S.T Desai, J.:— This reference under s. 66(1) made at the instance of the assessees, one of whom is Bhor Industries Ltd. Bombay and five others who are shareholders, raises certain interesting questions. The assessment years so far as the company is concerned are 1947–1948 and 1948–1949. The assessment year in respect of the shareholders is 1949–1950. The Bhor Industries Ltd. was at all material times a private company limited by shares and incorporated in the erstwhile Indian State of Bhor. Its registered office was situated at Bhor and it carried on business of dyeing, printing and bleaching cloth, proofing etc. For both the years 1946 and 1947 it was held to be “non-resident” in the then British India. It will be convenient to use the expression “British India” for taxable territories in our judgment. Holding that the company was non-resident in British India in either of the two years, the Income-tax Officer had to determine its total income and its total world income. The general meetings of the company were held in respect of those years at Bhor and the only dividends that were declared at those meetings aggregated to Rs. 2,580 and Rs. 1,140 for the two years respectively. In this judgment we shall refer to some facts only to serve as an illustration in appreciating the legal contentions raised before us. In 1946 the total income of the company was Rs. 4,32,542. The income arising in the Indian State of Bhor was Rs. 2,24,542, and its total world income which would be the sum of those two items was Rs. 6,57,084 and the only amount that it paid out as dividend was Rs. 2,580. In substance and in effect the profits were kept undistributed and the shareholders of that private limited company were content with that position. The company was one in which the public were not substantially interested within the meaning of the Explanation to s. 23A. The Income-tax Officer, therefore, invoked and brought into operation the provisions of s. 23A and made an order under s. 23A in respect of both the years. The dispute before the Income-tax Officer related to the contents of the order including proportionate quantum that could be included in the total income of the shareholders concerned for the purpose of their assessment for the year 1949–1950. It will be convenient to go back to the illustration with which we started. In respect of the year 1946, the position regarding the income of the company was this. The total income, as already mentioned, was Rs. 4,32,542. The income that accrued in the Indian State of Bhor was Rs. 2,24,542 and the income-tax and super-tax payable on the income of the company came to Rs. 1,89,237. The amount available for distribution had to be ascertained as required by s. 23A and that worked out at Rs. 2,43,305 by deducting the amount of income-tax and super-tax from the total income. The dividend declared by the company was only Rs. 2,580. Therefore, the undistributed portion which was deemed to have been distributed under s. 23A amongst the shareholders worked out at Rs. 2,40,725 by deducting Rs. 2,580 from Rs. 2,43,305. The position in respect of the year 1947 was slightly different, but it is not material to go into that for the purpose of this reference. Consequently, the facts for the purpose of this reference in respect of both the years can be taken as the same in view of the nature of the arguments urged before us. At this stage, we are, as already mentioned, referring to the income of the company. Some time after the end of the previous year 1947, the State of Bhor was merged in the then Province of Bombay in consequence of the States Merger (Governor's Provinces) Order, 1949. That order came into operation on August 1, 1949. On December 31, 1949, came into operation the Taxation Laws (Extension to Merged States and Amendment) Act, 1949. By s. 3 of the latter enactment the Indian Income-tax Act, 1922, as also the Indian Finance Act, 1949, were extended to all the merged States. That section specifically provides that the two Acts “shall operate as if they had been extended to, and brought into force in, all the merged States on the first day of April 1949”. The effect of this was that, although the State of Bhor became merged in the then Province of Bombay as from August 1, 1949, that being the date on which the assent of the Governor General was given, the effect of s. 3(2) was that the provisions of the Income-tax Act and the relevant Indian Finance Act, 1949, were brought into force in that State some months earlier, that is on April 1, 1949. section 60a was added to the Indian Income-tax Act to bring the law in harmony and by s. 6 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, the Central Government was empowered to make any exemption, reduction in rate or other modification in respect of income-tax in certain cases to avoid hardship and difficulties. We shall presently state the relevant provisions of the enactments of which we have made some mention. In exercise of the powers conferred by s. 60A, the Central Government made an order intituled “The Merged States (Taxation Concessions) Order, 1949,” and it is on the applicability, scope and the effect of para. 12 of that Order that the principal arguments before us have evolved. It is not necessary to set out in this judgment the relevant provisions of the States Merger (Governor's Province) Order, 1949, or the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, or any provision of the Indian Finance Act. The relevant part of s. 60A is as under:—

