Stone, C.J:—

This is a reference under s. 66(1) of the Indian Income-tax Act, 1922, and when it was called on in this Court, Mr. Setalvad, on behalf of the Commissioner, drew our attention to the fact that although a reference was asked for by the assessee, “the Gwalior Darbar,” that is to say, the State of Gwalior, as long ago as October 5, 1940, no reference was in fact made for six years. Mr. Setalvad pleaded in excuse for this gross delay the other work of the authorities concerned. I feel that no such excuse can be any exoneration for such a grievous lapse, which amounts to a denial of justice to the taxpayer who under the law is compelled to pay the full tax demanded pending a decision on the reference by this Court. It is most unfair, and it is to be hoped that the authorities will so conduct their affairs in the future that delays of this sort will not be heard of again.

The questions submitted to us, which are six in number, concern the assessment made on the Gwalior Darbar, through its agent Mr. A.H Wadia, for the assessment year 1939-1940 in respect of the account year April 1, 1938, to March 31, 1939, and touch and concern, except for question No. 6, the Gwalior Darbar's money-lending transaction in British India, and arise by virtue of the Government Trading Taxation Act, III of 1926. Section 2 of that Act provides:—

“2. (1) Where a trade or business of any kind is carried on by or on behalf of the Government or 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;

(b) to all other taxtation for the time being in force in British India in the same manner as in the like case any other person would be liable.

(2) 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-s. (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.”

And then sub-s. (3) is a definition section as to the scope of the expression “His Majesty's Dominions.” There is no doubt that the State of Gwalior is an entity within the purview of that section. As formulated the questions which have been referred to us are as follows:—

(1) Whether in the circumstances of this case the interest of Rs. 2,59,726 received by the Durbar on the loan advanced to the Provident Investment Co. Ltd., is assessable under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act, III of 1926?

(2) Whether the sum of Rs. 3,57,112 received by the Durbar out of the managing agency commission paid by the Tata Iron & Steel Co. Ltd. to Tata Sons Ltd. is assessable under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act, III of 1926?

(3) Whether the income derived from the property situated in Bombay and other places in British India purchased by the Durbar at execution sales in enforcement of mortgage decrees against mortgagors who had failed to pay the amounts advanced to them in the course of the money-lending business of the Durbar, is income arising in connection with the said business within the meaning of s. 2 of the Government Trading Taxation Act and whether the income arising from such property is liable to assessment under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act III of 1926?

(4) Whether the dividend of Rs. 1,88,030 received by the Durbar from the Sir Shapurji Broacha Mills Ltd. is taxable in the circumstances of this case under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act III of 1926?

(5) Whether the dividend of Rs. 83,447 received by the Durbar from the C.P Cement Co. Ltd. is taxable in the circumstances of this case under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act, III of 1926?

(6) Whether the Durbar is entitled under the provisions of the Income-tax Act read with the Government Trading Taxation Act, III of 1926, to a refund under s. 48(1) or a set-off under s. 18(5) of the Income-tax Act of income-tax alleged to be deemed under s. 49B thereof to have been paid by it as a shareholder in respect of the dividend received by it during the previous year?

With regard to question No. 1. Sir Jamshedji Kanga on behalf of the assessee submits that s. 2 of the 1926 act only deals with income which actually arises in British India, and not with income which under the Indian Income-tax Act, 1922, as amended by the 1939 Income-tax Act, is deemed to arise in British India or with income which under the amendments to s. 42 of the Act accrues or arises, whether directly or indirectly, through or from any money lent at interest and brought into British India in cash or in kind, which shall be deemed to be income accruing or arising within British India, and he submits, that if it were not so, the 1926 Act would be ultra vires the Indian Legislature. The 1926 Act was enacted by virtue of the powers contained in s. 65 of the Government of India Act, 1919, but the words I have quoted from s. 42 of the Indian Income-tax Act were not introduced until the 1939 amendments to that Act, that is to say, after s. 99 of the Government of India Act, 1935, had come into force. The sum of Rs. 2,59,726 involved in this question arose as follows:—

“A company styled the Provident Investment Co. Ltd. was incorporated in British India in 1927 with headquarters in Bombay, with 4966 shares of Rs. 1,000 each. It is practically a one-man company as all the shares are either owned by the Gwalior Durbar or its nominees. In 1933 the Durbar advanced to this company a loan of Rs. 50 lakhs on the security of its first mortgage debentures of an equal nominal value. The loan was advanced at Gwalior. The interest was payable there and the debentures also were deposited there. But admittedly the company brought the borrowed money to British India and utilised it for the purposes of its business in British India. The interest on the loan received by the Durbar for the year amounted to Rs. 2,59,726 referred to in Item (A) above. The interest was receivable and actually received at Gwalior.

