1960 PLP 1052 (PTD)

MUHAMMAD MUNIR, C. J.‑This is a suit on the original jurisdiction side of this Court. The plaintiff is the Government of West Pakistan and the defendant the Federation of Pakistan, and the point in dispute between the parties is whether the Punjab Government of the defunct Province of Punjab was liable to income‑tax and consequently also to excess profits tax for the profits of a business earned by it outside the Province. The suit was instituted by the Government of the Province of the Punjab but since that Province has been succeeded by the Province of West Pakistan, the Government of the new Province has been substituted as the plaintiff. Since 1921 the pre‑Partition Province of the Punjab had been running a factory at Jallo, called the Jallo Rosin and Turpentine Factory, where it carried on, through officers and men employed by it, the business of processing, preparing, manufacture and sale of turpentine and rosin. At certain periods of this activity, other individuals and departments or Governments of the Provinces or Indian States had been associated with the business on a profit sharing basis, but after 1944 the venture was exclusively carried on by the Province which in 1926 became the sole owner of the factory. After the Partition the ownership of the factory and the business came to vest in the Punjab Province of Pakistan. The factory had some agents who worked outside the Province, but they were accountable to the head office of the factory which all along was situate within Provincial limits. On 21st February 1947 an Income‑tax Officer served on the managing agents of the Factory a notice under section 34 of the Income‑tax Act requiring them to furnish a return for the income of the factory for the assessment year 1942‑43, and by his order, dated the 29th March 1947 he assessed the income of the Province of the Punjab from this source outside the Province at Rs. 3,06,

327. This assessment was followed by others for the years 1943‑44, 1944‑45, 1945‑46, 1946‑47, 1947‑48 and 1951‑52, the aggregate tax demand for the whole of this period being Rs. 25,22,556‑9‑

0. The plaintiff protested against these assessments and questioned the jurisdiction of the Income‑tax Officer to assess what were the revenues of the Provincial Government, but the objection was repelled. The plaintiff then addressed the Central Government on the subject and by a letter, dated the 12th March 1948 pointed out that the Provincial Government could not be taxed under the Income‑tax Act and suggested that the matter should be referred under section 213 of the Government of India Act, 1935 to this Court. But by their letter, dated the 30th May 1949 the Central Government refused to make the required reference and insisted upon its right to tax the Province. Thereupon, on November 17, 1952, the plaintiff brought the present suit asking for a declaration that the: (a) imposition of the tax was without jurisdiction ; (b) plaintiff was not liable to be taxed under the Income‑tax Act, 1922, and the Excess Profits Tax Act, 1940, for its income from the Factory including the Factory's commercial activities outside the Province of the Punjab ; (c) plaintiff was not liable to tax for income from commercial activities outside the Provinces of British India in the pre‑Partition period and outside the Provinces and the Capital of the Federation of Pakistan in the post‑Partition period ; and (d) plaintiff was not liable to be taxed for its commercial ventures outside the Province of the Punjab which were referable to a period anterior to the Partition of the country. In the written statement filed on behalf of the Federation several technical objections to the maintainability of the suit and the jurisdiction of this Court to entertain it were taken, and on the main point in dispute the stand taken was that the plaintiff was liable to taxation by the defendant under proviso (a) to subsec tion (1) of section 155 of the Government of India Act, 1935. On the pleadings the Court struck the following issues :‑ PRELIMINARY ISSUES (1) Is the present suit barred under section 67 of the Income tax Act, 1922 ? (2) Is the present suit not maintainable in view of the pro visions of section 9 of the Civil Procedure Code ? (3) Is the suit barred by time under Article 14 of the Limita tion Act? (4) Is the present suit not maintainable in view of the provi sions of section 204 of the Government of India Act, 1935 ? ISSUES ON MERITS (5) Is the plaintiff Province not liable to income‑tax at all under the provisions of the Income‑tax Act ? (6) Is the plaintiff not liable to tax in respect of goods sold outside British India before Partition and outside Pakistan after Partition ? (7) Is the plaintiff' Province not liable to income‑tax in respect of the goods sold by the Punjab Province before the 14th August 1947 ? (8) Whether the goods sold by the plaintiff Province through the commission agents are not liable to income‑tax ? (9) Whether a part of the profits paid to the Forest Department by the plaintiff Province as price of the goods supplied by that Department are not liable to income‑tax ? and (10) Whether the plaintiff Province