“If the Central Government considers it necessary or expedient so to do for avoiding any hardship or anomaly, or removing any difficulty, that may arise as a result of the extension of this Act to the merged territories or to the territories which immediately before the 1st November, 1956, were comprised in any Part B State or to Chandernagore, the Central Government may, by general or special order, make an exemption, reduction in rate or other modification in respect of income-tax in favour of any class of income, or in regard to the whole or any part of the income of any person or class of persons.”

2. It will be seen that income and classes of income and income of any person or classes of persons prior to April 1, 1949, was not being touched by the Indian Income-tax law when it was brought into the scheme of the taxation prevalent in the whole country. That, therefore, was bound to result in certain hardships and difficulties and likely to give rise to anomalous situations. To obviate that, and to give relief or exemptions where it was fit and reasonable to grant exemptions, the Legislature empowered the Central Government to pass requisite orders. It may here be mentioned that the Order was to be the creature of the provisions of s. 60A and nothing more. It could not operate beyond the ambit or matrix of s. 60A and was not intended to do so. We make this observation at this stage because the whole brunt of the argument of Mr. Palkhivala is to the contrary. The provision of the Merged States (Taxation Concessions) Order, 1949, which is very strongly relied on by Mr. Palkhivala is para. 12 of the same. In the course of the arguments before us as also in the judgment of the Tribunal reference has been made to certain other paragraphs of that Order. It will be convenient to quote those paragraphs:

“4. The provisions of paragraphs 5, 6, 9, 10 and 11 of this Order shall apply to only so much of the income, profits and gains included in the total income of an assessee as would, had he been resident in the taxable territories, have been exempt under clause (c) of sub-section (2) of section 14 of the Indian Income-tax Act, 1922, if the Act had not been passed.

5. (1) The income, profits and gains of any previous year ending after the 31st day of March 1948, which is a previous year—

(i) for the merged State assessment year 1948–1949, or

(ii) for the merged State assessment year 1949–1950,

shall be assessed under the Indian Income-tax Act, 1922, if, and only if, such income, profits and gains have not, before the 1st day of August, 1949 been assessed under the State law.

(2) Where the income, profits and gains referred to in sub-paragraph (1) have not been assessed under the State law, they shall be assessed under the Indian Income-tax Act, 1922, and the tax payable thereon shall be determined as hereunder:

(i) the tax on the amount of such income, profits and gains included in the total income shall be computed at the Indian rate of tax;

(ii) the amount of such income, profits and gains shall be computed under the State law and the tax thereon computed at the merged States rate of tax;

(iii) the amount, if any, by which the tax computed under clause (i) exceeds the tax computed under clause (ii) shall be allowed as rebate from the first mentioned tax, and the amount of the first mentioned tax as so reduced shall be the tax payable….

6. (1) The income, profits and gains of any previous year ending after the 31st day of March, 1948, which does not fall within paragraph 5 of this Order or of any previous year commencing after the previous year referred to in the said paragraph shall be assessed under the Indian Income-tax Act, 1922, but the tax payable on so much of the income as pertains to the period ending before the 1st day of August, 1949, shall be determined as hereunder—

(1) the tax on so much of such income included in the total income shall be computed (a) at the Indian rate of tax and (b) at the rate of tax in force in the merged State immediately before the 1st day of August, 1949;…

12. The provisions of section 23A of the Indian Income-tax Act shall not be applied in respect of the profits and gains of any previous year ending before the 1st day of August 1949, unless the State law contains a provision corresponding thereto.”

