<NAME>, J.

1. Their Lordships have to dispose of two consolidated appeals from a judgment of <ORG> at Patna, dated November 25, 1929, dealing with certain questions referred to the <ORG> by the Commissioner of Income-tax, Bihar and Orissa, under Section 66 of the Indian Income-tax Act, 1922. The questions all relate to the assessment for tax purposes of the income for the year 1926-27 of the <NAME> of Darbhanga, who died on July 3, 1929, and is now represented in these proceedings by his eldest son. As regards two of the questions, the Commissioner of Income-tax is appellant ; as regards the rest the assessee is appellant.

2. By Section 3 of the Act of 1922, income tax is chargeable in India "in respect of all income, profits and gains of the previous year." The assessee's practice was to make up his accounts for the Fasli year which ends on September 30, and consequently, under Section 2(11)(a) of the Act, the "previous year" in the present case is the Fasli year 1332, which ended on September 30, 1925. The taxable income of the assessee for the year 1926-27 thus consists of his income, profits and gains for the year ending September 30, 1925, as computed in accordance with the provisions of the Act.

3. The Assistant Commissioner of Income-tax, acting as Income-tax officer, having made an assessment of the assessee's taxable income for the year in question, the assessee appealed to the Commissioner of Income-tax, Bihar and Orissa, acting as Assistant Commissioner, who made an order reducing the assessment in respect of three particular items but otherwise affirming it. The assessee then required the Commissioner under Section 66 (2) to refer to <ORG> certain questions, purporting to be questions of law arising out of his order. The Commissioner, as required by the Act, drew up a statement of the case and referred it with his own opinion thereon to <ORG>. It is against the answers rendered by <ORG> to certain of the questions formulated in the case so stated that the present appeals have been taken.

4. With one exception, the points which were debated before their Lordships relate to moneylending transactions of the assessee. As the assessee was held not to be carrying on the business of moneylending, he was assessed in respect of these transactions, not under Section 10 which provides for the computation of the "profits or gains" of a business but under Section 12 , which provides for the computation of "income, profits and gains" from other sources. In the one exception, which relates to the carrying on of a colliery taken over by the assessee from a debtor, the assessment was under Section 10 .

5. As the questions which have arisen are in large measure due to the assessee's method or want of method in recording his moneylending transactions, it will be convenient to give a description of his practice in the matter as furnished in the case stated by the Commissioner. The assessees, it appears, kept "a deposit register in which payments made by debtors are ordinarily first of all recorded but without any allocation between principal and interest. Subsequently, if and when allocation is made, an entry in respect of the interest portion of these payments is made in the interest ledger as well as in the interest account of the general ledger. This allocation is not necessarily made in the year in which the money has actually been paid to the assessee. It may be made in the following year or, indeed, several years later.

6. Prior to the year 1331 <NAME> the assessee produced to the income-tax authorities only his interest ledger and did not disclose his deposit register. In these previous years he claimed to be and was assessed in each year on the total of the sums credited as interest in the preceding year in his interest register. Owing to the system on which the interest register was kept, it is obvious that the assessee was in each year assessed not on the total of the sums actually received by him as interest during the preceding year, but on such sums as the assessee had chosen during that preceding year to allocate to interest and carry to his interest register out of payments received by him in that and former years. In computing the income of the assessee for the year 1331 <NAME> the assessing officer had for the first time available to him the assessee's deposit register. On this occasion the officer made his computation by taking first all the sums allocated to interest and entered in the interest register for that year, irrespective of the years in which these sums had actually been received by the assessee ; he then resorted to the deposit register, noted the sums there shown as actually received in that year by the assessee but from which no allocations to interest had been carried to the interest register, made his own calculation of the proportions of interest comprised in such sums and added the result to the sum of the entries in the interest register for that year.

7. In computing the income of the assessee for the next year, viz., 1332 Fasli, being the income of the year of account with which their Lordships are concerned in this appeal, the assessing officer again took first the amount shown as credited in that year in the interest register, but on this occasion, less the sums which he had in the previous year taken into account from the deposit register and which now appeared in the interest register ; he next examined the deposit register and in the case of sums there shown as received in 1332 Fasli but from which the assessee had made no allocation to interest account he himself calculated the proportion of each receipt which represented interest and added the result to the figure obtained, under the deduction stated, from the interest register.

8. The Commissioner states as follows the general question which in these circumstances arises for decision :-

1. Assessees' method of accounting in respect of receipts from interest on loans being as described above was the assessing officer's action in calculating the profits and gains of the previous year as he has done warranted by law ?

9. The Commissioner has not attached numbers to the various questions and their Lordships have found it convenient to number those which they have had to consider in the order in which they have dealt with them.

10. The authority empowering the income-tax officer to discard the assessee's method of accounting and to adopt a method of his own is to be found in Section 13 of the statute, which, after enacting in general terms that income, profits and gains shall be computed in accordance with the method of accounting regularly employed by the assessee, goes on to provide inter alia that "if the method employed is such that in the opinion of the income-tax officer the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the income-tax officer may determine.

11. There can be no question that in the circumstances, the income-tax officer was entitled to disregard the assessee's method of accounting and adopt a method of computation of his own. But the fact that the income-tax officer has justifiably proceeded on a basis and in a manner of his own in computing the assessee's income, profits and gains does not, of course, exempt his computation from examination on appeal, and if it appears that he has adopted a wrong method, the assessment may be set aside. Their Lordships have, therefore, to consider whether the Commissioner and the learned Judges of <ORG> were right in answering in the affirmative, as they did, the question above posed.

12. Now it will be observed at once that the method adopted by the income-tax officer has the result of bringing out a sum composed in part of actual interest receipts of the assessee in the year of computation and in part of sums received in previous years and allocated by the assessee to interest in those years. The question is whether this method or combination of methods was legitimate. That it was legitimate to ascertain in the first place the actual receipts of interest in the year of computation is undoubted. Was it legitimate to add the items which the assessee in the year of computation carried to interest account out of sums received in previous years ? Was the officer entitled to treat these allocations as income of the year of computation ?

13. Where an assessee keeps his books on a cash basis disclosed to the revenue authorities and the officer accepts that basis, it is clear that the calculation must be based on actual receipts in the year of computation. Here, however, the assessee kept his books on a hybrid system and it was his practice to enter sums as he received them in a deposit register, not made available to the revenue authorities, without discriminating between interest and capital payments, and then subsequently to allocate and treat as income certain portions of these sums which he attributed to interest. What the officer is directed to compute is not the assessee's receipts but the assessee's income and in dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it. See per Lord <NAME> in delivering the judgment of the <ORG> in Commissioner of Taxes v. <ORG> [1914) A.C. 1001, 1011. The sums which the officer has brought into account from the interest register in so far as consisting of allocations from sums received in previous years have never borne tax and in their Lordships' opinion the assessee cannot complain if the officer agrees with the assessee in treating them as income of the year in which the assessee himself first thought fit so to regard them. Their Lordships see nothing contrary to principle in the computation of an assessee's total income for a particular year as consisting in part of actual receipts in that year and in part of sums carried by the assessee to income account in that year out of the receipts of previous years which have been held in suspense and no part of which has previously been returned as income. Their Lordships do not find that the income-tax officer in the present case has acted in any way illegally in computing the profits of the transactions in question for the year 1332 Fasli by taking into account both actual receipts of interest in that year and sums treated by the assessee in that year as receipts of interest by their transference to the interest register from what for this purpose may be regarded as a suspense account.

14. Their Lordships accordingly in the result find themselves in agreement with the affirmative answer rendered below to this question.

15. Their Lordships now pass to the consideration of two particular transactions as to which questions have arisen.

16. It appears that the assessee in respect of two mortgage decrees which he held against one <NAME> received payment in the relevant year of two sums of Rs. 3,400 and Rs. 2,78,000. The assessee appropriated the whole of the first of these sums to interest and no question arises with regard to it. As regards the second sum he appropriated only Rs. 18,816 to interest and claimed to attribute the balance towards the discharge of capital. The income-tax officer brought the whole sum of Rs. 2,78,000 into computation as an interest receipt, and the Commissioner and <ORG> have agreed with him. The question as framed by the Commissioner is as follows :-

2. In the circumstances of this case, what portion of the amount received from <NAME> in the previous year is legally taxable ?

