Lords Sitting of 27 February 1940

Preamble
The House met at four of the clock, The LORD CHANCELLOR on the Woolsack.

GOVERNMENT OF INDIA (ORISSA AND SIND GOVERNORS' ALLOWANCES AND PRIVILEGES) ORDER, 1940.
GOVERNMENT OF INDIA (ADAPTATION OF INDIAN LAWS) (AMENDMENT) ORDER, 1940.
GOVERNMENT OF INDIA (DISTRIBUTION OF REVENUES) (AMENDMENT) ORDER, 1940.
GOVERNMENT OF INDIA (FEDERAL COURT) (AMENDMENT) ORDER, 1940.
GOVERNMENT OF INDIA (HIGH COURT JUDGES) (AMENDMENT) ORDER, 1940.
GOVERNMENT OF BURMA (INDIA-BURMA FINANCIAL SETTLEMENT) ORDER, 1940.
GOVERNMENT OF BURMA (SHAN STATES FEDERAL FUND) ORDER, 1940.
THE SECRETARY OF STATE FOR INDIA AND BURMA (THE MARQUESS OF ZETLAND): My Lords, these seven Draft Orders have been examined by the India and Burma Orders Committee and in the case of six of them they report that
"the Orders can be passed by the House without special attention, and that no further inquiry is necessary before the House proceeds to a decision on the Resolution to approve the said Orders."
With regard to one of them, namely, the Government of India (Distribution of Revenues) (Amendment) Order, 1940, they made a separate Report to the effect that
"in the opinion of the Committee the Order cannot be passed by the House without special attention, but that no further inquiry is necessary before the House proceeds to a decision on the Resolution to approve the said Order."
In these circumstances it seems necessary for me to explain as briefly as may be the purpose of what I am bound to confess is a very complicated matter. The Draft Order deals with the distribution of

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revenues between the Federal Government of the future, or the Central Government of the present time, and the Governments of the Provinces. It was laid down by Section 138 of the Government of India Act, 1935, that the proceeds of Income Tax should be collected by the Central Government but that at an unspecified date in the future an unspecified amount of the proceeds of Income Tax should be assigned to the Provincial Governments. The question therefore with which we were faced was this: how much of the proceeds of Income Tax was to be assigned to the Provinces, and how soon was any part of the proceeds to be assigned to the Provinces? Upon that the Act itself was silent. It merely said that these things were to be prescribed, and the meaning of the word "prescribed" in its technical sense as used in the Act is "determined by Order in Council."
Let me refer your Lordships first of all to the guiding principles which were laid down in the Act itself. Section 138 says:
"Taxes on income other than agricultural income shall be levied and collected by the Federation, but a prescribed percentage of the net proceeds in any financial year of any such tax…shall be assigned to the Provinces and to the Federated States, if any.…"
At the present time, of course, Federation not having come into operation, there are no Federated States, and all we are concerned with therefore are the Provinces. That was the first guiding principle. The second guiding principle was laid down in subsection (2) of the same section in these words:
"Notwithstanding anything in the preceding subsection, the Federation may retain out of the moneys assigned by that subsection to Provinces and States—

(a) in each year of a prescribed period such sum as may be prescribed; and

(b) in each year of a further prescribed period a sum less than that retained in the preceding year by an amount, being the same amount in each year, so calculated that the sum to be retained in the last year of the period will be equal to the amount of each such annual reduction:"

Your Lordships, if you have been able to follow the provisions of the section, will see that we have to answer four distinct questions. The first is: how much of the divisible pool provided by the proceeds of Income Tax is to be assigned to the Provinces? The second question is:
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during what period is the Federal Government or the Central Government to be entitled to retain from the Provincial part of the pool a specified share? The third question is: how much of the Provincial pool is the Central Government to be entitled to retain during the first of the two time-periods? And the last question is: what is to be the duration of the second period of time during which the Federal Government gradually reduces the amount which it has been retaining during the first period of time from the Provincial share of the pool? It was quite obvious that it was impossible for anybody to answer those questions without very expert advice, and your Lordships will perhaps recall that I was successful in persuading Sir Otto Niemeyer to proceed to India to make an investigation of the whole financial position and to provide me with answers to, amongst other questions, those which are propounded in respect of Section 138 of the Act.
Sir Otto Niemeyer had no great difficulty in determining the percentage of the divisible pool which should be eventually assigned to the Provinces. The figure he recommended was 50 per cent.—half the divisible pool. He had no great difficulty in determining the duration of the two time-periods which had to be laid down. He suggested in each case a period of five years. But when it came to answering the question how much of the Provincial share of the divisible pool the Centre ought to be entitled to retain during the first five-year period he found himself in much greater difficulty. There were too many uncertain factors in the problem to make it possible to estimate the figures with any certainty; and he therefore approached the problem from a somewhat different angle. He took two of the sources of Central revenue together—Income Tax and the net revenue from the railways—and he asked himself, basing himself, of course, upon past Budgets, what actual sum of money the Central Government would be likely to require out of those two sources of revenue put together during the next five years. The figure at which he arrived was thirteen crores of rupees. He proposed, therefore, that we should assign to the Central Government out of these two sources of income, every year for five years, a sum of thirteen crores of rupees, and that the Provinces should take anything there might be over and above that