3. Section 23A of the Income-tax Act features prominently in this reference and we shall set out here the relevant part of that section, as it stood before the section was recast by the Finance Act of 1955 (we are concerned with the section before the amendment):

“23A. (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company upto the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent, of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income:

Provided that when the reserves representing accumulations of past profits which have not been the subject of an order under this sub-section exceed the paid up capital of the company, together with any loan capital which is the property of the shareholders, or the actual cost of the fixed assets of the company whichever of these is greater, this section shall apply as if instead of the words “sixty per cent” the words “one hundred per cent” were substituted:

Provided further that no order under this sub-section shall be made where the company has distributed not less than fifty-five per cent of the assessable income of the company as reduced by the amount of income-tax and super-tax payable by the company in respect thereof, unless the company, on receipt of a notice from the Income-tax Officer that he proposes to make such an order, fails to make within three months of the receipt of such notice a further distribution of its profits and gains so that the total distribution made is not less than sixty per cent of the assessable income of the company of the previous year concerned as reduced by the amount of income-tax and supertax payable by the company in respect thereof:

Provided further that this sub-section shall not apply to any company in which the public are substantially interested or to a subsidiary company of such a company if the whole of the share capital of such subsidiary company is held by the parent company or by the nominees thereof.

Explanation.—For the purpose of this sub-section,—

a company shall be deemed to be a company in which the public are substantially interested if shares of the company (not being shares entitled to a fixed rate of ???. whether with or without a further right to participate in profits) carrying not less than twenty-five per cent, of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficially held by the public (not including a company to which the provisions of this sub-section apply), and if any such shares have in the course of such previous year been the subject of dealings in any stock exchange in the taxable territories or are in fact freely transferable by the holders to other members of the public.

(2) The Inspecting Assistant Commissioner shall not give his approval to any order proposed to be passed by the Income-tax Officer under this section until he has given the company concerned an opportunity of being heard.

(3)(i) …

(ii) Where the proportionate share of any member of a company in the undistributed profits and gains of the company has been included in his total income under the provisions of sub-section (1) the tax payable in respect thereof shall be recoverable from the company, if it cannot be recovered from such member.

(iii) Where a tax is recoverable from a company under this sub-section, a notice of demand shall be served upon it in the prescribed form showing the sum so payable, and such company shall be deemed to be the assessee in respect of such sum, for the purposes of Chapter VI.

(4) Where tax has been paid in respect of any undistributed profits and gains of a company under this section, and such profits and gains are subsequently distributed in any year, the proportionate share therein of any member of the company shall be excluded in computing his total income of that year.

(5) When a company is a shareholder deemed under sub-section (1) to have received a dividend, the amount of the dividend thus deemed to have been paid to it shall be deemed to be part of its total income for the purpose also of the application of that sub-section to distributions of profits by that company.”

4. The assessees carried the matter in appeal to the Tribunal and the Tribunal decided against them practically on all the points. The primary contention of the assessee company before the Departmental authorities and the Tribunal was that it was entitled to claim benefit of the exemptions granted by para. 12 and the Income-tax Officer was not entitled to make any order against the company under s. 23A in respect of any of the two years. Another contention related to interest which the company was compelled to pay by reason of the fact that no advance payment of income-tax had been made as required by s. 18A of the Indian Income-tax Act. Here, the submission was that the company was not bound to pay any advance tax, and not being bound to pay any advance tax, there could be no question of penalty. The argument was that in any event the interest which it had been compelled to pay would, by the language of s. 18A, be equated with tax and that the amount of that interest had to be taken into consideration in computing the assessable income of the company under s. 23A. The contention of the shareholder-assessees was that they also were entitled to the benefit of the exemption granted by para. 12 and it was also their contention that they were entitled to the benefit of the provisions of s. 14(2)(c) under which in respect of income arising within any Indian State no tax was payable as laid down in that section.

