M. C. Chagla, C. J. - (1.)THESE five references raise common questions of law. All these references were pending before the High Court of Judicature, Deccan States, Kolhapur, and they have been transferred to us after the State of Phaltan was merged in the Province of Bombay.
(2.)THE assessee company was incorporated in the Phaltan State in the year 1933 as a private limited company and it was converted into a public limited company on September 17, 1942. During the accounting year ending on September 30, 1938, this company made a profit of Rs. 3,94,653, but it did not distribute any part of these profits by way of dividends to its shareholders who were three in number. THEreupon the Income-tax Officer took action under Section 23a (1) of the Act and ordered that all the assessable profits of the company should be deemed to have been distributed amongst the shareholders of the company. After the company was converted into a public company on September 17, 1942, an order was issued by the Income-tax Officer pointing out to the manager of the company that he had committed default under Section 18 (3a) and Section 18 (3c) in respect of 69 shareholders who were non-resident shareholders inasmuch as he had failed to deduct income-tax and super-tax from the dividends payable to these non-resident shareholders, and he thereupon passed an order under Section 18 (7) of the Act and issued a demand notice under Section 29 of the Act calling upon the company to pay the tax to him. It is against these two orders that an appeal was preferred to the Appellate Assistant Commissioner, who, under the income-tax law as applied to the Phaltan State, constituted the final Court of Appeal. THE Appellate Assistant Commissioner decided against the assessee company on both these points, and a reference was made to the Kolhapur High Court. THEre is one other point which has also been agitated and which might be dealt with straightaway and which was whether the Appellate Assistant Commissioner, Mr. R. R. Kaulgud, who decided the appeal, was competent to do so under the law. THE contention is that he has not been appointed by the Central Government as required under Section 5 (3) of the Act; but it is clear that under Pialtan Act No. Ill of 1941 by which the Income-tax Act was made applicable to the Phaltan State, the expression "central Government" wherever it occurred in the Act was to be construed as Phaltan State and as Mr. Kaulgud was appointed by the Phaltan Durbar, his appointment is as valid as it had been made by the Central Government.
The two main questions which we have to decide are really based on an agreement which was entered into between the Phaltan State and the assessee company on November 8, 1933, the effect of which agreement was to exempt the company from payment of tax for a period of ten years. In my opinion the jurisdiction that we exercise in dealing with income-tax references is an advisory jurisdiction. It is a strictly limited jurisdiction and the limits of that jurisdiction are clearly laid down in Section 66 of the Act. The nature of that jurisdiction is to advise on questions of law that arise out of orders made by the Appellate Tribunal, and the advice that we have to tender is based upon the provisions of law as contained in the Income-tax Act. We are not functioning as a civil Court dealing with contractual rights of parties, and I take the view that it is not open to us to construe the Income-tax Act in the light of any agreement that was arrived at between the Phaltan State and the assessee company. It may be that the assessee company has got contractual rights against the State arising out of that agreement, and it may be that the assessee company may be able to enforce those rights in a civil Court of law; but those rights cannot be considered or agitated before an advisory tribunal like us. All that we have got to do on these references strictly is to look at the two orders which are made and challenged and to consider whether those two orders are justified by the income-tax law; and it is not disputed by Sir Jamshedji that looked at it from that point of view independently of the agreement, no objection can be taken to the two orders made by the Income-tax Officer; but as the matter has been argued on the other footing also, namely, what is the effect in law of the agreement arrived at between the assessee company and the Phaltan State, I should also like to consider the matter from that point of view.

