as subjects of the new sovereign they have only such rights as are granted or recognised by him.
10. Thereafter they proceeded to observe that:
No act done or declaration made by the new sovereign prior to his assumption of sovereign powers over acquired territories can quad the residents of those territories be regarded as having the character of a law conferring on them rights such as could be agitated in his Courts. In accordance with this principle clauses in a treaty entered into by independent rulers providing for the recognition of the rights of the subjects of the ex-sovereign are incapable of enforcement in the Courts of the new sovereign.
Applying these principles to the facts of that case the Supreme Court held that the Covenant in question entered into by the Rulers of the Covenanting States was in its entirety an act of State and that one of the articles therein upon which reliance was placed by the appellant in that case could not operate to confer upon the appellant any rights as against the Patiala Union. Mr. Thakore is right when he contends that the act of entering into the covenant or agreement by the Government of India in this case constitutes an act of State and if any obligations which arise purely and simply by virtue of the Covenant or agreement were sought to be enforced the same could not be enforced in the municipal Courts of the land. After the Covenant was entered into if nothing more was done than it could very well have been urged that no relief could be given by the Courts in India. When the Constitution of India was framed certain rights and obligations which arose out of the Covenant were sought to be given effect to by virtue of the provisions of the Constitution itself. By Article 291 the payment of the amount of the privy purse under such Covenant has been made a charge on the Consolidated Fund of India and the amount thereof is required to be paid out of such Consolidated Fund and a further obligation has been imposed that the sums so paid would be exempt from all taxes on income. When the provisions contained in Article 291 are sought to be enforced in the Courts of the land it would be no answer to say that the obligations arose originally out of a covenant which constituted an act of State. There is however as we have already stated a bar to an action by reason of the provisions contained in Article 363 of the Constitution.
11. We shall now advert to the merits of the matter. Mr. Mody has very strongly urged before us that under the provisions of the Covenant the payment has been made free of all taxes. He further urged that under the provisions of Article 291 an exemption has been granted from all taxes on income and that when the Rulers of Indian States are subjected to the provisions of the Expenditure Act 1957 they are taxed in respect of an expenditure incurred enter alia out of the amount of the privy purse paid to them and that the constitutional guarantee given under Article 291 (b) is violated and that the obligations imposed under the Covenant which has been continued under Articles 294 and 295 of the Constitution have been violated. He referred us to the provisions of Section 5 (q) of the Expenditure tax Act. By Section 5 it is provided that no expenditure tax shall be payable under the Act in respect of any such expenditure as is referred to in the clauses therein mentioned and that such expenditure would not be included in the taxable expenditure of an assessee. Clause (1) appearing therein refers to any expenditure not being personal expenditure incurred by the assessee out of the sums if any guaranteed or assured by the Central Government as his privy purse for meeting any expenses in respect of:
(i) the maintenance of any member of his retinue and the payment of salaries allowances and pensions to the members of his staff or to persons who have retired from his service;
(ii) the maintenance of any one building declared by the Central Government as his official residence under paragraph 13 of the Merged States (Taxation Concessions) Order 1949 or paragraph 15 of the Part B States (Taxation Concessions) Order 1950.