In addition to these facts, there is the further finding of fact, that this loan of Rs. 50 lakhs formed part of the operations connected with the money-lending business of the Durbar. So that it comes to this, that the income belonged to or was connected with the Gwalior Durbar's money-lending business in British India, but accrued or arose to it outside British India. In my opinion Sir Jamshedji Kanga's first contention is concluded against the assessee by the decision in the Patiala State Bank case, which was decided by this High Court (see In re Patiala State Bank), which decision was upheld by the Privy Council (see Patiala State Bank v. Commissioner of Income-Tax, Bombay). In delivering the judgment of the Board, Lord Romer said (p. 211):—

“In their Lordships' opinion their answers which the High Court gave to the questions referred to them are plainly right, as is the reasoning upon which these answers were based. There are no words to be found in the Act of 1926 confining the operation of s. 2 to trades or businesses carried on in British India. The words of the section are quite general in their terms, and their Lordships are quite unable to find any reason whatever for introducing into the section by implication the qualification for which the appellant bank contends. The section therefore applies to the business of the bank although it is carried on exclusively in the State of Patiala. That being so it follows that the assessment complained of is a valid assessment, inasmuch as all the items affected by it represent income profits or gains of the said business received in British India, and are therefore such as would have been taxable under the Act of 1922 if received by a company in the like case”

In the case of a foreign company this income would be liable to Indian income-tax under sub-s. 4(c) of the 1922 Act, and in my opinion the Gwalior Durbar comes within the clear words of sub-s. 2(1)(a) of the 1926 Act, “liableto 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.” This concludes the matter, for a Ruler in respect of a trade or business carried on within British India is liable in respect of income arising in connection therewith to be taxed as if he were a company.

With regard to the submission of ultra vires, this proceeds on the basis that in making the Gwalior Durbar liable to taxation in respect of the income envisaged by s. 42 of the Indian Income-tax Act 1922 as amended by the 1939 Act, extra-territorial legislation has been passed. But in my opinion this is not so, for as long as there is a residential or business connection with British India, no question of the law being extra-territorial can arise. There is a territorial connection in this case through the nexus of the Gwalior Durbar's moneylending business carried on in British India (see Gov. Gen.-in-Council v. Raleigh Investment Co., Ltd.) see also Wallace Bros. & Co. Ltd. v. Commissioner of Income-tax Bombay in which case Sir John Beaumont said (p. 937):—

“There is clearly no provision in the Act which says that any extra-territorial legislation shall be outside the powers of the Indian Legislature. I will only refer to one passage in Colonial Gas Association Ltd. v. Federal Commissioner of Taxation from the judgment of Mr. Justice Dixon, in which he says:

‘To derive income from a country involves the person deriving it in a territorial connection with the country sufficient to support the validity of an exercise of the power in respect of the person as distinguished from the income.’

That is to say, if a person is deriving income from a business carried on in a country, he has a sufficient territorial connection with that country to prevent a law imposing tax upon on him being regarded as extra-territorial. Mr. Setalvad contends that inasmuch as the whole basis of liability to tax under the impugned sub-section is based on the bulk of the assessee's income arising in British India, the sub-section would not fall within an express prohibition against any extra-territorial legislation. It is, no doubt, true that there is some extra-territorial effect in the impugned sub-section. It does enable the foreign income of a non-resident to be taxed. But other sections have some extra-territorial effect, for instance, s. 4(a)(i), which directs that an individual shall be regarded as resident in British India if he has been there for a period amounting to one hundred and eighty-two days; so that although he has been in India only for half a year, he is to be taxed for the whole year; in that sense there is some extra-territorial effect in that provision. So I think there is in s. 42, which enables a non-resident to be taxed in respect of income derived from a business connection in British India. That extra-territorial effect is not so great as in the case of the impugned sub-section, because the income taxed under s. 42 must be derived from British India; but still it does enable a non-resident to be taxed. If one is going to say that the Government of India Act precludes all legislation which has any extra-territorial effect, it would be difficult to justify, not only the impugned sub-section, but s. 4A(a)(i) and s. 42. But, as I have said, there is nothing in the Government of India Act which lays it down that any legislation having any extra-territorial effect is invalid, and short of such a prohibition, I cannot see any principle in which the impugned sub-section can be held to be ultra vires.”