is not entitled to the grant of any declaratory decree? , The suit was fixed for hearing the evidence yesterday but with the consent of the parties we decided to hear arguments on the legal issues and deferred the hearing of evidence until we thought evidence to be necessary for the determination of the suit. We have accordingly heard Mr. Faiyaz Ali, Advocate‑General of Pakistan for the defendant Federation, and Mr. A. R. Changez, Advocate‑General of West Pakistan for the plaintiff province. The first issue to be determined before we proceed further is whether we have jurisdiction to hear the suit. The original juris diction of this Court is defined by section 204 of the Constitution Act which is in these terms :‑ "Subject 0 the provisions of this Act, the Federal Court shall, to the exclusion of any other Court, have an original jurisdiction in any dispute between any of the following parties, that is to say, the Federation, or any of the Provinces, if and in so far as the dispute involves any question (whether of law or fact) on which the existence or extent of a legal right depends." Thus the necessary conditions of the existence of this jurisdic tion are:- (1) that there should exist a dispute between the Federation or any Province or between the Provinces themselves ; (2) the dispute should involve a question on which the exis tence or extent of a legal right depends ; and (3) there must not be any repugnant provision in the Act. In the present case, undoubtedly a dispute exists ; this dispute is between a Province and the Federation ; and it involves a question of law on which the existence or extent of a legal right, namely, the right of the Federation to assess the Province to tax depends. On the plain words of the section, therefore, this Court exclusive jurisdiction in the matter, and it was admitted by Mr. Faiyaz Ali that if the Income‑tax Officer were a "Court", the objection to his jurisdiction to assess the Province were taken before him, he could not have adjudicated upon the merits of the dispute, ‑because in that case the dispute would have been exclusively cognizable by this Court. We do not consider it necessary to decide whether an Income‑tax Officer is a Court, because it appears to us to be perfectly plain that keeping in view essential nature of the dispute and the parties to it the case falls within the four corners of section 204, and we have exclusive jurisdiction in the matter. The principle underlying that section which creates a special jurisdiction is that all disputes, whether of law or of facts, on which the existence or extent of a legal right depends must be determined by this Court if the parties to the dispute happen to be the Federation on the one side and any one or more of the Provinces on the other or if two or more Provinces are arrayed against one another, because it is in the highest degree undesirable that the Federation and the Provinces should be fighting out their battles in ordinary Courts like common litigants. Mr. Faiyaz Ali admitted that the dispute prima facie fell within the terms of section 204, but relying on the words with which the section opens "Subject to the provisions of this Act" he contended that these words must be taken to mean "subject to the provisions of this Act or any other Act passed by the legislature in exercise of the powers conferred on it by this Act or any law recognised by this Act as being in force after the passing of the Act." The learned Advocate‑General had to resort to this construction in a desperate effort to support the argument that because the Income tax Act provides a complete machinery for the adjudication of disputes relating to income‑tax, being an exhaustive code not only governing rights and liabilities arising out of assessments to such tax but also the procedure for obtaining the determination of disputes relating to such rights and liabilities, section 204 must be read subject to the provisions of the Income‑tax Act, with the result that any dispute relating to income‑tax, even though it may be between the Federation and a Province, must be deter mined by the appropriate authority mentioned in the Income‑tax Act and not by any other Court including the Federal Court. We see no warrant in the words of the section for this forced interpretation, particularly when by giving effect to such contention we should not only be reading in the section what is not there but also arriving at the absurd conclusion that while the original jurisdiction of all other Courts including the High Court to decide disputes between the Federation and a Province are taken away, an ordinary official like the Income‑tax Officer should have been intended to be constituted the sole arbiter of disputes relating to his own jurisdiction to tax, whose decisions, subject to a right, of appeal or revision, were to carry an absolute finality. We see no reason for any such forced construction of the section and taking it to mean what its plain words say we hold that in the present case the necessary conditions of our exclusive jurisdiction are satisfied and that the dispute is cognizable by us alone. On the merits, the outstanding issue