17. The facts as stated by the Commissioner are that the total amount of interest irrespective of whether it was paid or not, which had as a matter of calculation, accrued on the debt from the date of its commencement down to the date of the payment of Rs. 2,78,000 to the assessee in the year 1332 <NAME> was Rs. 3,09,281. During the currency of the debt the debtor made regular payments over a number of years to the assessee, the total of which payments is not stated. These payments were entered in the deposit register but no allocations thereof were made as between principal and interest and no part of these payments was carried to the interest register. Consequently, no part of these payments was subjected to tax until the year <NAME> 1331, when the deposit register became available to the income-tax officer. In that year the deposit register showed the receipt of Rs. 38,091, and on this the officer claimed and was paid tax on the footing that it was attributable to interest and not to principal. The result is that against the total interest on the debt, viz., Rs. 3,09,281 no sums had been attributed by the assessee to interest out of the payments made to him by the debtor down to the date of the receipt by him from the debtor of the sum of Rs. 2,78,000 in the year <NAME> 1332, but that the income-tax officer had himself treated the sum of Rs. 38,091 received in the year <NAME> 1331 as interest and taxed it accordingly. That leaves Rs. 2,71,190 as the balance of the total interest on the debt during its currency towards which balance the assessee made no attributions of interest out of the payments received by him from the debtor during its currency. No tax has accordingly been paid in respect of any of these receipts other than the Rs. 38,091 which the officer treated as an interest payment in the year 1331 <NAME>. How in those circumstances should the receipt of Rs. 2,78,000 in the year 1332 <NAME> be treated ? The assessee contends that the whole of this sum, other than a sum of Rs. 18,816 which he admits may be treated as a payment of interest, should be treated as a payment against the capital liability of the debtor. But at the date when the assessee received payment of the Rs. 2,78,000 he had not either in his own books or in relation to the tax collector as yet attributed any sum towards the debtor's liability in interest, apart from the sum of Rs. 38,091 which the officer in the previous year had treated as interest. So far as the assessee's interest register showed he had not treated himself as having received any interest, and so far as that book, which he put forward to the revenue authorities as showing the interest which he had received, is concerned, there was still outstanding the whole sum of Rs. 3,09,281 of interest, as against which must, of course, be set the sum of Rs. 38,091 taxed as interest in the preceeding year. In disposing of the first question dealt with above their Lordships have held that the assessee cannot complain if sums which he himself in a particular year treats in his interest register as interest received in that year are also treated by the revenue authorities as income of that year although such sums were in fact received in previous years. Similarly and conversely, their Lordships are of opinion that the assessee cannot complain if he is treated as not having received any payment of interest in years in which he made no appropriations to interest out of sums received by him in these years and neither disclosed such receipts to the revenue authorities nor made any return of any part of them as income. Their Lordships, therefore, approach the question of how the sum of Rs. 2,78,000 actually received in the year <NAME> 1332 is to be dealt with on the footing that up to then no interest had been treated as paid out of the total of Rs. 3,09,281 due other than the sum of Rs. 38,091. Now where interest is outstanding on a principal sum due and the creditor receives an open payment from the debtor without any appropriation of the payment as between capital and interest, by either debtor or creditor, the presumption is that the payment is attributable in the first instance towards the outstanding interest : <CITATION> (1921) L.R. 48 I.A. 150,153, s. c. 23 Bom. L.R. 644. This presumption is no doubt operative primarily in questions between debtor and creditor, but in their Lordships' view, the income-tax officer, finding that the assessee received a payment from his debtor of Rs. 2,78,000 in the year <NAME> 1332 and that the assessee had not up till then credited himself as having received any interest or disclosed or accounted for any interest receipts to the revenue authorities, was entitled in the circumstances to treat this sum of Rs. 2,78,000 as applicable to the outstanding interest to the extent of Rs. 2,71,190, and accordingly to treat the payment to that extent as income of the assessee in the year of payment. It will be noted that the result of this is that the assessee will be able to treat all the unallocated payments received by him in the years before 1331 <NAME> as payments towards capital and none of these prior payments will have borne or can be called upon to bear tax. Under Section 34 of the Act, the income-tax officer cannot re-open any assessment after the expiry of one year from the end of the year of original assessment.

18. Their Lordships therefore agree with the learned Judges of <ORG> that the answer to this question is in figures Rs. 2,71,190.

19. The next question relates to the interest on the debt of one <NAME>, against whom the assessee held a judgment. The debtor in the year 1332 <NAME> made a payment to the assessee of Rs. 1,38,955. In his interest register for that year he appropriated and entered Rs. 20,000 out of this sum as interest, but he also entered in his interest ledger for that year a sum of Rs. 1,40,107, being appropriations then first made to interest out of sums received from the debtor in previous years, which, of course, had not borne any tax. The appropriations to interest by the assessee in his interest register for the years in question consequently amounted to Rs. 20,000+ Rs. 1,140,107 = Rs. 1,160,107. But of the Rs. 1,40,107 then first appropriated to interest by the assessee Rs. 80,000 was actually received by him in the year 1331 <NAME> and was in that year subjected to tax by the revenue authorities, so that the balance of Rs. 60,107 represented appropriations to interest by the assessee out of sums received in years before 1331. This sum had never before been appropriated by the assessee to interest or treated by him as income in a question with the revenue and following the principle already laid down by them, their Lordships are of opinion that it was properly regarded by the taxing officer as income of the assessee in the year in which ho appropriated it to income.

20. The question on this topic which was stated by the Commissioner is thus expressed :-

3. What is the amount of profits and gains arising out of the payments made by this judgment debtor legally taxable in this year ?

21. Their Lordships agree with <ORG> in answering that out of the appropriations to interest in the year of computation the total amount taxable is Rs. 60,107, over and above the proportion representing interest of the payment of Rs. 1,38,955 actually received in the year 1332, such proportion being admitted to be Rs. 1,23,906, so that the total sum chargeable with tax is Rs. 1,23,906+ Rs. 60,107 = Rs. 1,84,013.

22. Passing to the further questions raised in the case and omitting a transaction relating to a loan to a Colonel <NAME> as to which the assessee has acquiesced in the decision of <ORG>, their Lordships have next to consider the estimate made by the income-tax officer of the income received by the assessee in the year of computation from the purchase of properties under mortgage decrees. The general question which was raised below on behalf of the assessee was not argued before their Lordships, namely, whether when a mortgagee purchases at auction under a decree of the <ORG> the property which was the subject of the mortgage he can be said to have received to any extent the equivalent of the interest due on his mortgage. This question had been decided in the affirmative in a recent case of <CITATION> (1929) I.L.R. 9 Pat. 48, which their Lordships heard on appeal immediately after the present case and in which they are today delivering affirmative judgment on this point, to which reference may be made The assessee in the present case admitted the receipt of income in the year in question from this source to the extent of Rs. 4,364. This sum the income-tax officer increased to Rs. 1,04,364 and the question stated by the Commissioner is :-

4. Whether the assessing officer was right in making an estimate of Rs, 1,04,364 under this head as he has done ?

23. The Commissioner states that the assessee keeps a suit register in which the progress of each case is supposed to be noted but no attempt is made to keep this register up to date and in fact the sum of Rs. 4,364 referred to above is shown neither in this register nor in the interest account. On referring to the history of assessments made in previous years I find that in the assessment made in the year 1924-25 while the assessee showed no income under this head the assessing officer estimated the income to be Rs. 6,00,000. This sum was reduced on appeal to two lacs and the order on appeal was maintained by the then commissioner. In the assessment made in the year 1925-26 for similar reasons the assessing officer added back a sum of Rs, 3,00,000 without objection by the assessee. In that year assessee showed no income from this source in the return, but admitted in the course of assessment proceedings a receipt of Rs. 20,069 to which the assessing officer added back as stated above a sum of Rs. 3,00,000 without exception on the part of the assessee. Similarly in the year 1926-27 (the assessment with which we are now dealing) the assessee showed no income from this source in the statement filed with his return of income, but subsequently admitted realisation of Rs. 4,364 only.

