John Beaumont, Kt., C.J.
1. This is a reference made by the Income-tax Commissioner under Section 66(2) of the Indian Income-tax Act, 1922, and the substantial question, which arises, is whether the Patiala State Bank is liable to be assessed to income-tax under the Government Trading Taxation Act (III of 1926).
2. The facts found are that the Patiala State Bank is owned wholly by the Patiala State and carries on banking business. It has no separate entity, and I take it that when the Commissioner says "it is owned wholly by the Patiala State," he means that it is owned and controlled by the Ruler of the Patiala State, that is the Maharaja, who constitutes the government of the State. The questions raised relate to the assessments for two years, 1935-36 and 1936-37, and in respect of each of those years I gather that a notice was sent to the principal officer of the Patiala State Bank, and he made a return on which the assessments are based. We are not, therefore, concerned to consider whether the Patiala State Bank was bound to comply with the notices, and to make the required returns, nor are we concerned to consider what would have happened, if the Patiala State Bank had adopted a different course. It is possible that in that event the machinery for taxing a foreign company through its agent would have been applicable, but that is not a matter which calls for our decision.
3. The principal point, which has been argued, and the only question of substaince is whether the Government Trading Taxation Act of 1926 is a valid Act. The argument of the assessee is that it is ultra vires the Government of India. Before determining whether or not it is ultra vires the Government of India, it is necessary to consider what the Act actually meansi and purports to effect. The title is:
An Act to determine the liability of certain Governments to taxation in British India in respect of trading operations.
Then the preamble is:
Whereas it is expedient to determine the liability to taxation for the time being in force in British India of the Government of any part of His Majesty's Dominions, exclusive of British India, in respect of any trade or business carried on by or on behalf of such Government.
Then in Section 2 it is enacted as follows:
(1) Where a trade or business of any kind is carried on by on on behalf of the Government of any part of His Majesty's Dominions, exclusive of British India, that Government shall, in respect of the trade or business and of all operations connected therewith, all property occupied in British India and all goods owned in British India for the purposes thereof, and all income arising in connection therewith, be liable.
(a) to taxation under the Indian Income-tax Act, 1922, in the same manner and to the same extent as in the like case a company would be liable.
Sub-section (2) provides:
For the purposes of the levy and collection of income-tax under the Indian Income-tax Act, 1922, in accordance with the provisions of Sub-section (1), any Government to which that sub-section applies shall be deemed to be a company within the meaning of that Act, and the provisions of that Act shall apply accordingly.
4. Then Sub-section (3) enacts that the expression "His Majesty's Dominions" ineludes any territory which is under His Majesty's protection. Having regard to the Sanads, to which we have been referred, of 1815, 1847 and 1860, I feel no doubt that the Patiala State is a State under His Majesty's protection, and, therefore, comes within the expression "His Majesty's Dominions" in Act III of 1926.
5. It is to be noticed that the Act applies wherever a Government of the nature specified in the Act, which for simplicity I will refer to as "Dominion Government," carries on a business anywhere. I can see no justification for the view, which appears to have prevailed in the only case to which we have been referred in which this Act has been considered by a High Court in India, namely, In the matter of Ram Prasad (1929) I.L.R. 52 All. 419. that the Act is confined to business carried on in British India. It seems to me that the title, the preamble and the operative part of Section 2 make it perfectly clear that it applies to every case in which the Dominion Government is carrying on a business, and when that happens, the Dominion Government is liable to Indian income-tax, as though it were a company.
6. Turning to the Indian Income-tax Act of 1922, which is the Act applicable in this case, "company" is defined in Section 2(6) as meaning a company as defined in the Indian Companies Act, 1913, or formed in pursuance: of an Act of Parliament or of Royal Charter or Letters Patent, or of an Act of the Legislature of a British possession, and includes any foreign association carrying on business in British India, and which is certified as therein mentioned. I think the effect of Act III of 1926 is to add to that definition so as to include a Dominion Government deemed to be a company under Act III of 1926. The effect of the charging sections, Sections 3 and 4, is to render the income, profits and gains of a company liable to British Indian Income-tax Act, if such income, profits and gains accrue or arise or are received in British India. So that Act III of 1926 comes to this: that where a Dominion Government is carrying on a business anywhere, it is liable to British Indian Income-tax Act in respect of the income, profits and gains of that business which accrue or arise or are received in British India. The Act was, I understand, passed in pursuance of reciprocal arrangements with Great Britain and Dominion Governments, and it is to be noticed that it is in very similar terms to Section 25 of the Finance Act of 1925, which applies to Great Britain.