falling for determination is whether under the Income‑tax Act, XI of 1922, a Province is liable to be assessed on the profits accuring from any business activity outside the Province. The orders of assessment show that the assessable entity in this case was considered by the Income‑tax Officer to be an association of persons which was described in those orders as "The Punjab Government" regarding Jallo Rosin and Turpentine Factory, Jallo, and other business activities etc., outside the Punjab Provincial boundaries : profit liable to tax under section 155 of the Government of India Act, through Mr. P. H. Guest who is held as Principal Officer of the Association of Persons. The Punjab Government' Nursing Dass Building. The Mall, Lahore. His own jurisdiction to assess he assumed in just one sentence : "Under section 155, subsection (1) of Govern of India Act of 1935, the Provincial Governments are liable to tax in respect of any profits arising from any trade or business carried on by them outside their own Provinces." This argument was repeated in a subsequent portion of the order where he said "As regards the assessability of the profits which accrued or arose out of the Punjab, there is little doubt according to interpretation which is put on provision of section 155 (1) of the Government of India Act. The next question is the assignment of status. The proceedings have been started on the assumption that the Punjab Government is Association of Persons' which is one of the taxable entities set out in section 3 of the Income‑tax Act. The Punjab Government is not an individual which in its plain dictionary meaning means a `particular person indivisible'. It is not a firm, nor Hindu undivided family, nor a company even by legal fixture set out in the Government Trading Taxation Act of 1926 which excludes British India from its operation. It is neither a local body. The only status that we can assign to it is an `Association of Persons' which is a wide term to cover a case of the kind. Accordingly the Punjab Government is held assessable in that status." Before us also Mr. Faiyaz Ali relied upon section 155 of the Government of India Act and contended that that section has the effect of creating a liability to income‑tax if a trade or business of any kind is carried on by or on behalf of the Government of a Province in any part of Pakistan outside that Province. The section says : "(1) Subject as hereinafter provided, the Government of a Province shall not be liable to Federal taxation in respect of lands or buildings situate in Pakistan or income accruing, arising or received in Pakistan: Provided that‑ (a) where a trade or business of any kind is carried on by or on behalf of the Government of a Province in any part of Pakistan outside that Province nothing in this subsection shall exempt that Government from any Federal taxation in respect of that trade or business, or any operations connected therewith, or any income arising in connection therewith, or any property occupied for the purposes thereof. It is obvious that the principle recognised by this section is that the Government of a Province is not liable to taxation in respect of income accruing, arising or received in Pakistan. That principle, however, is qualified by the proviso that if a trade or business of any kind is carried on by or on behalf of the Govern ment of a Province in any part of Pakistan outside that Province, subsection (1) of section 155 in that case shall not have the effect of exempting that Government from any Federal taxation in respect of that trade or business or any `operations connected therewith or any income arising in connection therewith. The proviso is merely an exempting provision and recognises the liability of a Provincial Government to be taxed in respect of the profits of a trade or business which is carried on outside the Province. But the proviso does not itself create any liability to any particular Federal taxation it merely recognises such liability provided it is created by some other Act. In saying that "nothing in this subsection shall exempt" the proviso assumes that a liability exists, a liability created by some Act. If, therefore, the Ac itself does not make an income liable to tax there can be no question of its exemption from tax. The Indian Constitution enacts this principle in a somewhat different way in Article 289 which provides: "Parliament may by law provide for taxation in respect of a trade or business of any kind carried on by or on behalf of the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes, of such trade or business, or any income accruing or arising in connec tion therewith." Thus, while in India the liability of a State to income‑tax has to be created by Parliament by law, section 155 of the Govern ment of India Act declares that if any such liability is created by an Act of the Federal Legislature, then that liability shall not be affected by the main provision in subsection (1) of that section that the Government of a Province shall not be liable to Federal taxation in respect of income accruing, arising or received in Pakistan. The section is a counterpart to the