This case was confirmed in the Federal Court (see Wallace Bros. & Co., Ltd. v. Commis. of Income-tax) in which the Chief Justice of India Sir Patrick Spens said (p. 156):—

“As regards the contention that the impugned provisions are extra-territorial in their operation and accordingly beyond the powers of the Indian Legislature, we are of the opinion that taking the scheme as a whole they are not in their operation extra-territorial in the strict legal sense of that term. The Legislature has not attempted to regulate, punish or directly deal with any act done beyond the territorial limits of British India nor does it seek to impose a liability on property situate outside its jurisdiction. It was conceded on behalf of the appellant that when a person is resident in British India any legislation which brings his foreign income into account in assessing him to income-tax will not be extra-territorial. This illustration establishes (1) that the mere fact of the accrual of the income abroad is not conclusive, and (2) that when the cases refer in justification of such taxation, to the protection which a person enjoys by his residence in a particular country, the benefit of that protection is not limited to the income accrued or received in that country. Where the connection of the assessee with a particular country is not founded upon residence but arises out of business operations, it may be a question of degree whether the connection is slender or intimate, but it can none the less be as factual a connection as a connection based on residence.”

Accordingly in my judgment both these submissions fail and the Rs. 2,59,726 is liable to Indian Income-tax Act.

As to question No. 2. This involves a sum of Rs. 3,57,112 derived from a two annas share of Tata Sons Ltd. as managing agents of the Tata Iron and Steel Co., Ltd. It arises in a some what curious way. In 1924 Mr. Dinshaw, as agent for the Gwalior Durbar, lent from the moneylending business one crore of rupees, at a minimum rate of interest of 6½ per cent to the Tata Iron and Steel Co., Ltd. and as additional consideration he received a six annas share, in perpetuity, in the commission and other remuneration paid by Tata Iron and Steel Co., Ltd. to Tata Sons Ltd. Mr. Dinshaw passed on four annas to the Gwalior Durbar and retained two annas for himself. This transaction it appears was objected to by the Regency of the Gwalior State, and in 1927 the loans were repaid on terms which included the six annas share being reduced to four annas, two annas for Mr. Dinshaw personally and two annas for the Gwalior Durbar. The Rs. 3,57,112 represent the Gwalior Durbar's two annas share received during the account year. Clearly, in my opinion, this payment was not only connected with, but in fact still is an asset of the money lending business. There is nothing suggested to sever it from such business or to alter its quality or nature. Accordingly in my judgment it falls to be taxed in the assessment year in question.

With regard to questions Nos. 3, 4 and 5. These questions can be conveniently taken together, because the same principle applies in each case. In each case the Gwalior Durbar made a loan in British India as part of its moneylending business, and in each case there was a default or failure and the Gwalior Durbar received something in liquidation, or as a result of it.

The facts with regard to case No. 3 are as follows:—

“During the course of the Durbar's moneylendiug transactions in Bombay and elsewhere some of the mortgagors made default in payment of the principal and interest and the Durbar filed suits to enforce the mortgages and obtained decrees for the sale of the properties. The mortgaged properties which are all in British India were put up for sale in execution of these decrees and were purchased in court auctions by the Durbar and the Durbar still continues to own these properties.”

The amount involved in question No. 3 represents the income from these properties.