In <ORG> the Chief Justice (<NAME>) after pointing out that the question is one of quantum only, says (p. 271) :-

Learned counsel for the assesses has argued that the officer is not entitled to make a guess without evidence, and I agree with that contention, but in this case the state of affairs in the previous years, coupled with the fact that the assessee had a large mortgage loan business and must have enforced mortgages by sale on many occasions, afford ample material for the assessment made, I would answer the question in the affirmative.

24. The other Judges concurred and their Lordships also agree, adding only that if the assessee wished to displace the taxing officer's estimate, it was open to him to adduce evidence of all his purchase transactions during the year and of the financial results thereof, which he apparently made no attempt to do.

25. Their Lordships next turn to the consideration of a transaction between the assessee and one <NAME>. In the year 1332 Fasli <NAME> owed the assessee thirty-two lacs as principal and Rs, 6,09,571 as interest, or a total of Rs. 38,09,571 in all, in respect of an unsecured loan. In that year the assessee and his debtor entered into an arrangement whereby, as the Commissioner states the assessee took over from the debtor in satisfaction of this amount the follow ing items of property movable or immovable :-

Rs.

(1) <ORG>, valued at ... ... ... 7,37,339 (2) Shares in different companies, valued at... ... ... 94,125 (3) Bills receivable by the above brokers [i.e., <NAME> firm] 48,809 (4) Decree... ... ... ... ... ... 1,42,594 (5) Transfer of loan to <ORG> ... ... 10,00,000 (6) Pro-notes and hand-notes [of third parties] ... ... 52,106 (7) Hand-notes from <NAME>... ... ... 17,34,596 Rs. 38,09,569 26. The Commissioner unfortunately omitted to formulate any question of law arising out of this transaction. The duty of <ORG> under Section 66 (5) is to "decide the questions of law raised "by the case referred to them by the Commissioner and it is for the Commissioner to state formally the questions which arise. Here <ORG> itself formulated the questions to be decided as being :- 5. "Whether the interest (i.e., the sum of Rs. 6,09,571 due as interest by the debtor) can be considered to have been received and assessable ? 27. Their Lordships deprecate this departure from regular procedure, but in the circumstances have not thought it proper to decline to express their view on the question thus informally presented.

28. The Commissioner's opinion was that the transaction when rightly viewed amounted to the acceptance by the assessee from his debtor, in lieu and satisfaction of the capital and interest due to him, of assets and securities prima facie worth the valuation put upon them and that as the assessee had thus received payment in kind of the interest due to him in full, he should be assessed accordingly. There is, of course, no doubt that a liability to pay interest, like a liability to make any other payment, may be satisfied by a transference of assets other than cash and a receipt in kind may be taxable income. But for this to be so it is essential that what is received in kind should be the equivalent of cash or, in other words, should be money's worth (<ORG>) v. <NAME> (1904) 5 T.C. 159, Scottish and Canadian General Investment Company v. <NAME> (1922) 8 T.C. 265, both cited by <NAME> below). Now here the first six items, amounting to Rs. 20,74,973, may perhaps reasonably enough be regarded as the equivalent of cash, but the seventh item of Rs. 17,34,596, consisting of the debtor's own promissory notes, was clearly not the equivalent of cash. A debtor who gives his creditor a promissory note for the sum he owes can in no sense be said to pay his creditor ; he merely gives him a document or voucher of debt possessing certain legal attributes. So far then as this item of Rs. 17,34,596 is concerned, the assessee did not receive payment of any taxable in come from his debtor or indeed any payment at all. In so holding their Lordships find themselves in agreement with the learned Judges of <ORG> who differed on this point from the Commissioner.

29. This conclusion seems to have been regarded in <ORG> as decisive of the whole question, but before their Lordships an argument was submitted for the <ORG> which does not appear to have been advanced below. Assuming that the first six items, amounting to Rs. 20,74,973, may be treated as money's worth, counsel for the <ORG> contended that this sum, which far exceeded the total amount of interest due, must be treated as applicable in the first place to the discharge of the debtor's liability for interest. He relied on the presumption, already invoked in the case of <NAME> above, that a creditor is presumed to apply payments received from his debtor towards the extinction of interest claims before capital claims. But the situation which their Lordships are now considering differs materially from that which existed in the case of <NAME>. In that case, apart from other specialities, there was no settlement, but merely an open payment to account. Here there was an arrangement affecting the whole indebtedness whereby certain assets were accepted in part satisfaction and promissory notes were taken for the balance. The basis of the presumption, namely, that it is to the creditor's advantage to attribute payments to interest in the first place, leaving the interest-bearing capital outstanding, is gone. Moreover, if the question were one between <NAME> and the assessee, i. e., between debtor and creditor, the assessee might up to the last moment appropriate the Rs. 20,74,973 to capital account {Gory Brothers & Co. v. Owners of <ORG>Mecca". The "Mecca [1897] A.C. 286", and there is authority for the proposition that in a question with the revenue the taxpayer is entitled to appropriate payments as between capital and interest in the manner least disadvantageous to himself (<NAME> v. Law Guarantee and Trust Society, Limited [1904] 2 Ch. 569). Their Lordships have also not omitted to bear in mind the provisions of Sections 60 and 61 of the Indian Contract Act, though these were not relied on in argument as applicable to the case. In the result their Loadships are of opinion that, having regard to the nature of the transaction, the assessee is entitled to say that he has accepted the first six items in discharge pro tanto of his debtor's capital liability and that the capital debt now stands discharged to that extent. No part of the sum of Rs. 20,74,973 accordingly was received by the assessee as taxable income in the year of computation. The result is that the Commissioner's appeal against the answer of <ORG> to the fifth question fails.

30. A subsidiary point arose as to the year to which this income, if it was received, ought to be attributed. The Commissioner put the question :-

Whether if any sum is held to have been realised, it was legally recovered in the year 1331 or in the year 1332?

31. The Judges of <ORG> agreeing with the Commissioner expressed the view that if there was any receipt of interest it was attributable to the year 1332. The learned Chief Justice stated that it was "conceded on both sides that the instrument of transfer was executed and dated on April 29, 1925, that is, in 1332, and that the title to the assets conveyed passed on that date. Had the amount of interest been assessable it would have been assessable in respect of 1332." Their Lordships agree, and the answer of <ORG> to the question will be affirmed.

32. The next question is of a different character. When <NAME>, who was a sub-lessee of <ORG>, transferred it to the assessee as of the value of Rs. 7,37,339 he represented it to be free from encumbrances. The assessee subsequently discovered that there were arrears of fixed or dead rent due to the superior landlord to the extent of Rs. 67,872. The assessee paid this sum to the superior landlord and now claims to deduct it from his assessment. In this instance their Lordships are concerned with the computation of the profits or losses of a business under Section 10 of the Act, for the assessee was carrying on the business of a colliery owner.

33. The question arising in respect of this matter is put thus by the Commissioner :-

7. Whether the assessee is legally entitled to deduct the arrears of royalty which had accrued in previous years up to the date of his possession ?

34. The relevant provisions of the Indian Income-tax Act are contained in Section 10 which enacts in Sub-section (2) that the profits or gains of a business shall be computed "after making the following allowances, namely :->

(i) any rent paid for the premises in which such business is carried on...

(ix) any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.

35. Sub-section (3) provides that :-

In Sub-section (2) the word 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profis or gains are computed under the section.

36. The Commissioner was of opinion that the question which he had stated should be answered in the negative, on the two grounds that "admittedly" the assessee was entitled to recover from <NAME> the arrears of rent for the period prior to the assessee's possession, and that royalties were not rent within the statutory meaning. <ORG> answered the question in the affirmative, holding that royalties may properly be considered as rent ; that it was "a condition without which further mining operations could not be effected"; that payment should be made of the arrears which were "of the nature of a charge in the year 1332"; and that as the previous tenants had not paid their rent during the period in arrear they had not been able to deduct rent in their returns, and there was no reason why, when the arrears came to be paid, they should not be deducted as though they had accrued in the year in which they were paid.