preceding section which exempts the property vested in His Majesty for the purposes of the Government of the Federation from all taxes imposed by, or by any authority, within a Province, unless a Federal law provides otherwise. It appears to us, therefore, that if there be no specific legislation making the Government of a Province liable to income tax in respect of its trade activities, section 155 of the Constitution Act is not at all in point. To attract the operation of that section either the Income‑tax Act should impose on the Province a liability or there should be some such piece of legislation as the Govern ment Trading Taxation Act, 1926, which expressly makes the Government of any part of His Majesty's Dominions liable to tax, as if it were a company, in‑respect of any trade or business carried on by it in Pakistan. But that Act expressly excludes from its operation the Government in Pakistan, though Pakistan is one of Her Majesty's Dominions, thus showing that the Government of Pakistan, including in it the Government of any part of Pakistan, is exempt from the liability to pay income‑tax for any trade or business carried on by it within the country. We may now proceed to consider whether the Income‑tax Act, 1922 creates any liability which is preserved by the proviso to subsection (1) of section 155 of the Government of India Act. The charging provision in the Act is section 3 which provides that "Where any Central Act enacts that income‑tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority and of every firm and other associa tion of persons or the partners of the firm or the members of the association individually." The Income‑tax Officer conceded in his order that the Provincial Government was neither an individual, nor a Hindu undivided family, nor a company nor a local authority nor a firm ; but he thought that the words "association of persons" were wide enough to include the Government of a Province. The view that the Government of a Province could be taxed as an association of persons was taken for the first time by this particular Income‑tax Officer because though the Jallo Rosin and Turpentine Factory had been carrying on regular business since 1921 and earning profits none of the Income‑tax Officers ever thought that the Punjab Government could be taxed in respect of those profits, Nor in the course of arguments was any reference made by the learned counsel for the Federation to any similar precedent. Thus the impugned assessment was an unprecedented step. We do not know what led the Income‑tax Officer to bestow his special atten tion to this Factory, though several Provincial Governments had been engaging themselves in activities which were in the nature of trade or business. In this very Province the business of generating electrical energy is being carried on by the Provincial Government for over ten years, but no Income‑tax Officer ever thought of assessing the profits from that business. There is another aspect of the matter which is being com pletely ignored both by the learned Advocate‑General of Pakistan and the Government of Pakistan which insists upon its right to tax the Provincial Government. If, as held by the Income‑tax Officer and contended for by Mr. Faiyaz Ali, the Government of a Province is an "association of persons" within the meaning of section 3 of the Income‑tax Act, the Government of Pakistan also, precisely for the reasons advanced before us, must be held to be an "association of persons" because in this respect no distinction is possible between the Government of Pakistan and the Government of a Province. Under the existing constitutional position both are different branches of the Crown, carrying on their statutory duties within their respective spheres as defined by the Constitution Act. If, therefore, the contention be accepted that the Government of a Province is an "association of persons" the inevitable deduction from that proposition will be that the Government of Pakistan also is an "association of persons" and therefore, chargeable to income‑tax under section 3 in respect of all its revenues because such revenues, if they do not fall under any specific category, will all be income from "Other Sources" within the meaning of section 6 of the Act. Interest on securities and income from property shall be specifically chargeable while such commercial activities as railways, merchant shipping, post offices, telegraphs and telephones and a host of other undertakings may easily be held to be business. Even income from the State Bank of Pakistan will be taxable income. Mr. Faiyaz Ali admitted that that would be the result, but he maintained that the taxing autho rity cannot tax itself, and that therefore the Central Government for whose benefit the income‑tax is levied cannot itself be taxed in respect of its income. He cited no authority for this proposi tion and admitted that there is no specific exemption in the Act in favour of the Government of Pakistan. If the revenues of the Central Government are chargeable to income and the Act makes it the duty of the Income‑tax Officer to assess all such revenues, there is no question of the taxing