5. Three questions have been referred to us by the Tribunal on this reference:

“1. Whether Paragraph 12 of the Merged States (Taxation Concessions) Order, 1949, precluded the Income-tax Officer from making any order under section 23A in the case of the assessee company in respect of its profits and gains of the previous year ended

2. Whether in making an order under section 23A in respect of the profits and gains of the year 1946/1947 the assessable income of that previous year is to be reduced not only by the amount of Income-tax and super-tax payable by the company in respect thereof but also by the amount of interest charged to it in accordance with the provisions of section 18A?

3. Having regard to the order passed by the Income-tax Officer under section 23A in respect of the company's profits of the year 1947 and having apportioned the sum of Rs. 17,641/- to the shareholder, Pushpakumar, as his proportionate share in the distribution made by the Income-tax Officer under section 23A and having regard to the provisions of section 14(2)(c), whether the said sum of Rs. 17,641/- has been properly included in his total income for the purpose of charging it to tax?”

6. Questions 1 and 2 relate to the assessment of the company for the two years 1946 and 1947. Question 3 relates to the assessment of the shareholders-assessees for the assessment year 1949–1950.

7. It has been argued before us by Mr. Palkhivala that the effect of para. 12 of the Merged States (Taxation Concessions) Order, 1949, to which we shall refer as “the Concessions, Order of 1949” which was promulgated under s. 60A of the Income-tax Act, 1922, was that the company became exempt from the operation of s. 23A of the Income-tax Act notwithstanding the extension of the Income-tax Act to Bhor State. If one confines the matter to the language of para. 12 alone, the argument at first blush seems attractive, but para. 12 cannot be read in isolation. It has to be read in its proper setting and particularly bearing in mind the provisions of s. 60A of the Indian Income-tax Act. The argument founded on the phrasing of para. 12 needs to be stated very briefly and it is that the provisions of s. 23A could not be applied by the Income-tax Officer to the income of this company for the assessment years 1947–1948 and 1948–1949 (accounting years 1946 and 1947) because those were profits and gains of previous years ending before August 1, 1949, and there was nothing in the law of the Bhor State which contained any provision corresponding to the provision enacted in s. 23A whereby a fiction of law was raised and income which was not distributed amongst shareholders was to be deemed to have been actually distributed amongst them. The object of s. 23A and the sound principle underlying it are obvious and it is not necessary for us to discuss the same. Now the question is not of the object of that enactment or the principle underlying it but of its applicability or otherwise to the assessee company before us. The argument of counsel touches every element mentioned in para. 12 but it ignores the most material consideration, the consideration which goes to the root of the matter, and that consideration is that para. 12 applies to any assessee in respect of any assessment year. The application and scope of para. 12, as we already mentioned in passing, has to be gathered from the language of s. 60A. Therefore, it is necessary for us to examine the language of s. 60A. That section, as we have already mentioned, authorises the Central Government to grant exemption and reduction in respect of any income or classes of income or in regard to the income of any person or classes of persons. The crucial words of the section, it will be seen, are that the exemption or reduction which the Central Government is authorised to grant is in respect of a situation which may arise as a result of the extension of the Act to merged territories, which could only be after the date of the Extension Act, unless there was anything in the enactment itself to give it retroactive operation or it was required that it should have effect ex post facto. We have already mentioned that the Income-tax Act and the Finance Act were to be applied from April 1, 1949, but that will have bearing on certain other questions.

8. The argument of Mr. Palkhivala is that s. 60A contemplates removal of hardships as a result of the extension of the Act to merged States and it was to counteract the hardships that may arise not in respect of assessment years 1949–1950 or subsequent years but even in respect of earlier years. It is urged by learned counsel that the words which appear after the word “exemption”—in favour of any class of income, or in regard to the whole or an part of the income of any person or class of persons—were unqualified and not restricted to income-tax on income assessable for the year 1949–1950 and subsequent years and the measure therefore applied to any income and the tax payable on that income for earlier years and such relief was in fact calculated to counteract the impact of the extension of the Act to the merged States.

