J N DUGGAN Vs. COMMISSIONER OF INCOME TAX BOMBAY CITY

JUDGEMENT

(1.) THIS reference arises a very interesting and important question as to the validity of act XXII [22] of 1947.

(2.) THE assessees before us are Sir Jamshedji Duggan and Lady Duggan, and the question arises with regard to a certain sum of Rs. 2,40,863 included in Sir Jamshedji's return of income for the assessment year 1947-48. This sum is the profit which Sir Jamshedji made as a result of the sale of certain shares and securities. Lady Duggan likewise, in her return of income for the same assessment year, included as 'capital gains' two sums of Rs. 3,54,168 and Rs. 37,632 arising from the sale of shares and securities. The Income-tax Officer included these capital gains in the assessable incomes of the husband and wife under Section 12b, Income-tax Act. The contention raised by the assessees was that Section 12b, Income tax Act, was ultra vires of the Central Legislature. This contention was overruled by the Tribunal, and the assessees have now come before us on a reference made to us under Section 66 (1), Income-tax Act.

(3.) CERTAIN important amendments were effected in the Income tax Act by Act XXII [22] of 1947. A new definition of "capital asset" was inserted as Section 2 (4a), and ''capital asset" was defined as "property of any kind held by all assessee, whether or not Connected with his business, profession or vacation," and the definition then excluded certain properties mentioned in that clause. The definition of "income" was also expanded, and "income" was defined so as to include "any capital gain chargeable according to the provisions of Section 12b," Section 6, Income-tax Act, was also amended by including therein an additional head of income and that additional head was "capital gains. " Then we come to Section 12b, which specifically dealt with "capital gains. " and that section provided that the tax shall be payable by an assessee under the bead "capital gains" in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after 31-3-1946, and that such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place. Then there are several provisos to this section, with which we are not concerned. Then Sub-section (2) of Section 12b provided that the amount of a capital gain shall be computed after making certain deductions from the full value of the consideration for which the sale, exchange or transfer of the capital asset is made; and one of the important deductions is the actual cost to the assessee of the capital asset. Looking to these provisions, it seems to me clear that what the Legislature taxed was the capital value of certain assets, the capital value being computed in a particular manner. All assets were not taxed, but only those assets which were either sold, transferred or exchanged. On the sale, exchange or transfer of a capital asset, the capital asset was represented by the sale proceeds or, what the capital asset realised. The Legislature did not intend to tax the full value of the capital asset as represented by the sale proceeds, but permitted the assessee to deduct from the sale proceeds the actual cost to him of that capital asset. Therefore, there was no tax on capital value in respect of all assets of an assessee; nor was the tax on the full value of the capital asset. The tax was conditioned by the capital asset being sold, exchanged or transferred; and it was further conditioned by certain deductions which were permissible to the assessee, the most important of them being the cost of the capital asset to him. This being the scope and effect of Act XXII [22] of 1947, the question that arises for our Consideration is whether the Central Legislature which enacted this legislation was competent to enact it by reason of the provisions of the Government of India Act, 1935.