authority taxing itself because then the Income‑tax Officer is under a statutory obligation to assess to tax the income of every "association of persons" and it is not his business to see of what .persons the association is composed of except for the purpose of determining the liability to tax. And even in this respect, the argument of the learned Advocate‑General proceeds on a fallacy because under section 138 of the Constitution Act a prescribed percentage of the net proceeds of taxes on income, though such taxes are levied and collected by the Federation, cannot form part of the revenues of the Federation and has to be assigned to and distributed among the Provinces within which that tax is leviable. Thus, if the various revenues of the Federation are income liable to tax because the income is of an "association of persons", the Provinces have a share in it and the prescribed share of the Provinces does not constitute the revenues of the Federation. We now come to the question whether the Government of a Province is an "association of persons". In seeking to discover the sense in which this expression is used in the Income‑tax Act it becomes necessary to refer to the provisions of section 3 as a whole as well as to the words of the section as it stood before it was amended by Act VII of 1939. In the Act of 1922, as amended by Act XI of 1924, the section after the words "Hindus undivided family" contained the words "company, firm and other association of individuals." The present shape to the section was given by the Indian Income‑tax (Amendment) Act 1939, VII of 1939, with the result that instead of "Other association of individuals" we now have the expression "other association of persons". Now since the words "individual" and "persons" are both used in the same section it is obvious that there must be some important distinction between the two. On the present words of the section, an association need not be composed of individuals though its members must be persons, i.e., individuals or legal persons or both, the word "person" as held in Income‑tax Commissioner for City of London v. Gibbs (1942 A C 402), meaning in English Income‑tax law an entity of assessment, i.e. the possessor or recipient of an income which the Act requires to be separately assessed for tax purposes. The word "association" has no technical meaning and is wide enough to include all groups or aggregations of persons formed for the promotion of a joint enterprise, whether that enterprise is in the field of business or in the field of part, literature, science, philanthropy or some profession, and for the purposes of the section it is wholly immaterial whether such association is brought into existence by law or by agreement or whether it is or it is not registered under the Registra tion of Societies Act. Thus a Bar Association, a Club, or a Society for the prevention of cruelty to animals, or for any other charitable, religious, or cultural purpose, would be an "association of persons" though its liability to income‑tax will depend upon the other provisions of the Act. A firm is an association of persons and so is a company, though firms and companies are separately mentioned in the section. What is of importance is that the association, whether it consists of individuals or of legal persons or' both, its members must be capable of determination because the Income‑tax Officer has, in certain circumstances, the discretion either to tax the association as such or the members of the association individually. Mr. Faiyaz Ali cited some authorities on the construction of section 3 where, for instance, a Bar Council or a corporate body created by statute, e.g. a co‑operative society was held to be an individual, vide Commis sioner of Income‑tax, Madras v. The Bar Council, Madras ((1943) 11 I T R 14), Commissioner of Income‑tax v. Salem District Urban Bank Ltd. ((1940) 8 I T R 269), Commissioner of Income‑tax Bombay (A I R 1932 Bom. 106), but these are hardly of any relevancy in construing the section as it stands. There can be no doubt that the word "individual" after the amendment of 1939 can only mean a natural person, i.e., a human being, Vide Commissioner of Income‑tax, Bombay v. Ahmedabad Mill Owner s Association (I L R 1939 Bom. 451). In fact it was in view of the forced interpretation, given to the word "individual" in the type of cases cited by Mr. Faiyaz Ali that the section had to be amended in 1939 and the expression "association of individuals" to be substituted by "association of persons." While every individual must be a person, the converse is not true because an artificial or a legal person, whether it is a corporation aggregate or a corporation sole, is not an individual. An association, therefore, is liable to tax under section 3 as it stands at present even if its members are not individuals. Such members must, however, be persons, whether individuals or legal persons or, both. Nor are the cases cited by Mr. Faiyaz Ali in which the Crown or a State was held to be a person in point, because here the question is not whether the Provincial Government is a person which it may well be, but whether it is an "association