JUDGMENT - Chagla, C.J.

[1] The assessee company is incorporated in the Bahama Islands. It deals in petroleum products and soils its produce in India. Another company, the California Texas Oil Co., Ltd., (hereinafter called the California Company), is also incorporated in the Bahama Islands and this company holds all the shares of the assessee company. The assesses company made profits, and out of its profits it declared dividends which were paid to the California Company. These dividends were assessed to tax, and the question that arises on this reference is whether the tax was rightly levied. What was attempted to be done was to assess the dividend income of a non-resident company, and the assessment was not against the non-resident company, but against the asses-Bee company, who were declared the statutory agents of the California Company, under Section 43 of the Act. Now, the liability of a non-resident to pay tax is governed by Section 4 (1) (c) which provides for tax to be paid by such person who is not resident in British India during such year in respect of income, profits and gains which accrued or arose of were deemed to accrue or arise to him in British India during such year. Therefore, the California Company would have been liable to tax under this provision with regard to all profits which accrued or arose, or were deemed to accrue or arise to them within the year of account. There is a special provision with regard to dividends, and that provision is to be found in Expln. 3 which provides that a dividend paid without British India shall be deemed to be income accruing and arising in British India to the extent to which it has been paid out of profits subjected to income-tax in British India. Therefore, by reason of this explanation if dividends are paid out of profits which have been subjected to Income-tax in British India, they ate put in the same class as profits which accrue or arise, or are deemed to accrue or arise within the meaning of Section 4(1) (c). So the department proceeded to tax the California Company in respect of dividends received by them under this provision of the law. The contention of the department was that profits had been made by the assessee company in British India, that these profits bad been subjected to tax, and dividends had been paid out of these profits to the California Company, and therefore, that Company was liable to tax.

[2] The first contention that has been urged before us by Sir Jamshedji is that the Expln. 3 to Section 4 (1) (c) is ultra vires the Central Legislature. It is contended that this provision of the law deos not fall within Entry S4 of List I, Schedule VII, Government of India Act, 1935, inasmuch as this is not a tax on income as provided in that entry. Now, "tax on income was construed by the Privy Council in Wallace Brothers Co. Ltd. v. Commissioner of Income-tax, Bombay, 75 Ind. App. 86 (P.C.), and the Privy Council laid down that in order to determine which persons can be made liable to tax on income it was necessary to decide that there was a sufficient territorial connection between the taxing country and the person upon whom the tax was levied. The view of the Privy Council was that it was not competent to the Legislature to tax the income of every person who was not a resident within British India. The competency was confined to cases where a nexus was established between the assessee and the tax ing country. In that particular case, where the income of a foreign company was sought to be taxed, the Privy Council came to the conclusion that there was o territorial nexus, and, therefore, -the principle that we have to apply in deciding whether Explanation 3 was within the competency of Indian Legislature is to consider whether there is any nexus or territorial connection between the assessee company who is sought to be taxed in respect of its dividend income, and India, which is the country which is seeking to tax the assessee company.

Now, Sir Jamshedji

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