37. In their Lordships' view the solution of the problem is to be found in a consideration of the nature of the particular transaction out of which it has arisen. The assessee agreed to accept the transfer of the colliery in part satisfaction of <NAME> liability to him on the footing that it was valued for Rs. 7,37,399. Had he known, what was concealed from him, that arrears of unpaid rent had accumulated which he would have to pay to the superior landlord, he would have correspondingly diminished the sum at which he was prepared to take over the colliery and, according to the Commissioner, it was admitted that the assessee has a claim against <NAME> for the difference, although he may not be able to recover it. If it were recovered, it would properly be credited in diminution of the figure at which the colliery was taken over and would not enter the profit and loss account of working the colliery. From this it follows that the sum overpaid by the assessee for the colliery cannot properly be described as a loss sustained by him on income account. It is a sum which was payable by him in order to get possession of the colliery, not a sum expended by him in the carrying on of the colliery. It is not rent for any period of his possession, nor is it an expenditure incurred by the assessee for the purpose of earning the profits or gains of the colliery business. If the assessee paid it without any legal liability or necessity on his part to do so, such a voluntary payment is not a permissible deduction from income. Their Lordships are, therefore, of opinion that in the circumstances of this transaction the question should be answered in the negative.

38. Their Lordships have now dealt with all the questions which were argued before them. The result is the affirmation of the decision of <ORG>, except as regards question No. 7 as above numbered, on which their Lordships are of opinion that the appeal of the Income-tax Commissioner should be allowed, the finding of <ORG> reversed and the order of the Commissioner of May 24, 1927, restored.

39. Their Lordships desire to draw attention to the inconvenience which has arisen from the omission on the part of the Commissioner to number the questions which he has stated. It is desirable that the questions of law which the Commissioner refers to <ORG> should, for convenience of reference, be assembled and numbered consecutively at the end of the stated case. Their Lordships have also been embarrassed in disposing of the appeal by the absence of a formal decree by <ORG> following upon their judgment of November 25, 1929. Their Lordships have nothing before them to show whether, and if so how, the costs in the case were dealt with below.

40. Their Lordships will humbly advise His Majesty that in these consolidated appeals (1) the appeal of the Commissioner of Income-tax so far as relating to the seventh question as above numbered be allowed, the judgment of <ORG> reversed, and the order of the Commissioner of May 24, 1927, restored, and as regards the other question on which he appealed be dismissed ; (2) the appeal of the Maharajadhiraj of Darbhanga be dismissed ; and (3) the case be referred back to <ORG> in order that effect may be given to the order to be pronounced herein by His Majesty in Council.

41. Inasmuch as the Commissioner of Income-tax has been successful on one of the two points on which he appealed and the assessee has been unsuccessful on all the points of his appeal, the Commissioner will have three-fourths of his costs of the consolidated appeals before <ORG>. The costs below will be dealt with by <ORG>, on the case going back to it.


PETITIONER: <NAME> Vs. RESPONDENT: THE JANPAD SABHA, GONDIA DATE OF JUDGMENT: 07/02/1962 BENCH: AYYANGAR, N. RAJAGOPALA BENCH: AYYANGAR, N. RAJAGOPALA AIYYAR, T.L. VENKATARAMA SINHA, BHUVNESHWAR P.(CJ) <NAME>, K. MUDHOLKAR, J.R. CITATION: 1962 AIR 1073 1962 SCR Supl. (3) 70 CITATOR INFO : R 1964 SC1013 (14) AFR 1964 SC1166 (6) RF 1991 SC1676 (70,59) ACT: Legislative Power-Terminal Tax-Imposition by District Council under Provincial Statute-Constitution Act Placing tax in Federal Legislative List-Saving provision-Power of Provincial Legislature to continue tax C.P. and Berar Local Self Government Act, 1920 (C. P. 4 of 1920)-C.P. and Berar Local Government Act, 1948 (C.P.38 of 1948).s.192-C.P. and Berar Local Government (Amendment) Act, 1949 (C.P. 32 of 1949)-Government of India Act, 1045 (36 Geo. 5 Ch. 2. s. 143 (2). HEADNOTE: Under the C. P. and Berar Local Self Government Act 1920, <ORG>. in 1925, imposed a terminal tax on the export of bidis and bidi leaves by rail out of Bhandara district. By <ORG>, 1935, terminal tax was included in the Federal Legislative List but s. 143 (2) of the Act provided that such a tax which was being lawfully levied under a law in force on January 1, 1935, may continue to be levied until provision to the contrary was made by <ORG>. <ORG> continued to leavy and collect the tax. In 1948 the C P. and Berar Local Government Act, 1948, came into force which repealed the 1920 Act. It replaced <ORG>, Bhandara, with three janapada <ORG>s. Clause (c) ;of the proviso to the saving section s. 192 provided that 'all rates, taxes and cesses due to <ORG> shall be deemed to be due to the <ORG> to whose area they pertained, 71 By an amending Act of 1949 <ORG> replaced cl. (b) of the proviso to s. 192 by a new cl. (b) which, inter alia, continued in force all taxes which were in force immediately before the commencement of the 1948 Act, this amendment was given retrospective effect from the commencement of 1948 Act. The appellant contended that the 1948 Act which repealed the 1926 Act did not save the terminal tax, and once the tax was discontinued <ORG> had no power left to impose it afresh and that the amendment was accordingly beyond its legislative competence_. The respondent contended that s. 143 (2) of <ORG>, 1935. vested in <ORG> plenary power to legislate in respect of every tax which was being lawfully levied in the province, that cl. (c) of the proviso to s. 192 of the 1948 Act saved the tax and that the amendment was validly made and it saved the tax with retrospective effect from the date of the repeal of the 1920 Act. Held, that the terminal tax was validly continued by the retrospective amendment of cl. (b) to the proviso of s. 192 of 1948 Act. Section 143 (2) of <ORG>, 1935, did not confer upon <ORG> any plenary power of legislation in respect of taxes which were being validly imposed. But it did confer upon <ORG> a limited legislative power to enact a law with reference to the tax levy so as to continue it. The power of <ORG> to repeal the 1920 Act which imposed the tax was co-extensive with its power to enact such a law. In exercise of this limited legislative power <ORG> was competent to enact the Amending Act of 1949. Attorney-General for Ontario v. Attorney-General for the Dominion,  A.C. 348, referred to. Clause (c) of the proviso to s. 192 of the 1948 Act did not save the future imposition of the tax; it merely provided for the collection of taxes already accrued in favour of <ORG>s by the successor <ORG>s. The words in this clause "due to <ORG>" referred only to taxes which had accrued on the date of the repeal of the 1920 Act and did not include taxes which accrued later and became payable subsequent to that date. The subsequent amendment of 1949 could not be take a into account in construing cl. (c) and for determining the intention of the legislature. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 188 to 191 of 1956.

Appeals from that judgment and decree dated April 13, 1955, of the former "Nagpur High Court in Civil Suits Nos. 3, 4, 9 and 10 of 1955 (Original Nos. M.C.C. 194, 195, 200 and 202 of 1954).

<NAME>, Attorney-General .for India. <NAME>, <NAME> and <NAME>, for the, appellant (in C. A., No. 188 of 56).

<NAME>, Additional Solicitor General of India, and <NAME>, for the respondent (in C. A. No. 188 of 56). <NAME>: <NAME> and <NAME> for the appellants (in C. As. Nos. 189 to 191 of 56).

<NAME> and <NAME>, for the respondent (in C. A. No. 190 of 56).

<NAME>, for the respondent (in C. As. Nos. 189 and 191 of 56).

1962. February 7. The Judgment of the Court was delivered by AYYANGAR, J.-Section 143(2) of the Government of India Act, 1935 enacted.

"43(2). Any taxes, duties, cesses or fees which, immediately before the commencement of Part III of this Act, were being lawfully levied by any Provincial Government, municipality or other local authority or body for the purposes of the Province, municipality, district or other local area under a law in force on the first day of January, nin eteen hundred and thirty-five, may, notwithstanding that those taxes, duties, cesses or fees are mentioned in the Federal Legislative List, continue to be levied and to be applied to the same purposes until provision to the contrary is made by <ORG>."