9. Now, at the very outset, it is necessary to be clear in one's mind as to what was the result of the extension of the Income-tax law of British India to the Merged States. It was that any income not within the purview of the Act, income of persons or class of persons unaffected or untouched by the British Indian Act, became taxable and what is essential to note is that it became taxable for and/or after the assessment years 1949–1950. The exemption was to be for the benefit and relief of those who were hit by the Extension Act. Its object was that incomes which were otherwise not liable to tax but, by the Extension Act made so liable, were to be given partial relief or even exemption. But says Mr. Palkhivala, that is not the object of the Extension Act and that is not the effect of s. 60A. Now, it will be seen from the facts which we have already stated that even before the enactment of s. 60A the assessee company was liable to pay tax in respect of its income in British India (taxable territories). The inevitable starting point must be—Is the exemption claimed in respect of income for the assessment year 1949–1950 or any subsequent year? If not, s. 60A has not legislated for it and no question can arise of considering the operation of the Order. In our judgment, this must be so because the Order cannot embrace incomes which were not within the ambit of s. 60A itself. To put it differently, incomes which were not touched by the Extension Act were not to benefit by the exemption. What was legislated for was income for the assessment year 1949–1950 and subsequent years. That, to our mind, is the plain meaning of this important provision of the Extension Act.

10. What we have already mentioned is sufficient to dispose of the first question. But another argument has been advanced before us by Mr. Palkhivala and that is quod the income of the assessee-shareholders. The question as formulated relates to the case of the assessee company in respect of its profits and gains of the previous years 1946 and 1947. There is no specific question before us in respect of the income of the assessee-shareholders relating to the applicability and effect of para. 12 of the Concessions Order. But it is clear from the statement of the case itself that the assessee-shareholders also had asked the Tribunal, on this s. 66(1) application, to raise that question of law and it seems but only right that question No. 1 should be reframed by us and answered. We shall reframe question No. 1 by dividing it in two parts. The first part will be as the first question reads at present and the second part of that will be:

“Whether paragraph 12 of the Merged States (Taxation Concessions) Order, 1949 precluded the Income-tax Officer from making any order under Section 23A so as to affect the assessee shareholders in respect of their profits and gains for the assessment year 1949–1950?”