(iii) the maintenance of any conveyances or animals for official purposes:
(iv) the maintenance of any relatives dependent on him for maintenance:
(v) the performance of any official ceremonies; which expenses having regard 10 the status of the assessee or to the practice of the family to which the assessee belongs have to be or are being incurred by him and are in the opinion of the Expenditure-tax Officer reasonable Mr. Modi is right when he contends that apart from the expenditure referred to in Clause (q) if any other expenditure is incurred out of the amount of the privy purse of the petitioner a tax is liable to be levied under the Expenditure-tax Act. Mr. Modi is right when he contends that the petitioner is made subject to the provisions of the Expenditure-tax Act whereunder a part of the expenditure out of the privy purse is subjected to the expenditure-tax. Merely because he is liable to pay expenditure tax in respect of the expenditure incurred out of the privy purse it cannot be said that any provision of the Constitution has been violated unless it is established that the tax levied under the aforesaid Act is a tax on income. Mr. Modi asks us to interpret the words all taxes on income appearing in Article 291 in abroad sense. The words taxes on income also appear in item No. 82 of List I in the seventh Schedule to the Constitution of India. The words there used are Taxes on income other than agricultural income. Mr. Modi urges that the words all taxes on income in Article 291 must bear the same meaning as the words taxes on income in item No. 82 in List I of the seventh Schedule. We are in agreement with the submission made by him in this respect. The words have to be construed in a broad sense. Mr. Modi then enunciated propositions of law to which we can take no exception. He urged that inspite of the wide powers which may exist in the State to levy taxes the power to levy taxes can only be exercised by the State within the constitutional limits that whenever a question arises about the constitutionality of a tax the Courts are not concerned by the name by which the tax is called but are really concerned with the operation and effect of the Act and that whenever there is an immunity from taxation given by the State the State cannot destroy such immunity by its skilled legal manipulation. He referred us to some American Cases on the subject. As the above propositions are not contested by the learned Advocate General who appears for the respondents it is not necessary for us to go into the various cases to which reference has been made. After placing a liberal construction upon the words taxes on income we have to consider the real nature of the tax which is sought to be levied under the provisions of the Expenditure-tax Act and consider whether the tax so levied falls within the ambit of the words taxes on income. The Expenditure-tax Act as its very name indicates is a tax on expenditure. In the preamble it is stated that it is an Act to provide for the levy of a tax on expenditure. The term expenditure is defined in Section 2 (b) of the Act to mean any sum in money or moneys worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee and includes any amount which under the provisions of the Act is required to be included in the taxable expenditure. Taxable expenditure has been defined to mean the total expenditure of an assessee liable to tax under the Act. Section 3 is the charging section. By that section it is provided that subject to the other provisions contained in the Act there would be charged for every financial year commencing on and from the first day of April 1958 a tax (thereinafter referred to as expenditure-tax) at the rate or rates specified in the Schedule in respect of the expenditure incurred by any individual or Hindu undivided family in the previous year. By Section 4 it is provided that unless otherwise provided in Section 5 the following amounts would be included in computing the expenditure of an assessee liable to tax:
(i) any expenditure incurred whether directly or indirectly by any person other than the assessee in respect of any obligation or personal requirement of the assessee or any of his dependents which but for the expenditure having been incurred by that other person would have been incurred by the assessee to the extent to which the amount of all such expenditure in the aggregate exceeds Rs. 5000/in any year; and
(ii) any expenditure incurred by any dependent of the assessee for the benefit of the assessee or of any of his dependents out of any gift donation or settlement on trust or out of any other source made or created by the assessee whether directly or indirectly. Various exemptions are provided for by Section 5. By Section 6 provision is made for certain deductions out of the expenditure incurred. It is clear from the provisions of the Act that the tax is levied on the expenditure incurred by an assessee. A tax on income is tax when any monies which constitute income are received or deemed to be received by an assessee. A tax on expenditure is a tax in receipt of monies expended by or which are deemed to be expended by an assessee. One is a tax speaking figuratively when monies enter the till while the other is a tax in connection with monies which go out off the till. One taxes the entry the other taxes the exist. The result of a tax on income is to restrict the availability of funds for the purpose of expenditure. In connection with a tax on expenditure there is an attempt to restrict the expenditure or the spending of money. The object of such restriction may be either to encourage saving or to reduce the standard of living of those whose standard of living is high. A tax on expenditure is levied irrespective of the source from which the monies which are spent are derived. The source of the monies may be either income or capital or may even be borrowing. The non-existence of income is no bar in principle to the levy of an expenditure tax. It is only by reason of the operation of