of persons." As already pointed out, an association of persons must consist) of determinate members and the expression is wholly inapplicable to the persons who are running the Government of a Province in Pakistan. Under the Constitution Act the executive authority) a Province has to be exercised by the Governor, either directly ors through officers subordinate to him, though he must have a Council of Ministers to aid and advise him in the exercise of his functions, and all executive action of the Government of a Province has to be expressed to be taken in the name of the Governor. The word "association" can therefore never be applied to the Governor and his Ministers or the officers who are appointed by the Governor to exercise executive authority of the Province Realizing this position Mr. Faiyaz Ali attempted to argue that the Provincial Government was an "individual" represented by the Governor and that it was liable to tax in the status of an individual. But he hardly realised the implications of taxing the Governor as an individual, because when an individual is taxed the liability may be enforced against his property, and it could never be intended that this should be so in the case of the Governor of a Province. The principle is well established that the Crown unless expressly named is not liable to tax. For the purposes of exercising the executive authority of the Province the Governor acts for the Crown as much as the Governor‑General does when exercising the executive authority of the Federation. The liability of the Crown to tax cannot be established in the round about manner in which the learned Advocate‑General of Pakistan has sought to establish it. On well recognised principles the statute which seeks to tax the Crown, in whatever aspect of its activity must expressly take away the prerogative of its immunity from taxation. In the Act there is no such provision; the principle is against such, taxation; and the words of the section are not at all capable of making the Crown, while administering Provincial affairs, liable to tax because by no stretch of language or imagination can the Provincial Government, which means the Governor, can be held to be an "association of persons". It may be that the Provincial Government is a person in the technical sense of the term, but that in this case is wholly insufficient because under the Income‑tax Act a person is not a taxable entity which, among other entities specifically mentioned, must either be an individual or an "associa tion of persons". For these reasons, we think that the Income‑tax Officer exceeded his jurisdiction in assessing the Province to Income‑tax. In the discussion relating to this Court's jurisdiction, we should be taken to have negatived the contention that by reason of section 67 of the Income‑tax Act or section 9 of the Code of Civil Procedure no suit of the present kind lies. The necessary conditions of section 204 of the Government of India Act being satisfied the suit is plainly competent. There is a real distinction between those cases where a suit was held to be incompetent as, for instance, Releigh Investment Company Limited v. Governor General in Council (1960 P T D 981: A I R 1947 P C 78), Commissioner of Income‑tax, West Punjab v. Tribune Trust (1960 P T D 870: A I R 1948 P C 102) and Pindi‑Kashmir Transport Limited v. Commissioner of Income‑tax, Lahore (P L D 1954 Lah. 322), where the question was whether an assessment had been made according to law, the Income‑tax Officer having jurisdiction on the subject‑matter and over the assessee, and the present case where the question raised is that the Income‑tax Officer had no jurisdiction at all to proceed against the Provincial Government. Here there is a complete absence of jurisdiction and if the Income‑tax Officer had no authority to tax the Provincial Government, his proceedings are void, and the assessment order is not an answer to the suit on the ground that under the Income‑tax Act that order is final. The present proceedings cannot at all be held to be "under this Act" within the meaning of section 67 of the Income‑tax Act and therefore a suit even in a Civil Court will not have been barred. For the same reasons, section 9 of the Civil Procedure Code does not bar the suit. As regards the objection that the suit is barred by time, all that is necessary to say is that the assessment being void and the tax not having been paid no question of limitation arises. Obviously, the dispute has not been concluded because while the Federation insists on its right to tax, the Province denies any such power in the Federation and one of the reliefs claimed in the suit, paragraph (b) of the relief clause, seeks a declaration that the plaintiff is not liable to be taxed under the Income‑tax Act of 1922 or the Excess Profits Tax Act of 1940 in respect of its future income. For these reasons we decree the suit and declare that the Government of West Pakistan is not liable to income‑tax or excess profits tax in respect of the profits earned by the Province of the Punjab from The Jallo Rosin and Turpentine Factory. Both Governments must bear their own costs. Suit decreed.