The judgment of the court was delivered by
SRINIVASAN J. - In W. P. No. 307 of 1962, a writ of certiorari is prayed for to call for the records relating to the expenditure-tax assessment of the petitioner for the assessment year 1958-59 on the file of the Income-tax Appellate Tribunal, and to quash the order of the Tribunal. In W. P. No. 308 of 1962, a writ of prohibition is sought to prohibit the I Additional Expenditure-tax Officer from taking assessment proceedings under the Expenditure-tax Act in respect of the assessment year 19959-60. In Tax Case No. 263 of 1962, on the application of the assessee under section 25(1) of the Expenditure-tax Act, the following two question stand referred for the decision of this cour :
'(1) Whether the inclusion of the income from agriculture, interim payments and race winnings for determination of the total income of the assessee for the purpose of Expenditure-tax Act is justified in la ?
(2) Whether the inclusion of Rs. 26,650, being the customary allowance paid to the Ranees, is justifie ?'
We shall refer to the facts of the tax case first. This relates to the assessment for the assessment year 1958-59, the same period which is covered by W. P. No. 307 of 1962. The assessee was the holder of an impartible estate and the income that he derived during the previous year relevant to the assessment year arose out of agriculture, race winnings, interim payments received under the provisions of the Estates Abolition Act and business income. The total of these incomes came to Rs. 3,61,360. The Expenditure-tax Officer computed the expenditure of the assessee during the relevant previous year at Rs. 2,51,583 and levied tax thereon under the provisions of the Expenditure-tax Act at Rs. 2,22,583. On appeal, the order was modified by allowing an amount of Rs. 1,54,604 as a deduction in the taxable expenditure. In the further appeal to the Tribunal, it was contended that the income derived from agriculture and winnings in horseracing as well as the interim payments paid to the assessee under the Estates Abolition Act could not be regarded as incomes which could be taken into computation for assessing the total income of the assessee for the purpose of the Expenditure-tax Act. If these amounts are excluded, and if the amount of income-tax paid is deducted, it is urged that the income of the assessee as computable under the provisions of the Act did not exceed Rs. 36,000. Since the Act imposes expenditure-tax only in respect of persons who receive (as computed) incomes, above Rs. 36,000, the claim was advanced that the petitioners were not taxable. The principal contention of the assessee is that income from all sources referred to in the relevant provision of the Expenditure-tax Act should mean only income that is taxable under the Income-tax Act and not other incomes. This contention was not accepted by the Income-tax Appellate Tribunal. The claim to exemption of the sum of Rs. 26,650, being the allowance paid to the Ranees, was also rejected by the Tribunal.
The question that has been argued at length in these cases is that in the computation of the income for the purpose of determining the liability of a person to expenditure-tax, regard must be had only to those incomes which are taxable under the Income-tax Act. Since income derived from agriculture or from races is not so taxable, they should have been excluded from consideration. To hold otherwise, it is contended, virtually amounts to taxing an income which is not taxable either under the statute or to tax which no legislative authority is available in List I of the Seventh Schedule to the Constitution. In so far as the interim payments are concerned, it is contended on behalf of the petitioner that these payments are in the nature of capital receipts and are therefore not assessable to income-tax. If these payments are capital, it is obvious that they cannot be included under the head of 'income' even for the purpose of the Expenditure-tax Act. It is further contended that the Expenditure-tax Act is ultra vires and that no power has been conferred by the Constitution to impose a tax on expenditure. It is claimed that the Expenditure-tax Act indirectly seeks to bring to tax the very income or a portion of the income which had already suffered tax under the Indian Income-tax Act. In so far as the Expenditure-tax Act purports to levy tax on the expenditure of any amount originally derived as income from agriculture, it is claimed that it should be regarded as being beyond the competence of the Central Legislature. The Central Legislature cannot impose a tax on agricultural income and under the device of imposing a tax on expenditure, the levy of tax on income derived from agriculture cannot be justified.