The precise import, significance and effect of the words "continue to be levied and to be applied to the same purposes until provision to the contrary is made by <ORG>" is the common question which arises in these four appeals which come before us by virtue of certificates under Art. 132 of the Constitution granted by <ORG> at Nagpur. Section 51 of the Central Provinces and Berar Local Self Government Act, 1920 enacted :

"51. (1) Subject to the provisions of any law or enactment for the time being in force <ORG> may, by a resolution passed by a majority of not less than two-thirds of the members present at a special meeting convened for the purpose, impose any tax, toll or rate other than those specified in sections 24 , 48 , 49 , and 50 .

(2).................................................... (3)...................................................

By virtue of the power thus conferred <ORG> which was "a local authority" constituted under this Act of 1920 imposed a tax on the export of bidis and bidi-leaves by rail out of the Bhandara district by a resolution dated May 14, 1925, as amended by another dated April 18, 1926. The tax was at the rate of 4 annas per maund on bidis and 2 annas per maund on bidi leaves. <ORG> framed rules for the collection of the tax under s. 79 of the Act of 1920, and the said tax was being collected by this local authority on April 1, 1937, when Part III of the Government of India Act came into force. It is now common ground that the tax thus levied and collected was "a terminal tax on goods carried by railway" covered by entry 58 in the Federal, Legislative List-List I in the Seventh Schedule to the Government of India Act of 1935. The result of this tax being in the Federal Legislative List, it is manifest, is that <ORG> could not thereafter freshly impose such a tax under its legislative power. By reason of the provision however of s. 143 (2) of the Government of India Act, 1935, extracted earlier, the local authority continued to retain the authority to levy and collect the said tax and the tax continued to be collected by <ORG> even after April 1, 1937 when Part III of the Government of India Act came into force. While so, the Central Provinces and Berar Local Self Government Act, 1920, was repealed and was replaced by the Central Provinces and Berar Local Government Act, 1948, which came into force on June 11, 1948. District Councils which were the units of local government administration under the Act of 1920 were replaced by Janpads which comprised smaller areas and as a result the area which was under the jurisdiction of <ORG> under the Local Self Government Act of 1920, came to be constituted into three Janpads, viz., those of Gondia, Bhandara and Sakoli these being the three Tahsils comprised in the district and the three Janpads were administered by three Janpad Sabhas formed under the Act of 1948. There were provisions in the later enactment providing for continuity in the powers to be exercised by <ORG>s whom the former replaced. But what is of relevance to the points arising in the present appeals are those contained in a. 192 of the Act of 1948 which, as originally enacted, ran "On and from date on which this Act comes into force, the Central Provinces and Berar Local Self Government Act, 1920, shall be repealed : Provided that-

(a) all local authorities constituted under the said Act shall continue to function there- under for such time till the constitution of the Sabhas as the Provincial Government may, by notification, specify;

(b) all rules and bye laws made, all noti-

fications published, all orders issued and all licences and permissions granted under the said Act and in force immediately be-fore the commencement of this Act shall, so far as they are consistent with this Act, be deemed to have been respectively made, published, issued and granted thereunder;,

(c) all rates, taxes and cesses due to the district Council or <ORG> shall be deem- ed to be due to the <ORG> to whose area they pertain; and

(d) all references made in any Act of the Provincial Legislature to the said Act shall be read as if made to this Act or to the corresponding provision thereof."

Pausing here, two matters which figured largely in the arguments require to be noticed in the provisions of this section. The first is that there was an express repeal of the Local Self Government Act of 1920 effected by the main part of the section. The second is that the repeal was not absolute and unconditional but was modified, by a saving which continued the operation of certain of the provisions of the repealed Act. But the terms in which the right to collect the rates, taxes and cesges was continued in favour of <ORG> which replaced <ORG> under cl. (c) was capable of being construed as not enabling the future imposition of the rate, cess etc, by the Janpad sabhas. The scope and meaning of this clause which is one of the principal matters to be considered in these appeals we shall reserve for later consideration but at this stage it might be mentioned that the clause is certainly capable of being understood as transferring to the Sabhas only the right to collect the rates, taxes or cesses which had accrued due to <ORG> which had remained unpaid on the date when by virtue of the first part of 192 the Act of 1920 stood repealed and <ORG> ceased to exist. If this were the proper meaning of this clause it is obvious that <ORG> could no longer levy the terminal tax oil bidis and bidi-leaves where the export was effected on or after June 11, 1948, on which date by virtue of the Act of 1948, coming into force the earlier Act of 1920, stood repealed.

<ORG> were, however, continuing the levy and <ORG> sought to put the matter beyond doubt by an amending Act of 1949 by which cl. (b) of the proviso to s. 192 was replaced by a new clause reading:

""All rules and bye laws and orders made, notifications and notices issued, licences and permits granted, taxes imposed or assessed, ceases (other than additional cesses imposed in accordance with section 49 of the said Act), fees, tolls or rates levied, contracts entered into and suits instituted and proceedings taken under the said Act and in force immediately before the commencement of this Act shall continue to be in force and in so far as they are not inconsistent with this Act, they shall be deemed to have been respectively made, issued, granted, imposed or assessed levied, entered into, instituted and taken under this Act until new provisions are made tinder the appropriate provisions of this Act."

and by s. 39 of the Amending Act this amendment was given retrospective effect from the commencement of the Local Government Act of 1948. It was not in dispute that if the terms of el. (b) as amended by the Act of 1949 had found a place in the Local Government Act of 1948 when originally enacted. the levy of this tax by the Janpad Sabhas would have been valid. It is only necessary to add that if this tax had been lawfully levied by the Janpad Sabhas immediately before January 26, 1950, they could continue to be levied after Constitution came into force nothwithstanding the repeal of the Government of India Act by the Constitution and notwithstanding terminal taxes being a tax solely leviable by the Union List in Sch. VII) by reason of the provision contained in Art. 277 of the Constitution reading:

"277. Any taxes. duties, ceases or fees which, immediately before the commencement of this Constitution, were being lawfully levied by the Government of any <ORG> or by any municipality or other local authority or body for the purposes of the <ORG>, municipality, district or other local area may, notwith- standing that those taxes, duties, ceases or fees are mentioned in the Union List, continue to be levied and to be applied to the same purposes until provision to the contrary is made by <ORG> by law."

It would thus be seen that in order to sustain the claim, of the respective Janpad Sabhas who are the respondents in these four appeals to continue to lawfully levy the terminal tax it should be established either that cl, (c) to the proviso to a. 192 enabled them to do so or that the amendment effected to proviso (b) to a. 192 of the Act of 1948 was validly enacted.

Before considering this question it would be of advantage if we set out the facts of the cases under appeal. It is sufficient to refer to the facts in Civil Appeal 188 of 1956 because, except for the identity of the appellants and the amounts involved, the matter in controversy is exactly similar, <NAME> in Civil Appeal 188 is a proprietary concern carrying on business, alia, in manufacturing and selling bidis. In the course of that business they export bidis to various places outside the territorial limits of <ORG>, <NAME>. <ORG>, <NAME> demanded and collected taxes when the export took place from railway stations within its territorial jurisdiction. Between January 26, 1950, and June 30, 1952, the respondent <ORG> had collected tax totaling Rs. 3,818/15/3, the appellant concern contending that from the date of the coming into force of the Constitution the imposition and collection of the terminal tax by the respondent <ORG> was illegal, because the right to levy terminal taxes was vested exclusively in the government of the <ORG> under entry 89 in the First List to the 7th Schedule to the Constitution and sought the refund of this sum of tax from the respondent <ORG> and also required that it should desist from continuing the imposition and levy of this tax, and when the request was not needed, served notice on the <ORG>. In consequence of this notice though the <ORG> discontinued the collection of the tax, it refused to refund the tax already collected.Thereupon the appellant instituted a civil suit inthe court of the Civil Judge at <NAME> praying for a decree for the sum of Rs. 3,818/15/3 and costs. The suit was resisted and thereafter this alongwithseveral similar suits including three by the appellants in the other three appeals were all withdrawn to <ORG> under Art. 228 of the Constitution for deciding the substantial question of law as to the interpretation of the Constitution and of the Government of India Act as to whether the levy of the tax by the respondent <ORG> was lawful or not These suits were consolidated and were disposed of by a common judgment dated April 13, 1955, by which all the suits were dismissed but a certificate was granted under Art. 132 of the Constitution. On the strength of the certificate four of the aggrieved plaintiffs filed appeals to the <ORG> and that is how the matter is before us.