7. The contention of the assessee is that this Act is ultra vires the Indian Legislature, since it does not fall within the legislative powers conferred by Section 65 of the Government of India Act, 1919. That section, so far as material, provides: "The Indian legislature has power to make laws for all persons, for all courts, and for all places and things, within British India." The words are expressed in the most general terms, and in effect enact that the power of the Indian Legislature is to be territorial and is to extend to all persons and things within British India. Now, the argument is that income-tax is a tax imposed on persons, and that the Ruler of the Patiala State cannot be regarded as a person within British India. The latter proposition is, no doubt, correct, and up to a point I agree with the contention of the assessee on the first proposition. I think that, properly considered, income-tax is a tax on a person in relation to his income. The tax is not imposed on income generally; it is imposed on the income of a person, natural or artificial, as denned in Section 3. The assessment has to be made against a person, and the tax has to be collected from the assessee. The tax is not made a charge on the income upon which it is levied, and I think, broadly speaking, it is accurate to say that income-tax is a tax imposed upon a person in relation to his income. But, in my opinion, that does not mean that legislation as to income-tax can never be regarded as legislation as to a thing in British India within the meaning of Section 65 of the Government of India Act. In my opinion, a tax on income accruing or arising or received in British India by a person resident outside British India is legislation relating to something, i.e. certain income, in British India, and, therefore, to my mind, it falls within the very wide and general words of Section 65. In my judgment, therefore, Act III of 1926 is intra vires the Government of India. That was so held in In the matter of Ram Prasad (supra), to which I have referred, though, as I have indicated, I think that the learned Judges in that case were incorrect in treating this Act of 1926 as being confined to a business carried on in British India. If the Act is intra vires, that disposes of the principal question raised by the Commissioner, which is question (1):
Whether the Government Trading Taxation Act (III of 1926) is applicable to the Patiala State Bank rendering it liable to taxation under the Indian Income-tax Act, 1922?
The answer must be in the affirmative.
Question (2) is:
Whether investment by the Patiala State Bank of a part of its surplus funds in the Government of India Securities constitute trading or business in British India within the meaning of Section 2 of the Government Trading Taxation Act?
8. This question is inaccurately expressed. Section 2 does not mention trading or business in British India. We can only answer the question by saying that the income from the investments are profits from the business of the bank received in British India, and as such taxable.
Question (3) is:
Whether the property situate at Mussoorie taken over by the Patiala State Bank from its debtor, a subject of the Patiala State, in part satisfaction of a loan adtvanced to him, is property occupied in British India for the purposes of its trade or business in British India within the meaning of Section 2 of the Government Trading Taxation Act and whether all income arising from such property is liable to assessment by virtue of the provisions of the said Act?
9. Substantially I think the answer to this question must be in the affirmative, but I think that the property, which has been taken over in respect of a bad debt of the banking business, is not property occupied in British India for the purposes of the business, but the income derived from such payments is income arising in connection with such business, and in that sense falls to be: taxed.
Then question (4) is:
Whether the sum of Rs. 66,720 received by the Patiala State Bank on the sale of its investments during the year 1934-35 being the excess realised by it over the cost price of such investments, which has been included under the heading of profits in the relative profit and loss accounts and balance sheet, is assessable to Income-tax?
10. That seems to be really a question of fact, and we must answer it in accordance with the facts found by the Commissioner. He has found that these profits on the sale of investments are part of the income of the Bank, It might be suggested that they are accretions to capital, but the Commissioner having, found from the accounts of the Bank that they are profits of the Bank, I think we must answer the question in the affirmative.
11. Question (5) seems to be covered by the answer to question (2). Question (6) does not arise. The answer to question (7) must be answered in the affirmative.
12. We answer the questions accordingly and direct the assessee to pay costs. Costs to be recovered from the assets of the Patiala State Bank.
13. The relevant facts and sections of Acts of the Indian Legislature have been referred to in the judgment just delivered by the learned Chief Justice.
14. The important question argued before us is in respect of the validity of Act III of 1926 described as "an Act to determine the liability of certain Governments to taxation in British India in respect of trading operations." It was argued on behalf of the assessee that the Act: was ultra vires the Government of India, whose powers to legislate were limited by Section 65 of the Government of India Act, 1919. It was secondly argued that the Patiala State was not one of His Majesty's Dominions, as stated in Section 2(3) of Act III of 1926, and, therefore, it was not covered by the Act. It was next argued that the machinery to assess the State under Section 42 and / or Section 43 of the Indian Income-tax Act, 1922, was not adopted. It was lastly contended that as the State is owned by the Ruler, it was not competent for the Government of India to legislate in respect of the ruler.