In the counter-affidavit on behalf of the Expenditure-tax Officer, it is claimed that the contention that the expenditure-tax is only an indirect tax on income is erroneous. It is urged that notions based upon the Indian Income-tax Act cannot be imported for the purpose of interpretation of the provisions of the Expenditure-tax Act. It is further urged that under entry 97 of List I, Parliament is enabled to enact a law levying a tax on any other matter not mentioned in List II of List III. It is also contended that the proviso to section 3 of the Expenditure-tax Act, which is intended to determine the class of persons who should be liable to the charge, is founded on a rational basis. There is no warrant, according to the contentions in the counter-affidavit, to exclude incomes, which may not be taxable under the Indian Income-tax Act, in applying the proviso in question.
Section 3 of the Act imposes the charge to expenditure-tax, and it reads thu :
'3. Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of April, 1958, a tax (hereinafter 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.'
Originally, this section contained a proviso in the following term :
'Provided that no expenditure-tax shall be payable by an assessee for any assessment year if his income from all sources during the relevant previous year 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 Rs. 36,000.'
The effect of this proviso was to define and determine the class of persons who would be liable under the main provision, that is to say, taking note of the income from all sources during the relevant previous year and deducting therefrom the amount of taxes to which such income may be liable, if the net figure does not exceeds Rs. 36,000, such an assessee would not be liable to expenditure-tax. This proviso was amended by Act XII of 1959, and in its amended form, it reads thu :
'Provided that no expenditure shall be payable by an assessee for any assessment year if the income from all sources derived by the assessee and his dependents during the previous year as reduced by the amount of taxes to which such income may be liable under any law for the time being in force does not exceed Rs. 36,000.'
It will be noticed that the income to be taken into account by this amended proviso is the income not only of the assessee but of his dependents as well, and the expression 'the amount of taxes to which such income may be liable under any other law for the time being in force' was also substituted by 'the amount of taxes to which such income may be liable under any law for the time being in force,' the word 'other' being dropped. This proviso was omitted by Act V of 1964, substantially the same effect being achieved by amending the Schedule to the Act specifying 'nil' rate for the initial slab of Rs. 36,000 of the taxable expenditure.
It is the contention of Mr. Vedantachari, learned counsel for the petitioner, that the real object of the enactment is to tax incomes which may have escaped tax at the income stage. It is urged by him that the Act is not intended really to control expenditure, for the tax is not levied from persons who have 'incomes'. It may be that there are persons who do not have taxable incomes but who meet whatever expenditure they have to meet out of capital. Those persons do not come within the ambit of the Act. This is pressed by the learned counsel in support of his argument that the tax is not really designed to control expenditure; were that really so, the Act should have dealt with expenditure, whether or not it was met out of income or capital at all. He argues further that if any control of the expenditure is what is aimed at by the Act, it would be more appropriate to impose such control on people with smaller incomes, for it is they who require protection against excessive spending. On the other hand, three Acts were more or less simultaneously passed by Parliament, they being the Gift-tax, the Wealth-tax and the Expenditure-tax Acts. The intention of the Central Legislature was clearly to plug up loopholes by which incomes escaped taxation under the Income-tax Act. Such incomes could be caught in the net of taxation either by the Expenditure-tax Act, by the providing taxes on expenditure above certain figures, or taxes on gifts or taxes on wealth, these being the only means by which any incomes which escaped the Income-tax Act could possibly be utilised. The sole object of this integrated scheme of legislation was, according to the learned counsel, only to bring to tax such incomes as might have evaded income-tax, and if that should be the aim and object of the Act, it cannot but be presumed that the legislature sought to impose in a different form tax on incomes which were lawfully not subject to tax under the Income-tax Act. It is argued that a proper understanding of the proviso would support the above inference.
Turning to the proviso, it is urged that the several expressions used herein follow the pattern of the Income-tax Act. The proviso refers to 'income from all sources' and to the 'previous year', and the same interpretation must be placed upon these expression as would apply to them in the context of the Income-tax Act. The expression 'income from all sources' or even what a source really indicates is not anywhere defined in the Expenditure-tax Act. As the Act was originally passed, 'previous year' was defined to mean the previous year as defined in clause (11) of section 2 of the Income-tax Act. It was subsequently amended by Act XII of 1959. But, nevertheless, for all intents and purposes, the definition of the 'previous year' in the Expenditure-tax Act follows the pattern set in the Income-tax Act. Section 6 of the Income-tax Act defines the heads of income chargeable to income-tax and while setting out certain special heads such as salaries, interest on securities, income from property, profits and gains of business, profession or vocation and capital gains, it includes a head as 'income from other sources.' The expression 'from all sources' used in the Expenditure-tax Act must, according to Mr. Vedantachari, be related to such sources as are envisaged in the Income-tax Act.