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sum from the two sources of revenue. That recommendation and his other recommendations were accepted and were given the effect of law by Parliament through the agency of an Order in Council.
Perhaps I can explain the thing most simply to your Lordships by giving you an actual illustration of how the Niemeyer formula has worked. I give you the figures of a typical pre-war Indian Budget. The amount from Income Tax in the divisible pool stands, in this Budget, at 12½ crores. The net revenue from the railways in the same Budget stands at 2¼ crores, making a total pool of 14¾ crores. Deducting thirteen crores from that—the figure laid down as the amount required by the Central Government—a sum of of 1¾ crores is left, which went to the Provinces. Very well; the Niemeyer formula so far has worked very fairly and quite satisfactorily. But Sir Otto Niemeyer could not, of course, foresee that there would be a world war, and the effect of the world war upon the financial position of India has been very considerable. In the first place, one of the main sources of the revenue of the Central Government, namely the Customs Duty, has been seriously affected. Owing to the restriction of imports, the revenue from Customs Duties has fallen off by a sum which is likely to be this year something like four crores of rupees; and whereas the revenue from Customs has fallen off, expenditure under the heading of Defence has inevitably increased.
Therefore there is likely to be a very considerable difference between revenue and expenditure in the current Indian Budget, unless the Central Government is able to obtain a larger share of the proceeds of Income Tax and of the railway revenue. Curiously enough, the proceeds of Income Tax and the revenue from the railways are rising and look like continuing to rise, and the result of that, if we were to adhere to the Niemeyer formula, would be this. While the Central Government was losing money over the Customs, and incurring additional expenditure in connection with defence, it could receive no more from the railways and the Income Tax than the thirteen crores laid down; whereas the Provinces would receive a wholly unexpected windfall of a considerable amount. It is clear that that is a situation which must be remedied, and we are
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proposing, therefore, in the Draft Order which is now before your Lordships to go back to the actual guiding principles of the Act itself: to leave the question of the railway revenue out of the formula altogether, and to assign to the Central Government during each year of the first five-year period—and there are now only three years of the five-year period left—a specified sum. The question is: what is that specified sum to be? We have taken the actual amount which has passed through the Central Government during the last three years from the Provincial share of the Income Tax pool, and we have found that on the average it has been rather more than 4½ crores of rupees. We propose, therefore, to take for our figure the round sum of 4½ crores of rupees.
Now let me illustrate to your Lordships, by applying that formula to the same Budget figures that I have already used, how it will work. The divisible Income Tax pool, as I have already mentioned, in this typical pre-war budget is 12½ crores of rupees. Under the provision that eventually the Provinces are to receive 50 per cent. of the pool and the Central Government 50 per cent., the Central Government retains its 50 per cent. of 12½ crores—that is to say, 6¼ crores. Adding to that the 4½ crores which it is to retain during each of the next two years from the Provincial share of the pool, it receives 10¾ crores; but in addition to that, of course, it gets the whole of the railway revenue. The Provinces still get the 1¾ crores, as they did under the older formula, and in the event of there being any steep rise from now onwards in the proceeds of the Income Tax the Central Government and the Provincial Governments will each get their equal share of the increase.
We have finally, therefore, only to consider the position during the five years of the second five-year period, when the Central Government is gradually to reduce the amount which it has been retaining from the Provincial share of the pool; and a simple arithmetical calculation shows that if you are to reduce the sum of 4½ crores, which you are taking from the Provincial pool, by equal amounts for five years until you reach zero, you must reduce the amount you are retaining by three-quarters of a crore in the first year, a crore and a half in the second year,