The facts with regard to question No. 4 are:—

“In the course of the Durbar's moneylending business it undertook to finance the operations of the Sir Shapurji Broacha Mills Ltd. and was providing funds required from time to time for the business of the Mills. Between the years 1925 and 1930 the total sum advanced from time to time amounted to about a crore of rupees, in respect of principal, and the interest due on the advances amounted to Rs. 49 lakhs. The Company's position became hopeless and a scheme of reconstruction was introduced with the sanction of the Court in the year 1933 according to which the Durbar agreed to give up its claim to all the interest and also to substantial part of the principal. The result was that the Durbar accepted 75,212 shares of the face value of Rs. 100 each under the reconstruction scheme in full satisfaction of its claim, that is the sum due to it was reduced to Rs. 75,21,200.”

In the year under reference the reconstructed company paid a dividend of Rs. 1,88,030, on the shares standing in the name of the Durbar and this is the item in question.

The facts with regard to question No. 5 are more or less the same as those in question No. 4. The Durbar held debentures in a company called the Central Provinces Portland Cement Co., Ltd. which company failed and went into liquidation. A new company named the C.P Cement Company was formed in 1929, which took over the assets and liabilities of the old company and the Durbar accepted 4553 preference shares in the new company in full satisfaction of its claim. During the accounting year in question the new company paid dividends amounting to Rs. 83,447 and those dividends are the amount involved in this question.

In each of these cases the new asset has not been taken out of British India, and there is no unequivocal act, which severs the connection of these three new assets from the original moneylending business. In my opinion these three cases are covered by what was said by Sir John Beaumont in referring to the Mussoorie properties in the Patiala State Bank case,(p. 91):—

“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 advanced to him, is property occupied in British India for the purposes of its trade or business in British India within the meaning of s. 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? 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.”

For the same reason, in my judgment, the income in each of these three cases falls to be taxed in regard to the assessment year in question.

As to question No. 6. This question is of a somewhat different character, and concerns the claim for a refund of tax on dividends paid after deduction of tax by the companies concerned. The facts as stated in the reference are as follows:—

“The Durbar invested large sums in shares in various public companies besides the shares in the two companies referred to in questions Nos. 4 and 5. The dividends received during the year from these companies were Rs. 11,52,359. As these were treated to be income from investments not coming within the scope of the Government Trading Taxation Act, the Income-tax Officer did not include these in the assessment. The Durbar, however, claimed that it was entitled to a set-off or refund of income-tax deemed under the provisions of s. 49B to have been paid by it.”

By s. 48 of the Indian Income-tax Act it is provided:—

“If any individual, Hindu undivided family, company, local authority, firm or other association of persons, or any partner of a firm or member of an association individually satisfies the Income-tax Officer or other authority appointed by the Central Government in this behalf that the amount of tax paid by him or on his behalf or treated as paid on his behalf for any year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of any such excess.”

By s. 49B it is provided:—

“Where any dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed to any of the persons specified in s. 3 who is a shareholder of a company which is assessed to income-tax in British India or elsewhere, such person shall be deemed in respect of such dividend himself to have paid income-tax (exclusive of super-tax) at the rate applicable to the total income of a company for the financial year in which the dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed on so much of the dividend as bears to the whole the same proportion as the amount of income on which the company is liable Income-tax, to pay income-tax bears to the whole income of the company.”

But the Gwalior Durbar, being a State, is not taxable at all in British India, and is excluded from the operation of s. 4(c) of the Income-tax Act except to the limited extent of its moneylending business by virtue of the 1926 Act. The Durbar is only a limited assessee, within the meaning of sub-s. 2(2) and s. 3 of the Income-tax Act to the extent to which it is so made by the 1926 Trading Act. If it were otherwise, then the whole income on these shares would be liable to Indian income-tax and the Durbar's privileged position as a State would be gone. Sir Jamshedji Kanga, on behalf of the assessee, goes to the length of saying, that if the Gwalior Durbar had no moneylending business at all and its only financial interest in British India were these shares, although he would not as a Ruler be liable to be assessed to tax, he would nevertheless be entitled under the refund sections. The answer in my opinion must be that anyone who is not liable to Indian Income-tax at all can no more claim a benefit under that Act than he can be saddled with a burden. This claim also of the Gwalior Durbar must, in my opinion, be rejected.