Before considering the submissions made to us by the learned Attorney-General for the appellant it would be convenient to state the exact factual position relating to the levy of the impugned tax :

(1)The tax being one on goods exported out of the local area by-rail would answer the description of a terminal tax falling within the exclusive jurisdiction of <ORG> under <ORG>.Act, 1935. The position has continued to be the same under the distribution of legislative power in relation to taxes under the Constitution. The result would, therefore, be that but for the saving contained in s. 143(2) of <ORG> Act, 1935 it would not have been legally competent for the local authority to continue to levy the tax after <ORG> Act came into force ; similarly but for Art. 277 that levy could not have been continued beyond January 26, 1950. On the facts stated earlier it would be seen that the right of the local authority to levy the tax would be ultimately dependent on the same being authorised by s. 149(2) of <ORG> Act. (2)The, tax that was sought to be levied by the respondent <NAME> and which was challenged as unauthorised and illegal was identical in the incidence as the tax which <ORG> lawfully levied, just prior to the commencement of Part III of the Government of . India Act , 1935. By incidence we mean the subjectmatter of the tax, the taxable event as well as the rate of the duty. In other words, the tax now sought to be levied and that which was lawfully imposed and collected prior to April 1, 1937 were exactly identical in their effect and operation. Similarly there was no controversy as regards either the identity of the area in aid of whose local administration the tax *as now sought to be collected, nor as regards the purposes for which they were utilised as compared with what prevailed on April 1, 1937.

The principle contention however, raised on behalf of the appellant before <ORG> was based upon a denial of the identity of the authorities-three Janpad Sabhas with <ORG>, Bhandars which levied and collected the tax prior to April 1, 1937. The learned Judges of <ORG> rejected this contention and held that the three Janpad Sabhas which replaced <ORG> of Bhandara were in substance identical with the latter principally for the reason that the area covered by the three newly created Janpads was the same as that for which <ORG> functioned and that the purposes for which the tax collected would be utilized which are the, criteria specified in s. 143(2) -were exactly the 'same, Just as it could not be disputed that if there were any change in the composition of <ORG> the identity of a local authority would not be altered for the purposes of s. 143(2) , the mere splitting up of that local area for being administered by a plurality of <ORG> would not effect any change material for the purposes of the continued exigibility of the tax under s. 143(2) . The learned Attorney-General therefore very properly did not press before us this point based upon the disappearance of <ORG> and its being replaced by the respondent-Sabhas as any ground for denying to the respondent-Sabhas the right to levy the tax. The only point that was urged before us in challenge of the right of the respondent-Sabhas to continue the levy of this terminal tax may be formulated thus: <ORG> in exercise of its legislative power under item 13 of the Provincial Legis- lative List enacted the Local Government Act, 1948 and validly repealed the Act of 1920 under which this tax was levied. As part of the same legislation and taking effect at the same time it was open to that <ORG> to have continued the provisions of the repealed Act of, 1920 under ,which the impugned tax was levied so as to enable the newly created Janpad Sabhas to exercise the fiscal powers of <ORG>s which they replaced, thus so to speak modifying or qualifying the repeal. Such a continuance could be provided by a saving clause couched in appropriate phraseology to effectuate such an intention. If this had been done the source of legal authority to levy the tax would, even after the Act of 1948 came into force, have been the repealed Act of 1920 which to the extent of the saving would be deemed to have continued in force. But this was not done. There was, no doubt, a saving under the proviso to s. 192 but the saving in respect of the taxes which was contained in sub-cl.(c) to the proviso was confined to the recovery of taxes which had accrued due on the date of the repeal but which still remained uncollected and the purpose of the sub-clause was to effect a distribution of those assets, viz., of the accrued arrears among the several Janpad Sabhas which replaced each <ORG>, so that when on June II, 1948, the Act of 1948 came into force, the effect of it was that the repeal of the Act of 1920 was for all purposes relevant to the matter now in controversy complete and with it the power to levy the tax in future stood. extinguished, save only as regards the right to collect the arrears which had accrued due to <ORG>s before that date. No doubt, the Provincial <ORG> effected an amendment to s. 192 in 1949 by which the saving was extended to include the right of the Janpad Sabhas to continue to levy the impugned tax and this amendment was given retrospective effect as from Tune 11, 1948, but this amendment was beyond the legislative com. petence of <ORG> since in pith and substance it was virtually a legislation expressly conferring upon the Janpad Sabhas the right to levy a terminal tax a right which they did not possess before that date and unless the Legis- lature was competent to enact a law in relation to such a tax it could not validly confer upon the local authority what in legal effect should be considered to be a fresh right to levy the tax. The argument was also presented in a slightly different form by saying that on the terms of s. 143(2) of the Government of India Act there was a provision only for the continuance of the tax and that when once that continuity was broken by a valid piece' of legislation such as took place in this case when the Local Self Government Act 1920 wes repealed without a properly drafted saving clause enabling the continued levy of the tax, the discontinuity created thereby could not thereafter be repaired and the gal) filled by further legislation even though it purported to be with restrospective effect. Mr. <NAME> learned Additional Solicitor General who appeared for the respondent-Sabhas submitted several answers to sustain the validity of the continued imposition of the tax, He first urged that the effect of s. 143 (2) of the Government of India Act, 1935 was in effect to vest in Provincial <ORG>s a plenary power to legislate in respect of every tax which was being lawfully levied by local authorities etc. in the Province prior to the commencement of Part III of the Government of India Act so "much so that even if the amendment efrected to s. 192 by the Local Government (Amendment) Act of 1949 be treated as itself a fresh imposition of the tax its validity could not bechallenged. We must express our inability toaccept this extreme contention. Section 143 (2) which is a saving clause and obviously, designed, to prevent a dislocation of the finances of Local Governments and of local authorities by reason of the coming into force of the provisions of the Government of India Act distributing heads of taxation on lines different from' those which prevailed before that date, cannot be construed as one conferring a plenary power to legislate on those topics till such time as the Central <ORG> intervened. Such a construction would'necessarily involve a power in the Provincial <ORG> to enhance the rates of taxation-a result we must say from which Mr. <NAME> did not shrink, but having regard to the language of the section providing for a mere continuity and its manifest purpose this construction must be rejected.