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and so on, with the addition of three-quarters of a crore every year until you come to the end of the second five-year period in the spring of 1947, when you will have reached equilibrium, and the proceeds of the Income Tax will then be divided equally between the Federal Government—if a Federal Government exists at that time—and the Provinces.
My Lords, I am very conscious that this is a very complicated matter, and I am afraid a rather dry one; but I hope that I have been able to make the general principles on which we are proceeding intelligible to your Lordships, and that you will therefore be willing in the circumstances of the present time to agree to the Draft Orders.
Moved, That the Draft Orders, as presented to Parliament and reported from the India and Burma Orders Committee on Tuesday last, be approved.—(The Marquess of Zetland.)
4.22 p.m.
LORD SNELL: My Lords, the matter which the noble Marquess has presented to your Lordships is one of very great complication and can be fully understood, I feel, only after a close examination of all the documents that may be concerned. It would appear to require almost superhuman wisdom to allocate with equity the sums available between one claimant for them and another; but I understand the noble Marquess to assure us that no constitutional change of a controversial character is involved in these particular Orders, and not only the one on which he has addressed your Lordships. I should like to know, however, if that is possible, what is the Indian reaction to these proposals. Personally, I am very anxious that the Provinces should not be impoverished by any new judgment to the extent that they will be unable to pursue a constructive programme of their own. At this particular time, when there is a controversy with Provincial Governments, it is highly advisable that we should not give to them any kind of financial grievance. I confess that I listened with a good deal of attention to what the noble Marquess said, and if I do not fully understand the implications of this Order he will forgive me. The difficulties of the Indian Income Tax seem to be almost as great as those of the Income Tax of our own country, which I
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also do not understand; but I am willing, for the purpose of this afternoon's debate, to accept the assurance of the noble Marquess that no constitutional difficulty arises and that it is merely a question of equitable allocation of the funds available to the Central and Provincial authorities. I should like to ask however whether, if in the working out of this Order it does prove that there is anything inequitable, the matter will be again reconsidered.
4.25 p.m.
THE MARQUESS OF ZETLAND: I am obliged to the noble Lord for what he has said. The various Provincial Governments were consulted with regard to a formula which was a little less favourable to them than the one which I have now adopted, and one would naturally have expected that all the Provincial Governments with one voice would have raised their opposition to the proposal; but, somewhat to my astonishment, that was not so. It is true that some of the Provincial Governments objected.
LORD SNELL: Was this before the Provincial Governments resigned, or since?
THE MARQUESS OF ZETLAND: Since; but the noble Lord will remember that not all the Provincial Governments have resigned, and some of those Provincial Governments which have not resigned, namely, popular, responsible Governments, have accepted the formula. On the other hand, one or two of the Governments which are now autocratic Governments, in the hands of the Governor, objected. I can quite understand that they should. They wanted to get hold of as much money as they could, and I do not blame them; but the fact that some of the Provincial Governments appreciated the difficulties occasioned in the financial system by the outbreak of war and accepted the formula which I am now proposing to your Lordships shows, I think, that it cannot be inherently unfair to the Provincial Governments.
What really would have happened would have been this. As I have said, if the Niemeyer formula had been retained, the Provincial Governments would have received a wholly unexpected windfall. Everyone, of course, likes receiving unexpected windfalls, but they would

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have received it at the expense of the Central Government; and, for the reasons which I have explained, it is essential that the finances of the Central Government should maintain their stability, particularly in time of war. There was only one other question that the noble Lord put to me, and that is whether any change of a constitutional nature was involved. It certainly involves no change of a constitutional nature at all; in fact, the formula which I have adopted in this Draft Order is closer to the provisions of the Act than the Niemeyer formula itself. I hope that the noble Lord will be satisfied on those two points.
On Question, Motion agreed to.

SOLICITORS (EMERGENCY PROVISIONS) BILL. [H.L.]
Order for the Day for the House to be put into Committee read.
4.29 p.m.
LORD WRIGHT: My Lords, as further Amendments may be proposed to this Bill, I beg to ask that it be not proceeded with to-day.
Order for the House to be put into Committee discharged.

INDUSTRIAL ASSURANCE AND FRIENDLY SOCIETIES (EMERGENCY PROTECTION FROM FORFEITURE) BILL.
Order of the Day for the House to be put into Committee read.
Moved, That the House do now resolve itself into Committee.—(The Lord Chancellor.)
On Question, Motion agreed to.
House in Committee accordingly:
[The EARL OF ONSLOW in the Chair.]
Clause 1:
Application of Act to assurance policies.
1. This Act applies to—

(a) policies of industrial assurance;

(b) policies of assurance upon human life effected with collecting societies, not being policies of industrial assurance; and