Reference has been made by the learned counsel to the general principle of interpretation of statutes that though the literal construction of a provision of an Act has in general a prima facie preference, to arrive at the real meaning, it is necessary to examine the aims and objects of the whole Act. At page 61 of Maxwell on the Interpretation of Statutes (11th edition), an illustration has been afforded in respect of the construction to be placed upon an expression used in an Act. The learned author states that the meaning of an expression can be adopted to what appears to suit most exactly the object of the Act. Bindra in Interpretation of Statutes (3rd edition) also refers to cases where a departure from the plain meaning is permitted, and observes that in construing technical expressions, it is not always the grammatical and the ordinary sense that need be followed. It is stated herein as a settled rule in the interpretation of statutes that generally words will be taken to have been used in the wider or in the more restricted sense according to the general scope and object of the Act, and that another rule is that generally words will ordinarily be construed with no wider meaning than is necessary to carry into effect the objects and purposes of the Act. It is thus the contention of the learned counsel, that though section 3 in its main part refers to a charge on the expenditure, the proviso deals with it only to the extent of income arising from certain sources and that these sources should again be within the taxable competency of the legislature. According to the learned counsel, therefore, in taking account of expenditure, those items of income which are not chargeable to tax should be excluded, and reference should be had only to that quantum of income which arises from sources other than the taxable sources. In In re Hindu Womens Right to Property Act, the word 'property' was, in the context of the legislation, construed to mean non-agricultural property, although no such limitation appeared from the provisions of the Act. In Umayal Achi v. Lakshmi Achi, it was pointed out that the Act, the Hindu Womens Right to Property Act, could not affect the devolution of land in the Governors Provinces, and that as a principle of construction, it would be proper to limit the expression 'property' to mean all property in respect of which the legislature was competent to legislate. These principles regarding construction have been approved by the Supreme Court in R. M. D. C. v. Union of India where their Lordships observe that what have to be considered in the context would be (1) what was the law before the Act was passes, (2) what was the mischief or defect for which the law did not provide, (3) what remedy Parliament has appointed, and (4) the reason for the remedy. But, at the same time, their Lordships point out that what the court is called upon is to ascertain the real intent, and that must, of course, be gathered from the words used in the statute. It is true that the decision should not rest on the literal interpretation of the words used in disregard of all other materials. But it is however obvious that these aids to interpretation have to be sought and resorted to only in cases of ambiguity. If the expression used, read in the context of the entire enactment, is capable of a rational construction, the aim and object of what the legislature thought would not really call for consideration. It is not the presumptions of the legislature that make the law but what it expressly set down in the statute in question.
Though it may perhaps be conceded that the Expenditure-tax Act was one of several enactments designed to prevent the evasion of tax on income, the enactments, the Wealth-tax Act, the Gift-tax Act and the Expenditure-tax Act do not of their own force seek to tax income. The Income-tax Act expressly sought to tax income on the occasion of its receipt or accrual. But, when once the income had been earned and taxed, the Income-tax Act was no longer effective and other devices to tax were obviously resorted to, different from those which the income-tax law take care of. The broad statement that these taxes from part of one integrated scheme to check evasions of tax does not express the whole underlying purpose of the several enactments. The title of the Expenditure-tax Act was merely 'An Act to provide for levy of tax on expenditure', and if that should reveal the purpose of the legislation, the circumstance that taken together with all the other Acts, the effect was that evasions of income-tax were also checked, would not make that the sole underlying purpose of the Act.