In order to mark our displeasure at the six years' delay in making this reference referred to at the beginning of my judgment, we deprive the Commissioner of one-half of his costs and order the assessee to pay one-half of the Commissioner's costs.

Certificate granted under s. 205 of the Constitution Act.

Chagla, J.:—The six questions we have to consider in this reference all raise the question of the liability of the Gwalior Durbar to tax. Now by the Comity of Nations Sovereigns and Rulers of States are not subject to the Municipal laws of any particular country and it is only by the Government Trading Taxation Act (III of 1926) that His Majesty's Dominions including territories under His Majesty's protection or territories in respect of which a mandate was being exercised by the Government of any part of His Majesty's Dominions were made subject to payment of income-tax under certain conditions and limitations contained in that statute. Therefore, it is necessary in order to determine what the liability of a Ruling State is to pay income-tax under the Indian Income-tax Act to construe the provisions of that statute. Now in order that a Government contemplated by that statute should become liable to taxation, it must carry on trade or business. The Privy Council has now laid down in Patiala State Bank v. Commissioner of Income-tax, Bombay, that the trade or business need not be carried on in British India. It would be sufficient if a trade or business is carried on anywhere. Then there must be income which must arise in connection with that trade or business or in connection with the property occupied in British India and all goods owned in British India for the purposes of that trade or business. Now it is to be noted that all income which arises in connection with trade or business or property or goods is made liable to tax. There is no limitation or qualification to the expression “income” used by the Legislature. The only limitation which one finds is the limitation that is to be found in sub-cl. (a) of s. 2(1) of the Government Trading Taxation Act and that is that the liability to tax is in the same manner and to the same extent as a company would be liable under the Indian Income-tax Act. Sir Jamshedji Kanga has strenuously contended that the income in connection with trade or business that becomes liable under this statute is income which must arise in British India. That is in my opinion reading into the section a qualification or a limitation which the Legislature did not think fit to import. Now if that is the true construction of s. 2(1)(a) which contains the material provisions of the Act as far as these questions are concerned, what is the liability of the Ruler in relation to the income covered by question No. 1?

Question (1) deals with the loan advanced by the Gwalior Durbar to the Provident Investment Company Limited, in Gwalior. The interest which the Durbar earned on this loan was also to be received in Gwalior. But the Provident Investment Company, Limited, the borrower, took the money lent to it from Gwalior into British India. Now, says Sir Jamshedji, this is an artificial income and the income that has got to be taxed under Act III of 1926 is actual income. Now to my mind that is an entirely fallacious argument, because the income which the Durbar received was actual income—income which could be computed in rupees annas and pies; what is fictional or artificial or notional about it is the place of accrual. Under s. 42 of the Indian Income-tax Act, non-residents are made liable to tax in case of certain kinds of incomes which the law considers to be incomes for the purposes of the Income-tax Act; they are deemed to arise or accrue in British India, and one of these kinds of income is where any money lent on interest is brought into British India and any income arising from such money is deemed to be income for the purposes of s. 42 of the Income-tax Act. Therefore, s. 42 considers the accrual of income in cases of moneyslent and brought into British India as having accrued in British India. The only two questions which we have to ask with regard to this income in order to decide and determine whether the Gwalior Durbar is liable to tax or not are: first, did this income arise in connection with the trade or business carried on by the Gwalior Durbar? and the second question is: if the Gwalior Durbar was a company, would it be liable to tax under the provisions of the Indian Income-tax Act? Now with regard to the first question, there is a finding of fact by the Assistant. Appellate Commissioner that the loan was advanced as part of the operations connected with the money-lending business, and that finding of fact is reiterated by the Commissioner who in his opinion says something to the same effect. With regard to the second question, there can be no doubt that a non-resident company would be liable to tax on money which it lent to a borrower and which money was brought into British India and from which money the company derived income. If the company is liable, then under s. 2(1)(a) of the Government Trading Taxation Act the Gwalior Durbar is also liable.

