Paragraph 4 of the Merged States (Taxation Concessions) Order, 1949 applies only to income which would have been exempt under S. 14 (2) (c) of the Income-tax Act, 1922, if the Taxation Laws Act, 1949, had not been passed.

Judgement

SHAH, J.:- The appellant is a private trust, and was within the meaning of Ss. 4-A and 4-B of the Income-tax Act, 1922 resident and ordinarily resident within British Indian in 1948. The appellant held 1000 shares in an investment company styled Home Mehta and Sons Ltd. (hereinafter called the Company ) which carried on the business of investing in shares in companies registered in British India and in the former Indian States Dividends from British Indian companies were received by the Company at its registered office at Bombay, and dividends from the Indian States companies were received by the Company at its registered office at Billimora in the State of Baroda.

2. In the calendar years 1948 and 1949 the appellant received at Billimora Rs. 65,000 and Rs. 2,10,000 respectively as dividend in respect of shares held by it in the Company. The 2nd Income-tax Officer, A-I Ward, Bombay, upheld the claim of the appellant that its dividend income received from the Company at Billimora had accrued or arisen in the Baroda State, and as the income was not brought into British India it was exempt from liability to tax by virtue of S. 14 2) (c)of the Income-tax Act. The Commissioner of Income-tax, Bombay held that the income accrued or arose to the appellant in Bombay where the dividend was declared, and was on that account liable to be assessed under the Income-tax Act, 1922. The Commissioner accordingly directed the Income-tax Officer, to pass orders imposing tax on the dividend income received by the appellant from the Company. On appeal, the Income-tax Appellate Tribunal held that the dividend income accrued or arose at Billimora and not at Bombay, but by reason of the definition of "taxable territories" the income which accrued at Baroda attracted liability to tax under the Income-tax Act and did not qualify for rebate under paragraph 6 of the Merged States (Taxation Concessions) Order 1949.

3. The following questions were referred by the Tribunal under S. 66 (1)of the Indian Income-tax Act, 1922, to the High Court of Bombay for its opinion:

"(1) Whether on the above facts and circumstances of the case the assessee is entitled to rebate equal to the difference between the British Indian rate and Baroda State rate in respect of the dividend income?

(2) Whether on the facts and circumstances of the case the dividend income accrued or arose to the assessee at Bombay?"

The High Court held, following its earlier judgment in Mrs. Kusumben D. Mahadevia. Bombay v. Commissioner of Income-tax. Bombay, I. T. Ref. No. 28 of 1955, dated 20-2-1956 (Bom.) (unrep.), that the Merged States (Taxation Concessions)Order, 1949 did not apply to the income of a resident assessee and therefore, the first question must be answered in the negative. The High Court declined to answer the second question. With special leave granted by this Court, the appellant has appealed to this Court.

4. Income received by the Company from its transactions in the Indian States was retained at its office in Billimora and dividend declared out of that income was paid to the applicant at the registered office in the State of Baroda. This dividend it is common ground was not brought into British India. To appreciate the claim that the income qualifies for rebate under paragraph 6 of the Merged States (Taxation Concessions) Order, 1949, the relevant statutory developments in tax laws to effectuate the merger of the former Indian States since August 15, 1947 may be briefly set out. Under S. 14 (2)(c) of the Income-tax Act, added by Act 23 of 1941 and amended by Act 22 of 1947, it was enacted that:

"The tax shall not be payable by an assessee * * * 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 S. 12-B or S. 42."

By paragraph 3 of the States Merger (Go