Even accepting the arguments of the learned counsel that the Expenditure-tax Act does take into account the incomes from the sources which are referred to in the Income-tax Act, it does not immediately follow that the Expenditure-tax Act brings to tax the income from those sources. It is true, as contended by Mr. Vedantachari, that Parliament has no authority to tax agricultural income. Equally, it has no power to levy a tax on betting, as both of these come within the State legislative list. The attempt of Mr. Vedantachari is to establish that because Parliament has no power to tax these heads of income, it has designed this device of taxing the expenditure. In effect, it taxes those heads of income which it is not competent to tax. It seems to us that this conclusion cannot be reached on the basis of any manner of interpretation of section 3 of the Act. Firstly, that Parliament can impose a tax on expenditure in exercise of the legislative authority conferred by entry 97 in List I can admit of no denial. It is expenditure that is taxed, and solely for the reason that expenditure can be incurred only out of income, generally speaking, it would not immediately follow that it is the income that is being taxed. The tax on income is levied at the stage when the income accrues or arises, to state broadly. At the stage, the Income-tax Act steps in and takes toll of a part of the income. Thereafter, the remaining amount is not liable to any tax as a tax on income. Obviously, the same argument as advanced by Mr. Vedantachari would apply to a consideration of the validity of the Wealth-tax Act or the Gift-tax Act. When once income has been realised from whatever source it may be in the shape of money or its equivalent, it ceases to carry with it any impress of its source. It simply remains money in the hands of the person. If Parliament could lawfully levy a tax on any particular activity of an individual the fact that that activity is associated with the income does not mean that it is the income that is taxed. We are unable to see what warrant there is for holding that the identity of the source is maintained even after the income has been realised from the source.
It has been argued that the use of the expression 'other' in the phrase 'to which such income may be liable under any other law for the time being in force', is really revealing, for the inference should flow from the use of the expression 'other' that this Act also is an Act which casts a liability upon the income. As we have stated already, the word 'other' was dropped by the Amending Act XII of 1959. Even apart from that, this word really conveys no sense in the context, for the Expenditure-tax Act does not purport to levy a tax on income. We shall presently refer to the proper scope of a proviso. No emphasis can, therefore, be placed on the expression 'other' in support of the contention of the learned counsel that the real purpose of the Expenditure-tax Act is to levy a tax on income.
Mr. Sampath Ayyangar in his Three New Taxes comments thu :
'Parenthetically, the readers attention may be drawn to the word other occurring in the phrase to which such income may be liable under any other law. The words other is used as contra-distinct from expenditure-tax mentioned in the opening part of the proviso. The expenditure-tax is a tax on expenditure, not on income. In these circumstances, the use of the word other in this context is baffling. In order to make sense of this last part of the proviso, the word other should have to be ignored.'
Section 3 of the Act by its main part imposes the expenditure-tax on every individual. The proviso steps in and limits the levy to only that class of persons whose net income after the payment of taxes in respect of the income from all sources exceeds a particular figure. The function of this proviso is to carve out a class of persons who would be liable to the charge under the main part of the provision. The proviso is not itself the charging provision. In determining the class of persons who would be liable to the charge, the law takes into account the totality of the income received by the person from all sources, and deals with it in a particular manner in making the classification of persons to be charged and those not to be charged. But the charge itself is undoubtedly not upon the net figure so reached. The charge is upon the activity of the person concerned in expending the amount. When once that stage is reached, we are unable to see that the fact that the expenditure is incurred out of income realised from agriculture should make a difference to the legislative competency of Parliament to enact the law.
Mr. Vedantachari again and again urges that the various technical expressions used in the Act are drawn from the Income-tax Act and defined similarly and that the authorities administering the law are the very authorities who also administer the income-tax law. Reference has been made to the definitions of 'previous year', 'assessment year', 'place of residence' in section 5(o) of the Act and the like, and it is contended that this piece of legislation has to be interpreted only in the context in which the legislation was enacted, viz., the evasion of taxes under the income-tax law. It is argued that the dominant intention of the legislature was not to restrict expenditure, or, if it were so, such a restriction should be of uniform application. The real intent is the indirect levy of tax and bring to assessment those incomes which stood exempted from the operation of the income-tax law.