Now, turning to the agreement, the two material clauses are Clauses (15) and (16 ). Clause (15) provides that the net or gross earnings of the company will not be subject to the levy of any tax, cess or duty by the Durbar except as hereinafter provided. And what is hereinafter provided is contained in Clause (16) which provides that the Phaltan Durbar shall exempt the company in respect of its first sugar factory at Pimpalachi Wadi from payment of income-tax from the commencement of the company until the expiry of a period of ten years computed from the date of the regular manufacturing of sugar in the said factory. After the expiry of the said period the Phaltan Durbar may levy income-tax at a rate not exceeding one anna in a rupee on the net profits of the said sugar factory. In calculating the net profits the usual deductions in respect of depreciation etc. permissible under the Income-tax Act for the time being in force in Phaltan State shall be allowed. Now, as I read these two clauses, all that they mean is that although there may be a liability on the company to pay tax under the Income-tax Act, the Phaltan State agrees not to recover that tax from the assessee company for a period of ten years or, to put it in a different language, the company and the State agree that the company will not be liable to pay any tax for a period of ten years from the commencement of the company; and it is important to note that even after the expiry of ten years a specific agreement is entered into between the State and the company that whatever the rate of tax may be under the Income-tax Act, as far as this particular company is concerned, it will pay taxes at the specific rate mentioned in the agreement. Now, Sir Jamshedji reads this agreement as if it exempted altogether the income of the assessee company from its total income which is liable to tax under the Income-tax Act. Sir Jamshedji wants us to read this agreement as if it constituted one additional provision to Section 4, Sub-clause (3), of the Act. Section 4, Sub-clause (3), of the Act contains various exemptions and those exemptions are exemptions of income, and the sub-clause provides that the various categories of income mentioned in that sub-clause shall not be included in the trial income of the person receiving them. Therefore for the purposes of the Income-tax Act, as all those categories of income mentioned in Section 4, Sub-clause (3), are not assessable income in the eye of the income-tax law, they cannot be looked upon as such. Now, I refuse to read Clauses (15) and (16) of the agreement as bringing about the same result as Section 4, Sub-clause (3), of the Income-tax Act. Sir Jamshedji has argued that the Raja of Phaltan was all powerful and that he combined in himself the Executive, the Legislature and even the Judiciary, and therefore we must look upon this agreement as a fiat of the Sovereign and as a fiat amending Sub-clause (3) of Section 4 of the Act and giving an exemption to the income of the company comparable to the exemption given by the statute. It may be that the Raja of Phaltan combined all these functions in himself; but what we have to consider is what particular function was being discharged when this agreement was entered into between the assessee company and the Phaltan State. It could not possibly be said that it was the legislative function which the Raja of Phaltan was discharging when he entered into this agreement with the assessee company. It is clearly an executive act of the Phaltan Durbar, and an executive act cannot override and supersede a statute or a law of the country. Even though the Phaltan State might be supreme, the Raja of Phaltan could not by a mere executive firman override the provisions of a statute which he himself had put into operation in his own State. If that be the position, then the order made by the Income-tax Officer presents no difficulties. When we turn to Section 23a of the Act, the conditions necessary are either that there should be no distribution of profits or that the distribution should be less than sixty per cent, of the assessable income of the company. Now, Sir Jamshedji says that this section cannot apply because there is no assessable income of the company which can be distributed. Here again there is a clear fallacy, because the income that this company earned was certainly assessable to income-tax, and it could have been assessed to income-tax. The only relief that the assessee company got was that by an agreement with the State it was not made liable to pay the tax. Assessability of income and liability to pay tax are two different conceptions altogether, and I fail to see why the income of this company was not assessable to tax merely because the Durbar in its executive capacity had exempted the assessee company from payment of tax. Therefore once there was an assessable income and there is no distribution of profits at all, Section 23a would certainly come into operation.

(3.)THEN Sir Jamshedji points out that the assessable income of the company for the purpose of Section 23a is to be reduced by the amount of income-tax and super-tax payable by the company and Sir Jamshedji argues that this shows that this section only applies to those companies which pay income-tax or super-tax. The expression used is "payable by the company" or, in other words, income-tax and super-tax to which the company is assessed; and there is no difficulty in this case in holding that this company was assessable to income-tax and super-tax, and if no amount was in fact paid by the company, then no amount would be deducted from the assessable income of the company in order to determine whether the profits distributed were less than sixty per cent, of the income or not.
Then, Sir Jamshedji draws our attention to Section 23a, Sub-section (3), Sub-clause (ii), which provides that 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; and Sub-clause (in) of Section 23a (3) provides that where 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. Now, Sir Jamshedji says that the company cannot be and is not an assessee because it has not paid any tax, but Sub-clause (in) of Section 23a (3) makes the company a notional assessee and that is also only for the purpose of Chapter VI which Chapter deals with the mode of recovery of tax.