15. The question, whether the Act was ultra vires the Government of India or not, was raised and decided in In the matter of Ram Prasad (1929) I.L.R. 52 All. 419. and the learned Judges there rejected the contention that it was ultra vires. The argument in substance is that Act III of 1926 makes a Dominion Government in respect of its trade or business, wherever carried on, liable to be taxed as a company. The words "in British India" are not used in connection with trade or business or income arising in connection therewith. Where the Legislature wanted to use those words in connection with properly occupied in British India, and goods owned in British India, they expressly said so. From the omission of those words in connection with trade or business or income arising in connection therewith, it was contended that the legislative power of the Government of India had been exceeded. In my opinion, that contention is unsound. The only object of the Act of 1926, in my opinion, was to legislate in respect of a particular use of the public property of a Dominion Government. Under International Law the legislature of a country does not enact laws which affect the public property of another country. By Act III of 1926 therefore the attempt was not to legislate generally in respect of the public property of a Dominion Government but in respect of its trading operations only. It appears that a mutual arrangement was made between the different Dominions of His Majesty by consent, and by Section 2(3) the Act was made applicable equally to territories which were under His Majesty's protection or over which a mandate was being exercised by His Majesty's Government. If such a Dominion Government carried on trade or business, the Government of India enacted that it should be liable to tax under the Indian Income-tax Act in the same manner and to the same extent as in the like case a company would be liable. In other words, the legislation was to state that a Dominion Government carrying on trade would, for the purpose of the Indian Income-tax Act, be treated as a company in like circumstances. If the State carried on business within British India, its liability would be as defined by the Indian Income-tax Act. If it carried on business wholly outside British India, it would not be affected by the Indian Income-tax Act, because that Act only was in respect of income within British India, either actually accruing or deemed to accrue as defined by that Act. This piece of legislation is covered by the words of Section 65 of the Government of India Act, which permit the Government of India to legislate for all persons, for all Courts, and for all places and things, within British India. While it cannot be disputed that the liability to pay income-tax is on the individual, it is a tax on the income. In so far, therefore, as the liability of a Dominion Government was stated by Act III of 1926 to be in respect of its income covered by the Indian Income-tax Act, there appears no reason to consider it ultra vires. With respect, I am unable to agree with the line of reasoning adopted in In the matter of Ram Prasad where the words "in British India" were attempted to be read as connected with "trade" in Section 2 of Act III of 1926. The words "in British India" have to be read in connection with income by reason of the provisions of the Indian Income-tax Act. But Act III of 1926 does not in terms state that the word "trade" or "business" or "income arising in connection therewith" have to be in British India. I find no justification for including those words in Section 2 of Act III of 1926 in connection with "trade" business or income arising in connection therewith. As I have pointed out, by reason of Sub-section (3) of Section 2 however the result is the same, namely that the liability of the Dominion will be as if it were a company working under like circumstances under the Indian Income-tax Act.
16. The second contention, that the Patiala State was not under the protection of His Majesty, cannot be upheld in view of Sanads III and IV of 1815, which are found printed in Aitchison's "Treaties, Engagements and Sanads" Vol. I, at pages 158-159. It is there clearly provided that the Raja had the right of protection from the British Government. The Patiala State is, therefore, a Dominion under the protection of His Majesty.
17. The third contention that the liability to tax has to be worked out under Sections 42 and 43, and there was no other method by which the State Bank could be assessed, discloses some misunderstanding. In Whitney v. Inland RevenueCommissioners  A.C. 37. Lord Dunedin pointed out that there are three stages in the imposition of a tax as follows (p. 52):--
there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend upon assessment. That, ex hypothesi, has C already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay.
18. The question of how the person whose liability to tax is determined has to be assessed is a matter of machinery. It is admitted here that the Patiala State Bank (assessee) when called upon sent a return to the Income-tax Officer. We are not, therefore, at this stage concerned with the question what would have happened, if the assessee had refused to send a return. I do not propose to anticipate an argument on that point nor to express any opinion on it.
19. The last question, whether the Ruler is liable to be assessed, also does not directly arise. The assessee in the case is the Patiala State Bank. On the facts mentioned in the reference, it is a department of the State. There is a difference between the private property of the Ruler of the State and the property of the State itself. In holding that it was competent to the Government of India to legislate in respect of trading operations of the State, I think it is also held that the State as such, and to the extent it is covered by Section 2(1) of Act III of 1926, is liable to assessment. Statham v.. Statham and the Gaekwar of Baroda (1912) P. 92. which was relied upon in this connection, has in the circumstances no application.
20. I, therefore, agree that the answer to questions (1) and (7) should be in the affirmative. As regards the other questions, they are questions of fact, and I agree that the answers should be in the affirmative also.
Income-tax Reference No. 2 of 1940.
21.The answers in the second reference will be the same as in the first reference, and the same Order as to costs. The assessee to pay costs, to be recovered from the assets of the Patiala State Bank.