We are unable to accept this line of argument. If, as we hold, the tax is one a particular activity and not on the receipt or the accrual of income, the basis of the contention that it is really designed to tax income vanishes. The proviso on the foot of which learned counsel bases the bulk of arguments was really intended for the purposes of a carving out a class of persons liable to the tax and was not intended to specify the particular heads of income, expenditure out of which would be made liable to tax. The proper function of a proviso was explained by the Supreme Court in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. These passages are sufficiently explanator :
'The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso, would fall within the main enactment. Ordinarily, it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment.... The territory of a proviso, therefore, is to carve out an exception to the main enactment and to exclude something which otherwise would have been within the section. It has to operate in the same field, and if the language of the main enactment is clear, it cannot be used for the purpose of interpreting the main enactment, or to exclude by implication what the enactment clearly says, unless the words of the proviso are such that is its necessary effect.'
It is clear from the above decision that it would not be proper to use the proviso for the purpose of interpreting the main provision itself. When the main provision imposes a charge on expenditure and says nothing more, that the proviso takes into account the income from all sources for the purpose of determining the class of persons who would be liable to expenditure-tax cannot lead to the inference that the main provision itself is intended to levy a charge on those heads of income referred to in the proviso.
On a consideration of these contentions, it seems to us that the claim of the petitioner that for the purpose of applying the proviso only those heads of income which are taxable under the Income-tax Act should be taken into account cannot be accepted. We do not also agree with the learned counsel that the real purpose of the Act is to tax those heads of income which were not chargeable under the Income-tax Act. We are satisfied that neither the aim and object of the Act nor the pattern of legislation in enacting these new taxes gives any support to the contention advanced.
It was next urged that the Act is discriminatory because it selects only certain persons and leaves out others; that is to say, only persons with incomes are selected, and though a person may indulge in expenditure, if he does not have a source of income, he is left unaffected by the Act. For instance, a person with a large capital may convert the capital into cash and expend it till the capital is exhausted, and though his expenditure might come within the taxable limits in so far as the quantum is concerned, he would not be liable to pay any tax, for he cannot be caught within the net of selection formulated in the proviso. It is no doubt true that only persons who are in receipt of income and whose income as computed in the proviso exceeds a certain figure who come within the scope of the charging provision. But we are not satisfied that the Act can be struck down as discriminatory on that basis. The real purpose of making this selection is that an overall limit to the quantum of expenditure is set by the figure of income computed according to the proviso. Virtually, what the proviso in making the selection indicates is that an expenditure less than Rs. 36,000 would not be chargeable to tax. By excluding persons whose total incomes as computed in the manner laid down in the proviso does not exceed Rs. 36,000, what the legislature sought to say appears to be that a person could without attracting the incidence of tax, spend up to the limit of Rs. 36,000. Indeed, that this is so is made clear by the subsequent amendments which deleted this provision altogether and amended the schedule to the Act by imposing a 'nil' rate of tax on the first slab of Rs. 36,000 of the expenditure. The object of the proviso was solely to carve out a class of persons who could be subjected to the expenditure-tax. The Income-tax Act also exempts persons as a class whose income does not exceed a particular figure. The same principle is adopted in making a classification of persons liable to be brought under the levy. The legislature thought that a maximum of Rs. 36,000 as an allowable expenditure would be reasonable and purported to impose tax only on that class of persons whose expenditure exceed that figure. It is also clear that the class of persons whose expenditure would exceed the taxable limit but who do not have any incomes, that is to say, who virtually liquidate their capital by such expenditure, would be a negligible and in any event a dwindling group. Their exclusion from the taxable group is not in the circumstances invidious. The classification as far as we can see has a reasonable relation to the object of the Act. We are unable to agree that any discrimination is involved.
It follows that the two writ petitions fail. They are dismissed, but there will be no order as to costs.
Coming to the tax case, it is not disputed that the receipts by way of interim compensation have been held by this court to represent receipt of capital. They cannot be regarded as income. They will necessarily have to be excluded in applying the proviso. Learned counsel has not pressed before us his contention that the allowances made to the Ranees are deductible items of expenditure. Learned counsel has also not pressed his contention that race winnings should be excluded in applying the proviso. The only point really argued with reference to the first question was that the income derived from agriculture should have been excluded in applying the proviso. In the view that we have taken on the writ petitions, this contention fails. It follows that expect with regard to the inclusion of the interim payments in the total income of the assessee in applying the proviso, the first question will have to be answered in the affirmative. The second question is also answered against the assessee. In the circumstances, there will be no order as to costs.