Two objections have been taken by Sir Jamshedji Kanga to the liability of the Gwalior Durbar to pay tax on this particular income. In the first place, it is suggested that Act III of 1926, if it purports to tax income of this nature, is extra-territorial in its operation; and it is further contended that, if it is extraterritorial, it is ultra vires of the Indian Legislature. In my opinion, both these contentions are untenable. In the case of income-tax what the Legislature does is to tax the assessee in connection with his income, and the proper territorial limitation is that from which the income is derived should be within the territory for which the Legislature is enacting laws. In this case the money was lent in Grwalior but that money was brought into British India, and there can be no doubt that there is a connection—and a very direct one—between the income derived by the Gwalior Durbar and the money which undoubtedly it lent at Gwalior but which was in British India when the income was derived. The cases in the books also lay down that in order that an Income-tax legislation should be intra-territorial there must be some nexus between the State and the individual whom it is seeking to tax, and the nexus which is supplied in this case is the presence of the money lent in British India. That constitutes the nexus between the taxing State and the assessee, namely, the Gwalior Durbar. Assuming that this provision is extra-territorial in its character, in my opinion, the Indian Legislature is perfectly competent to enact extraterritorial legislation. The Indian Legislature is the creature of the Government of India Act of 1935; but within the limits of that Statute it is sovereign in character. Section 99 empowers the Legislature to make laws for the whole or any part of British India and these laws are to be made with regard to the subjects which are enumerated in s. 100 and the schedules to that section of act. Therefore, the only limitation on the Legislature is (1) that the Act or the law must be for peace, order and good government of British India, and (2) that it must relate to the subjects specified in the seventh schedule. Income-tax is a subject which the Indian Legislature is competent to legislate upon; and if it is for peace, order and good government of British India, then no limitation is placed upon the Legislature that the provisions of the Act of the Legislature passed should be intra-territorial in their character. It is entirely a matter of State policy to what extent the Indian Legislature should enact extra-territorial statutes. No Legislature would like to stultify itself and no Legislature would pass laws which it could not enforce; but those are not matters for a Court of law. All that we are concerned to consider is the validity of the Act passed by the Indian Legislature and, in my opinion, an Act of an Indian Legislature cannot be impugned solely on the ground that its operations are extra-territorial in their character. I may point out that it was suggested by Sir Jamshedji Kanga that the proper Act to consider was not the Government of India Act of 1935 but the Government of India Act of 1919, because it was sought to be contended that the Government of India Act which was in force when Act III of 1926 was passed was the Act of 1919; and what we have to consider is whether Act III of 1926 was intra vires of the Indian Legislature looking to the terms of the Act of 1919. Now Act III of 1926 makes a Ruler liable with regard to his income in connection with his trade or business in the same manner and to the same extent as a company would be liable under the provisions of the Indian Income-tax Act. Therefore, we have really to look to the Indian Income-tax Act of 1922 to see whether the income taxed under the provisions of that Act makes the application of Act III of 1926 extra-territorial in its operation; and s. 42 of the Indian Income-tax Act or rather the particular provision with regard to the money lent being brought into British India was incorporated into the income-tax Act of 1922 by the amending Act of 1939. Therefore, when the Legislature passed that amendment and made a Ruler liable with regard to the income of that character, the Indian Legislature was fully competent to legislate in that sense and for the purpose of imposing that liability.

With regard to the second question, I do not see how it can be disputed that the two-annas share in the commission paid by the Tata Iron and Steel Company, Limited, which the Durbar is receiving does not owe its origin to the loan, originally advanced by F.E Dinshaw in 1924. A rather fantastic theory was suggested by Sir Jamshedji Kanga. He suggested that in making this advance F.E Dinshaw committed a breach of his duty as an agent to the Gwalior Durbar, and when the loan was terminated F.E Dinshaw started paying two annas in the rupee of this commission to the Durbar as compensation or damages for breach of his duty as agent. Apart from the fact that the whole suggestion, as I have said, is fantastic, there is absolutely nothing on the record to bear out this suggestion. The facts on the record are that a loan was advanced by F.E Dinshaw on certain terms, one of the terms being payment of a certain share in the Tata Sons, Limited, that Dinshaw put an end to the loan but payment of a share in this commission to the Gwalior Durbar continued.