the proviso to Section 3 that no expenditure tax is payable by an assessee whose income from all sources as reduced by the amount of taxes to which such income may be liable under any other law for the time being in force does not exceed rupees thirty-six thousand. An expenditure may result not merely in reducing ones income but may result in reducing even ones capital. Having carefully considered the provisions of the Expenditure tax Act it is not possible for us to accede to the argument that the tax sought to be levied thereunder is a tax on income. We are in a sense supported in the conclusion to which we have arrived at having regard to the way in which the monies derived by way of expenditure tax have been dealt with. Article 270(1) of the Constitution provides that taxes on income other than agricultural income shall be levied and collected by the Government of India and distributed between the Union and the States in the manner provided in Clause (2) thereof. By Clause (2) it is provided that such percentage as may be prescribed of the net proceeds in any financial year of any such tax except in so far as those proceeds represent proceeds attributable to Union territories or to taxes payable in respect of Union emoluments shall not form part of the Consolidated Fund of India but shall be assigned to the States within which that tax is leviable in that year and shall be distributed among those States in such manner and from such time as may be prescribed. We are informed that the taxes levied and collected by the Government of India under the Expenditure-tax Act 1957 are not dealt with or distributed in the manner provided by Article 270. The Expenditure-tax Act 1957 is an Act falling within the ambit of Article 248 of the Constitution and of entry No. 97 in List I of seventh Schedule to the Constitution. Mr. Modi drew our attention to a decision of the Supreme Court reported in A.I.R. 1961 Supreme Court 1165 in the case of Bombay Gas Co. Ltd. v. Jts workmen. That case related to bonus and the various deductions which were liable to be made before considering the profits of the Company available for distribution. In the course of its judgment a reference has been made to what has now come to be known as the Full Bench formula whereunder certain deductions are being made before the divisible amount from which bonus could be paid is arrived at. When the Full Bench formula was evolved the Wealth-tax Act had not been enacted. A question arose whether a deduction should be made on account of the wealth-tax in the same manner in which deduction had been made in connection with income-tax paid by the employer. The Court there came to the conclusion that deduction should be made in connection with monies paid on account of wealth-tax. This authority has no bearing whatsoever in connection with the question that arises before us relating to the interpretation of the expression taxes on income within the meaning of Article 291 of the Constitution. As the matter involved in this petition is of considerable importance we have carefully applied our minds to all the relevant matters placed before us and we are of the view that the expenditure tax levied under the Expenditure-tax Act 1957 cannot be regarded in any sense as a tax on income.
12. Mr. Modi then further argued that even if such a tax may not be a tax on income it constitutes a tax from which Rulers have in fact been exempted by reason of the provisions of Article 10 of the Covenant. He urged that when it is provided by Article 10 that the amount of the privy purse shall be free of all taxes it means that it shall be free from all taxes relating not merely to the receipt of the amount of the privy purse but from all taxes when the same is expended. The argument in substance comes to this that the Ruler is to be personally exempt from all taxes in respect of any commodities which he may purchase out of the monies given to him by way of privy purse and in respect of all that he may do with the amount of the privy purse. He would not be liable for payment of entertainment-tax when he visits a cinema-show and he would not be liable to pay any duty on any article which he might import or purchase if he utilises the amount of his privy purse in connection with the same and on every occasion when he incurs an expenditure an inquiry would have to be made whether he is paying the amount out of the privy purse or out of any other sources. In our view there is no warrant for this submission. The expression free of all taxes is intended to mean free of all taxes which would be payable because of the receipt of the amount of the privy purse.
13. Mr. Mody further contended that the obligations that had been imposed by the Covenant had been accepted by the Government of the United State of kathiawar and had been given effect to by Ordinance No. 1 of 1948 promulgated by the Raj Pramukh in exercise of the powers conferred upon him under the terms of the Covenant. Not a single provision of the Ordinance has been pointed out to us which in any way relates to the obligations imposed under Article 10 of the Covenant concerning the privy purse and the argument based on the provisions contained in Ordinance I of 1948 is without any merit. Even if Ordinance I of 1948 had sought to give effect to the provisions of Article 10 of the Covenant and Article 10 had formed the subject matter of such ordinance it would have been open to the legislature of that very State to undo that which had previously been done by an Ordinance and it would have been subsequently open to the Parliament of India to undo that which had been done by such Ordinance and enact the Expenditure tax Act 1957
In the result the petition fails and is dismissed. The matter has gone on before us for a considerable length of time and we consider that the fair order to make as regards costs would be that the petitioner should pay to the respondents a sum of Rs. 600/- by way of costs and we order accordingly. The application is stay is also dismissed.