11. It has been urged by Mr. Palkhivala that even on the construction we are inclined to put on s. 60A and the view we are inclined to take of the application and effect of para. 12 of the Concessions Order, the assessee-shareholders have been taxed in respect of the assessment year 1949–1950 and would be within the ambit of the section itself and the Order. In a broad general sense we agree with Mr. Palkhivala. It is said by Mr. Palkhivala that the shareholders were hit by the s. 23A order although it was made in respect of the company's income for the years 1946 and 1947 which corresponded with two assessment years prior to August 1, 1949, because here the shareholders were being taxed for the assessment year 1949–1950. The next step of the argument is that a shareholder whether resident or non-resident could claim benefit of para. 12 and ask for exemption in respect of the assessment year 1949–1950 and the sequitor, it is said, of this premise is that s. 23A could not be applied to the case of these assessees. The primary liability under s. 23A, it is said, was of the shareholders. The profit was the profit of the company and the State law did not contain any provisions analogous to that contained in s. 23A and it stood to reason, so the argument has run, that the shareholders in any event should have the benefit of the exemption. Here also at first blush, the argument sounds somewhat attractive but in substance it amounts to this that we must look only at the Order and read para. 12 in the context of the relevant provisions of the Order but not in the light of s. 60A of the Indian Income-tax Act and the meaning and scope of s. 23A of the Income-tax Act. Section 60A, as we have already observed, is the very foundation of the Order of 1949 including para. 12 of the same and before we look at para. 12, we have to remember that the scope and ambit of the exemption granted by para. 12 has already been determined by s. 60A. Therefore, even when applying para. 12 to the case of an assessee-shareholder in respect of any ‘income of any person or class of persons’ taxed by operation of the Extension Act, we have to go back to the application and effect of that section itself and in the present context, the provisions of that section and s. 23A of the Income-tax Act have to be read together. Paragraph 12 itself states that the provisions of s. 23A of the Income-tax Act would not be applied in respect of the profits and gains of any previous year ending before August 1, 1949. Mr. Palkhivala rightly agrees that the-profits and gains of any previous year here must mean the profits and gains of the company and not profits and gains of the assessee-shareholders. The starting point of invoking the operation of s. 23A is the profits and gains of a company, which profits and gains, it is to be ascertained, were or were not properly distributed as required by law. It necessarily follows that the profits and gains of the company must be profits and gains which are brought within the operation of the Extension Act, and para. 12 cannot be read in isolation or divorced from its setting. It is, however, argued that even if para. 12 has to be read in the light of s. 60A and the context of that section, when it came to making a concession to an assessee-shareholder for the assessment year 1949–1950 or any subsequent year, it was open to the Government to extend the relief and grant the exemption to all or part of any income of the assessee. To the difficulty raised by the language of s. 60A, the answer of learned counsel is that to restrict it would be adding words in para 12. Reference has been made in support of this argument to para 4 of the Order and it is said that where the Government wanted the operation of the Order to be limited, it has specifically so provided. This part of the argument, in our judgment, is not well-founded. To read para 12 in the context of s. 60A would not be adding anything to the language of the paragraph. It has of necessity to be read and given effect to only within the ambit of s. 60A. There is another aspect of the same matter. It can be said that in a sense the shareholder does not come into the picture when para. 12 mentions profits and gains of any previous year ending before August 1, 1949, because these profits and gains can only be profits and gains of the company, and the profits and gains of the company, which can give rise to any exemption or any relief are the profits and gains for the year 1949–1950 and subsequent years. This is not to suggest that para 12 has no applicability to the case of any assessee-shareholder. We are merely pointing out that this is another facet of the same question. Of course para 12 does apply to an assessee-shareholder but it can only apply to an assessee-shareholder within the ambit and scope of s. 60A and not outside it. The result, as we see, is that the assessee-shareholder, although he became entitled to claim relief or exemption by operation of the Order made under s. 60A in respect of the assessment year 1949–1950, the effect of para 12 read with s. 60A and s. 23A of the Income-tax Act is that it was the undistributed profit of a company for the year 1949–1950 and subsequent years only to which the exemption can relate.

12. The second question before us on this reference raises a very short contention and we have already indicated what that contention is. The argument is founded on the language of s. 18A(8) which is as under:

“Where, on making the regular assessment, the Income-tax Officer finds that no payment of tax has been made in accordance with the foregoing provisions of this section, interest calculated in the manner laid down in sub-section (6) shall be added to the tax as determined on the basis of the regular assessment.”

13. This section, relates to advance payment of tax. Learned counsel has relied on the words “shall be added to the tax as determined on the basis of the regular assessment.” The brief argument is that by adding this amount to the tax, the amount became tax for the purpose of computation envisaged by s. 23A. There is nothing in the language of s. 23A which permits of any such artificial meaning being given to penalty interest nor is there anything which permits of any equivalence being established between the payment of penalty interest and tax and super-tax contemplated by s. 23A. We may add that s. 29 deals with the question of tax, penalty and interest as separate concepts.

14. The third question, which, according to learned counsel, is also an important question on this reference, relates to the contention of the assessee-share holders that they have always been and have continued to be entitled to the exemption given by s. 14(2)(c) which at the material time was as under;

“The tax shall not be payable by an assessee…

(c) in respect of any income, profits or gains accruing or arising to him within an Indian State, unless such income, profits or gains are received or deemed to be received in or are brought into (British India) in the previous year by or on behalf of the assessee, or are assessable under section 12B or section 42.”