With regard to question No. 3, it has been urged by Sir Jamshedji Kanga that when the Durbar purchased the mortgaged properties at the judicial sale, it became the absolute owner of the property and these properties had nothing whatever to do with the trade or business carried on by it; and in support of that contention, Sir Jamshedji has relied on a decision of this court in Himatlal Motilal and Ramanlal Lallubhai v. The Commissioner of Income-Tax, Bombay. In that case in part satisfaction of a mortgage decree the mortgagee purchased the mortgaged property for Rs. 60,000 and six months later sold the same for Rs. 38,000 and he claimed the loss as an allowable business loss in the loan transaction; and Sir John Beaumont, Chief Justice, and Mr. Justice Mirza held that the loss on the sale was loss of capital invested in the purchase of the property and not an allowable business loss in the loan transaction as claimed by the assessee. Now there is nothing to indicate in the facts of that case that the assessee was carrying on a moneylending business. If this was an isolated loan transaction, then the decision of our Court, with respect, is perfectly understandable. The difficulty in the way of Sir Jamshedji is this: that we have on the record the fact that his client carries on a moneylending business, that these properties were mortgaged against advances of moneys, and that as the moneys were not paid, the properties were brought to sale and the Durbar purchased these properties. Ordinarily to my mind these properties would continue to remain in the moneylending business as assets of that business standing to the credit of that business. It was for the assessee to show and to establish that he did something whereby he withdrew these properties from the moneylending business and constituted them an independent investment. There is nothing whatever on the record to establish that position.

I agree with the learned Chief Justice that questions Nos. (4) and (5) in principle really stand on the same footing as question No. (3). In the case of question No. (3), in place of the mortgage money being returned to the Durbar, it obtained certain properties. In the case of questions Nos. (4) and (5), the debtor again defaulted and instead of the immoveable property the Durbar received certain shares. The principle that must govern the transactions underlying questions Nos. (4) and (5) must be the same as underlies the transaction covered by question No. (3).

Question No. (6) raises a rather more important question. The Durbar has invested large sums in the purchase of shares of limited companies. Admittedly these investments have nothing whatever to do with the moneylending business. The Durbar contends that it is entitled to claim a refund in respect of tax paid on these dividends by the various limited companies. Now the position in law is that a company does not pay tax on behalf of a shareholder. A company pays tax on its profits and after payment of tax dividends are distributed to the various shareholders. But in order to avoid double taxation, the Legislature has provided by s. 49B that the tax paid by the company should be deemed to have been paid by the shareholder. Sir Jamshedji says that with regard to these investments, he is not liable to pay any tax because these investments have nothing to do with trade or business and do not fall within the ambit of Act III of 1926, and, therefore, he says that to the extent that tax had been paid by the company he is entitled to a refund. Now s. 49B provides that only a person specified in s. 3 and who is a shareholder of a company which is assessed to income-tax in British India or elsewhere is entitled to the benefit of that section. The Durbar is undoubtedly a shareholder in companies which are assessed to tax; but the question that falls to be considered is whether it is a person specified in s. 3. Now Sir Jamshedji says that the Durbar is a company assessable as a company and he falls under s. 3. He argues that but for that he would not be liable to pay any tax at all. It is by virtue of s. 3 he contends that he can be charged to tax at all. Now it is entirely fallacious to suggest that the charging section with regard to the Gwalior Durbar is s. 3 of the Act. It is not by virtue of s. 3 that the Gwalior Durbar is made liable to pay tax under the Indian Income-tax Act nor is it that he is an assessee contemplated by s. 3 of the Act. The charging section with regard to the Durbar is s. 2(1)(a) of the Government Trading Taxation Act (III of 1926) and that is the section that makes him liable to pay tax, and it is that section that provides that he is liable to pay tax as if he was a company in the same manner and to the same extent as in the like case a company would be liable. Therefore, the effect of this provision is that for the purposes of the Indian Income-tax Act the Durbar is deemed to be a company; but that does not make it a company, nor does it make it an assessee under s. 3 of the Indian Income-tax Act nor does it enlarge the ambit of s. 3 by including a Ruler as an assessee for the purposes of s. 3 of the Act.

I, therefore, agree that the questions should be answered in the manner suggested by the learned Chief Justice.

Attorney for Commissioner: D.H Nanavati.

Attorney for assessee: Payne and Co.

A.J.P