The next point urged by Mr. <NAME> was based on the construction which he aought to put on cl.(c) of the proviso to s. 192 of the Local Government Act of 1948. He submitted that the words ,,due to <ORG>" were wide and apt enough to include not merely the taxes that had accrued due on the date of the repeal of the Act of 1920 but even the amounts which accrued later and became payable subsequent to that date-"Due" he said meant ,,payable" and as the words of the sub-section did not specifically limit the period when the cess became payable to some time anterior to the repeal of the Act of 1920. it ought to be read as including those amounts which accrued due and became payable even thereafter. We find it difficult to accept this submission either. The difficulty in accepting it is created only in part by the use of the expression "due"- but the main hurdle in the way of the respondent is that what is saved by the sub-clause (and is distributed among the Janpad Sabbas which replaced <ORG>), is specified as a cess' rate etc. due to <ORG>. The rate, cess or duty due to <ORG> could obviously be only that which had accured due to <ORG> while that body was in existence and with the extinction of <ORG> by the repeal of the Act of 1920 there could be no question of any further sums being due to such a body. Mr. <NAME> however sought to get over this situation by suggesting that the words "due to <ORG>" were merely descriptive of the nature of the tax and did not pre- dicate that it was an amount due to a particular body on the date when it became due. In our opinion this is not an interpretation which the words could reasonably bear and we have, therefore, no hesitation in rejecting this argument. It- was then submitted that even if the words of cl. (c) of the proviso would not ordinarily include a saving as regards the right of the Janpad Sabhas to levy the tax in the future, still we should adopt that construction as being in consonance with and for giving effect to the intention of the legislature which made it clear that that was so by enacting the amendment to s. 192 by the Act of 1949 within a year or so after the Act of 1948. We consider that this submission also deserves, in the circumstances of the present case, to be rejected. It is a cardinal principle of statutory construction that the intention of the legislature should be gathered from the words of the enactment. If, as we have held, those words are incapable of the construction that there was a savig of the right of the Janpad Sabbas to impose and collect the tax- apart from the right to collect the arrears of tax which accured due while <ORG> was in existence,that construction cannot be modified and the legislative intent with which that proviso was enacted supplemented by a reference to what the legislature did later. No doubt, there is authority for the position that when the meaning of the words used in an enactment is ambiguos or obscure, subsequent statutes might sometimes be used as what has been termed "a parliamentary exposition" of the obscure phraseology. It is hardly necessary to discuss the permissible limits of this node of construction for the purpose of the present lase, because the prime conditions for invoking that rule are absent here- there is no obscurity or ambiguity in the words of el. (c) and secondly if the learned Attorney-General is right, <ORG> had no legislative capacity to enact the Amending Act of 1949-and this must include legislation either by way of explanation or exposition, and of course by positive enactment. If there is incapacity to enact retrospective legislation on the matter, the position is not rendered different by viewing it as parliamentary exposition. The validity of the amendment effected by the Act of 1949 must be judged independently and on its own inerits and its terms cannot be used as a guide to the interpretation of what the legislature in enacting s. 192 of the Act 1948 intended by the words in cl. (c). The next submission was that as the Act of 1949 amended the terms of s. 192 so as to save the power of the Janpad Sabhas to levy the cess with retrospective effect from the date when the Act of 1920 stood repealed, there was in the eye of the law a continuity in the levy of the cese; or rate and so no hiatus or period of discontinuity existed 'such as had been suggested by the learned Attorney-General and the existence of which was the entire foundation of his argument. It must, however, be mentioned that the learned Attorney-General was not oblivious of this feature of the legislation of 1949, viz., that it purported to operate as it were to close the gap, but his submission was that if, in fact, the gap existed and there was factually a period of discontinaity, the legislature which had no authority to enact positive legislation with reference to the topic in May 1949 was incompetent to pass an enactment with retrospective effect.

In our opinion, this argument of Mr. <NAME> requires serious consideration and the answer would turn on the proper construction of the terms of s. 143(2) of the Government of India Act. The first matter to be considered would be the source of the legislative power to enact the Local Government Act of 1948. In so far as the constitution of local authorities, their territorial distribution, the endowing them with powers, jurisdiction and authority in general are concerned, the legislative power therefore is to be found in entry 13 of the Provincial Legislative List II to Sch. VII of the Government of India Act, 1935 reading :

"Local Government, that is to say, the constitution and powers of municipal corpora- tions, improvement trusts, district boards, mining settlement authorities and other local authorities for the purpose of local self- government on village administration".

It must however be observed that merely because the legislature is empowered under this entry to constitute local authorities and vest them with powers and jurisdiction it would not follow that these local bodies could be vested with authority to levy any and every tax for the purpose of raising revenue for the purposes of local administration. They could be validly authorised to raise only those taxes which the Province could raise under and by virtue of the relevant entries in the Provincial Legislative List. This is on the principle that the Province could not authorise local bodies created by it to impose taxes which it itself could not directly levy for the purposes of <ORG>. Now comes the question whether <ORG> was competent, by legislation, to discontinue the levy of the tax by effecting a repeal of the taxing provision contained in the Local Self Government Act of 1920. There is no doubt that the general principle is that the power of a legislative body to repeal a law is co- extensive with its power to enact each a law, as would be seen from the following passage in. the judgment by Lord <NAME> in Attorney-General for Ontario v. Attorney-General for the Dominion(1) :

"Neither the Parliament of Canada nor the provincial legislatures have authority to repeal statutes Which they could not directly enact."

But obviously its application in particular instances would be controlled by express constitutional provision modifying the same. We have such provision in the case on hand in s. 143(2) of the Government of India Act, 1935. In the context the relevant words of the sub-section could only mean "May continue to be levied if so desired by <ORG>" which is indicated by or is implicit in the use of the expression "May" in the clause 'may be continued until provision to the contrary is made by <ORG>." This would therefore posit a limited legislative power in the Province to indicate or express a desire to continue or not to continue the levy. If in the exercise of this limited power the Province desires to discontinue the tax and effects a repeal of the relevant statute the repeal would be effective. Of course, in the absence of legislation indicating a define to discontinue the tax, the effect of the provision of the Constitution would be to enable the continuance of the Dower to levy the tax but this does not alter the fact that the provision by its implication confers a limited legislative power to desire or not to desire the continuance of the levy subject to the overriding power of <ORG> to put an end to its continuance and it is on the basis of the existence of this limited legislative power that the right of <ORG> to repeal the taxation provision under the Act of 1920 could be rested. Suppose for instance, <ORG> desires the continuance of the tax but considers the rate too High and (1)[1896] A. C. 348, 366.

wishes it to be reduced and passes an enactment for that purpose, it cannot be that the legislation is incompetent and that <ORG> must permit the local authority to levy tax at the same rate as prevailed on April 1, 1937 if the latter desired the, continuance of the tax. If such a legislation were enacted to achieve a reduction of the rate of the duty, its legislative competence must obviously be traceable to the power contained in words "may continue to be levied" in s. 143(2) of the Government of India Act. If we are right so far it would follow that in the exercise of this limited legislative power <ORG> would also have a right to legislate for the continuance of the tax provided, if of course, the other conditions of s. 143(2) are satisfied, viz., (1) that the tax was one which was lawfully levied by a local authority for the purposes of a local area at the commencement of Part III of the Government of India Act.,. (2) that the identity of the body that collects the tax, the area for whose benefit the tax is to be utilised and the purposes for which the utilisation is to take place continue to be the same and (3) the rate of the tax is not enhanced nor its incidence in any manner altered, so that it continues to be same tax. If as we have hold earlier there is a limited legislative power in the Province to enact a law with reference to the tax levy so as to continue it, the validity of the Act of 1949 which manifested the legislative intent to Continue the tax without any break, the legal continuity being established by the retrospective, operation of the provision, has to be upheld.

The appeals therefore fail and are dismissed with costs-one set of hearing fees.

Appeals dismissed.


CASE NO.: Appeal (civil) 488 of 1957 PETITIONER: State of Bihar RESPONDENT: <NAME> DATE OF JUDGMENT: 25/11/1959 BENCH: B.P. SINHA (CJ) & P.B. GAJENDRAGADKAR & K. SUBBARAO & K.C. DAS GUPTA & J.C. SHAH JUDGMENT:

JUDGMENT AIR 1960 SC 689 The Judgment was delivered by <NAME>, <NAME>, C.JThe main question for determination in this appeal by special leave is whether the provisions of Art. 311 (2) of the Constitution ar applicable to a probationer in <ORG>, who has been discharged as unsuitable on grounds of notoriety for corruption and unsatisfactory work in the discharge of his public duties.