15. We are not concerned here on this reference with s. 12B or s. 42. We have already mentioned that the operation of the Income-tax Act and the Finance Act, 1949, was retroactive from April 1, 1949. Now, relying on s. 14(2)(c) the argument urged on behalf of the assessee-shareholders is that the effect of the Extension Act and the Order was not to deprive them of the benefit of s. 14(2)(c) in any manner. It is said that the income which they derived as dividends could not be charged in their hands unless it was shown that it accrued in British India or is deemed to have accrued in British India or was brought into British India in the previous year. The argument proceeded that this is a case of a fiction of law created by s. 23A. Dividend which may have been distributed could only be at the office of the company in Bhor State, and since the income was to be deemed to have been distributed in the Bhor State, it was exempt from tax under s. 14(2)(c), even though the assessee-shareholders were residents within British India. Though included in their total income, it was to be exempt from taxation and the shareholders would not have to pay tax on it by operation of s. 14(2)(c). It has been urged that the shareholder would be justified in saying that he should be put in the same position in which he would have been if 60 per cent, of the profits of the company had been declared as dividend. The shareholder would not have to pay tax in respect of the income in British India by operation of s. 14(2)(c). Reference has also been made to s. 16(2)(a) and it is said that it relates only to rates and not to assessments. The argument here has centred round one point and that point is that what was to be regarded was not the law in force on August 1, 1949, but the law in force in Bhor State on April 1, 1949, and if that was the position, the application of s. 14(2)(c) survived. Now, we have already pointed out that although the extension of the Income-tax Act to the merged States was by virtue of the provisions of the Extension Act, 1949, retrospective effect was given to the provisions of the Income-tax Act and the Finance Act, 1949, as from April 1, 1949. Therefore, this argument does not survive. Learned counsel has also relied on what he had already submitted in the context of the first question before us. It is not necessary for us to deal with the same over again.

16. On the other hand, it has been argued by Mr. Joshi learned counsel for the Revenue, that so far as undistributed profits are deemed to be distributed by virtue of an order made under s. 23A, there is no question of accrual. The deemed income is to be included in the total income and the point of exemption is not material in this context because the inclusion is by virtue of s. 23A itself. Then, it is said that even assuming that the place of accrual was of relevance, it became immaterial because Bhor State had become part of British India (taxable territory) for the purpose of application of the Income-tax Act as from April 1, 1949. It is not necessary for us to deal with the first argument of Mr. Joshi. The second argument meets the case. In our opinion, it is not permissible to the assessee-shareholders, in view of the relevant provisions of the legislation to which we have already referred, to claim that they were entitled to the benefit of s. 14(2)(c).

17. We have so far not referred to one argument of Mr. Palkhivala and that argument is, if we may so describe it, de hors the Extension Act.

18. It turns on the construction to be put on para 4 of the Order of 1949. Succinctly stated, the argument has been that the paragraph gave benefit of the relevant exemptions both to assessees who were non-residents in the taxable territories and those who were residents in the taxable territories. The identical point was raised before this Court in Mrs. Kusumben D. Mahadevia v. The Commissioner of Income-tax . 1956 Income-tax Reference No. 28 of 1955, decided by Chagla, C.J and Tendolkar, J., on February 20, 1956 Unrep.. in a matter, which, we are informed, has been carried to the Supreme Court. In that case, this very contention was negatived and we are bound by that decision. It is not necessary for us to examine this argument of Mr. Palkhivala.

19. Our answer to the first part of question (1) will be in the negative and to the second part of the same question will also be in the negative.

20. Our answer to question (2) will be in the negative.

21. Our answer to question (3) will be in the affirmative.

22. Assessee to pay the costs.

Solicitor for the applicant: Mulla & Mulla and Cragie Blunt & Caroe.

Solicitor for the respondent: A.S Parikh.