The facts of this case are short and simple. The respondent was appointed as a temporary Sub-Deputy Collector in the year 1944. In 1946, he was vested with the powers of a magistrate of the First Class. In December, 1947, he was appointed to a substantive post in <ORG>, on probation. During the period of his probation, he was posted at Jamshedpur in the district of Singhbhum, and later at Nawada in the district of <NAME>. Proceedings were taken against him and he was called upon to show cause why his services should not be terminated forthwith, by the <ORG> letter dated 4 November, 1952, a copy of which was forwarded to the respondent through the District Magistrate, <NAME>. In that letter it was stated that throughout the year 1948 and upon the end of May 1949 the respondent, while employed as a Sub-Deputy Magistrate at Jamshedpur, had earned notoriety for corrupt practices, that from May, 1949 to March, 1951, the respondent's reputation while posted at Nawada, continued to be bad, and that his judicial work while at Jamshedpur had been subjected to careful scrutiny by <ORG>, leading "to discovery of incredibly perverse decisions" given by him. Instances of eight cases with all the necessary details were also recited therein. Those proceedings terminated in an order of the <ORG> of Bihar, dated 23 July, 1953, the relevant portions of which are as follows :-

"1. Certain facts were brought to the notice of Government about the unsatisfactory work and conduct of Mr. <NAME>, Sub-Deputy Collector, on probation, while posted at Jamshedpur and Nawadah, which raised grave doubts regarding his integrity and indicated that he was a corrupt and unreliable officer. Confidential enquires were made and it was found that while employed at Jamshedpur Mr. <NAME> had the reputation of being a corrupt officer. Two successive Deputy Commissioner of Singhbhum under whom Mr. <NAME> had served had also mentioned in their annual confidential reports that this officer had a bad reputation at Jamshedpur. The judicial work of Mr. <NAME>, while at Jamshedpur, was subjected to a careful scrutiny and Government found ample materials to show that the reports about his resorting to corrupt practices were justified. He was transferred to Nawadah. Both the District Magistrate, Gaya, and Commissioner, Patna Division, reported that the Nawadah Mr. <NAME>'s honesty was open to doubt. He was then transferred to Gaya. His was then transferred to Gaya. His work at Gaya was found to be wholly unsatisfactory.

2. In consideration of all these facts it was provisionally decided to terminate the probation of Mr. <NAME> and discharge him from service. He was accordingly asked to show cause against his discharge. His explanation was carefully considered by <ORG> and found to be unsatisfactory.

3. In view of these facts, Government have, after consulting <ORG>, been pleased to order that Mr. <NAME> should be discharged from service forth with.

4. Mr. <NAME>, probationary Sub-Deputy Collector, is, therefore, discharged from service with effect from the date on which this order is served on him.ORDER Ordered that a copy of this resolution be forwarded to the District Magistrate, Gaya, for service on Mr. <NAME>.

(By order of <ORG>) (Sd.) B. N. SINHA, 24-7-53, Deputy Secretary to <ORG>."

The respondent moved <ORG> at Patna under Arts. 226 and 227 of the Constitution against the order of the <ORG> quoted above. The matter was heard by v. <NAME>, J. (as he then was) and <NAME>, J. <ORG> by its judgment dated 19 January, 1955 allowed the application and quashed the order aforesaid of the <ORG> dated 23 July, 1953. <NAME>, J., with all the contentions raised on behalf of the respondent-petitioner in <ORG> - and after examining the relevant, rules of the Civil Services (Classification Control and Appeal) Rules and Art. 311(2) of the Constitution, came to the conclusion that the respondent was not entitled to a full enquiry as contemplated by the Para. 1 of rule 55 of the Civil Service (Classification, Control and Appeal) Rules, but that he was entitled to the protection under Art. 311(2) of the Constitution. He also held that there had been a violation of the principles of natural justice, inasmuch as the special reports of the Commissioner of Chotanagpur Division and of the Deputy Inspector-General of Police in <ORG>, had not been shown to the respondent. On these grounds he held that the order of discharge impugned by the respondent was illegal and ultra vires. <NAME>, J., did not express a decided opinion on the question whether the respondent was entitled to the protection of Art. 311(2) of the Constitution, because in his view the decision of <ORG> in <NAME> case [L.R. 75 I.A. 225] was concerned with a confirmed officer, whereas the respondent was only an officer on probation. But he agreed with <NAME>, J., in the result on the ground of the violation of the principles of natural justice.The State of Bihar moved <ORG> for leave to appeal to this <ORG>. The application for leave under Art. 132(1) of the Constitution was heard by <NAME>, C.J. (as the then was) and <NAME>, J. <ORG>, by its order dated 8 August, 1955, refused to grant the leave on the ground that the case had not really been determined on an interpretation of Art. 311 of the Constitution, but substantially on the ground that there had been an infringement of the principles of natural justice. The State of Bihar thereafter moved this <ORG> for special leave to appeal, which was granted on 28 November, 1955. That is how the matter had come before this <ORG>.

The main point in controversy before us turns on the question whether the provisions of Art. 311(2) of the Constitution are attracted to the case of a public servant who was still a probationer and had not been confirmed in a substantive post. The question whether there had or had not been a violation of the principles of natural justice, which was the basis of the decision in <ORG> as indicated above, was not raised before us. The judgment of <ORG> could be allowed to rest on that basis alone, but as it appears that this <ORG> granted special leave to determine the controversy based upon the interpretation of Art. 311(2) of the Constitution, we think it necessary to express our opinion on that part of the case. The decision of this <ORG> in <CITATION> 1958 (1) LLJ 544 ] had not been given till then. If that decision were in existence then, perhaps the special leave would not have been granted. In our opinion, the controversy raised in this case is completely covered by the decision of the Constitution Bench of this <ORG> in <NAME> case (supra.) The main question for decision in that case was whether the appellant <NAME> had been reduced in rank by way of punishment as a result of the order of the General Manager of the Railway. Though, in that case, this <ORG> decided that the order impugned had not that effect, this <ORG> went elaborately into all the implications of the service conditions, with particular reference to the Railway Service Rules and the constitutional provisions contained in S.240 of the Government of India Act, 1935, and Art. 311 of the Constitution. The elaborate discussion in that judgment has reference to all stages of employment in the public services including temporary posts, probationers, as also confirmed officers. In so far as those observations have a bearing on the termination of service or discharge of a probationary public servant, they may be summarized as follows :1. Appointment to a post on probation gives to the person so appointed no right to the post and his service may be terminated, without taking recourse to the proceedings laid down in the relevant rules for dismissing a public servant, or removing him from service.

2. The termination of employment of a person holding a post on probation without any enquiry whatsoever cannot be said to deprive him of any right to a post and is, therefore, no punishment.

3. But, if instead of terminating such a person's service without any enquiry, the employer chooses to hold an enquiry into his alleged misconduct or inefficiency of for some similar reason, the termination of service is by way of punishment, because it puts a stigma on his competence and thus affects his future career. In such a case, he is entitled to the protection of Art. 311(2) of the Constitution.

4. In the last-mentioned case, if the probationer is discharged on any one of those grounds without a proper enquiry and without his getting a reasonable opportunity of showing cause against his discharge, it will amount to a removal from service within the meaning of Art. 311(2) of the Constitution and will, therefore, be liable to be struck down.

5. But, if the employer simply terminates the services of a probationer without holding an enquiry and without giving him a reasonable chance of showing cause against his removal from service, probationary civil servant can have no cause of action, even though the real motive behind the removal from service may have been that his employer thought him to be unsuitable for the post he was temporarily holding, on account of his misconduct or inefficiency or some such cause.

It would thus appear that, in the instant case, thought the respondent was only a probationer he was discharged from service really because the Government had on enquiry come to the conclusion, rightly or wrongly, that he was unsuitable for the post he held on probation. This was clearly by way of punishment and, therefore, he was entitled to the protection of Art. 311(2) of the Constitution. It was argued on behalf of the appellant that the respondent, being a mere probationer, could be discharged without any enquiry into his conduct being made and his discharge could not mean any punishment to him, because he had no right to a post. It is true, if the Government came to the conclusion that the respondent was not a fit and proper person to hold a post in the public service of the <ORG>, it could discharge him without holding any enquiry into his alleged misconduct. If the Government proceeded against him in that direct way, without casting any aspersion on his honesty or competance, his discharge would not, in law, have the effect of a removal from service by way of punishment and he would, therefore, have no grievance to ventilate in any <ORG>. Instead of taking that easy course, the Government chose the more difficult one of starting proceedings against him and of branding him as a dishonest and an incompetent officer. He had the right, in those circumstances, to insist upon the protection of Art. 311 (2) of the Constitution. That protection not having been given to him, he had the right to seek his redress in <ORG>. It must, therefore, be held that the respondent had been wrongly deprived of the protection afforded by Art. 311(2) of the Constitution. His removal from the service, therefore, was not in accordance with the requirements of the Constitution.The appeal is accordingly dismissed with costs.