(c) policies of assurance upon human life, in respect of which there are separate premiums, effected with registered friendly societies other than collecting societies;

being policies of assurance for an amount not exceeding fifty pounds, exclusive of any bonus
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added thereto, which were effected at least two years before the first day of September, nineteen hundred and thirty-nine, and were in force immediately before that day.
4.30 p.m.
THE LORD CHANCELLOR (VISCOUNT CALDECOTE)THE LORD CHANCELLOR (VISCOUNT CALDECOTE) moved to leave out all words after and including "effected" and insert "in force immediately before the first day of September, nineteen hundred and thirty-nine, and in respect of which not less than two years' premiums have been paid (whether before or after the passing of this Act)." The noble and learned Viscount said: My right honourable and learned friend the Attorney-General in another place undertook to insert an Amendment to Clause 1 by which the scope of the Bill would be slightly enlarged. The Bill as it received a Second Reading only applied to policies which had been effected at least two years before September 1, 1939. The Amendment proposed will make the Bill apply to policies in force on September 1, 1939, and in respect of which not less than two years' premiums have been paid.
Amendment moved—
Page 1, line 17, leave out from ("were") to the end of line 19, and insert the said new words.—(The Lord Chancellor.)
On Question, Amendment agreed to.
Clause 1, as amended, agreed to.
Clause 2:
Protection from forfeiture in cases of default due to war.
(5) Where an application under this section is granted, whether by the company or society or the Commissioner, then, subject to the provisions of this Act relating to the determination of protection, the policy shall not be forfeited for the default to which the application related or any subsequent default in the payment of premiums and no further notice shall be served under Section twenty-three of the Industrial Assurance Act, 1923, and any term of the policy providing that, on a default in the payment of premiums, the policy shall be converted into a free paid-up policy for a reduced amount or be surrendered for a cash payment, shall not apply as respects the said default or any subsequent default.
THE LORD CHANCELLOR THE LORD CHANCELLOR moved, in subsection (5), to leave out all words after "1923." The noble and learned Viscount said: It is proposed to leave out these words in order that an Amendment which will come in more properly to

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Clause 10 may be made effecting the same purpose. It is really a drafting Amendment, and I beg to move.
Amendment moved—
Page 3, line 14, leave out from ("1923") to the end of line 18.—(The Lord Chancellor.)
On Question, Amendment agreed to.
Clause 2, as amended, agreed to.
Clause 3 agreed to.
Clause 4:
Determination of protection.
4. Where in relation to any policy of assurance an application for protection has been granted under this Act, the company or society with which the policy was effected may at any time appeal to the Commissioner for the protection to be determined, and if the Commissioner is satisfied that the owner of the policy is no longer unable by reason of circumstances arising directly or indirectly out of the war to pay the premiums on the policy, he shall make an order for the determination of the protection, and thereupon subsection (5) of Section two of this Act shall cease to apply as respects any default in the payment of premiums falling due after the date of the order, but without prejudice to the making of a further application for protection.
THE LORD CHANCELLOR THE LORD CHANCELLOR moved to leave out Clause 4 and insert the following new clause:
Determination of protection.
"4.—(1) Where in relation to any policy of assurance an application for protection has been granted under this Act by the company or society with which the policy was effected, and the company or society is satisfied that the owner of the policy is no longer unable by reason of circumstances arising directly or indirectly out of the war to pay the premiums on the policy, it may serve a notice in the prescribed form on the owner of the policy to the effect that his protection will be determined after the expiration of twenty-eight days from the service of the notice, but that an appeal against the notice may be made within the said twenty-eight days by or on behalf of the owner to the Commissioner.
(2) Where an appeal is made in accordance with the notice, the protection shall not be determined pending the decision of the appeal, and if the Commissioner is satisfied that the notice ought not to have been served, he shall revoke the notice.
(3) Where in relation to any policy of assurance an application for protection has been granted under this Act by the Commissioner, the company or society with which the policy was effected may at any time appeal to the Commissioner for the protection to be determined, and if the Commissioner is satisfied that the owner of the policy is no longer unable by reason of circumstances arising directly or indirectly out of the war to pay
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the premiums on the policy, he shall make an order for the determination of the protection.
(4) Where a notice has been served under this section and has not been revoked on appeal, or the Commissioner has made an order determining the protection, subsection (5) of Section two of this Act shall cease to apply as respects any default in the payment of premiums falling due after—

(a) the expiration of the period specified in the notice or the decision of the appeal (if any) against the notice, whichever is the later, or

(b) the date of the order,

as the case may be, but nothing herein shall be taken to prejudice the making of a further application for protection.
(5) Where in relation to any policy of assurance an appeal is made to the Commissioner and granted by him, whether under this section or under any other provision of this Act, the policy shall thereafter be treated for the purposes of this section as a policy in relation to which an application for protection has been granted by the Commissioner and not by the company or society with which the policy was effected."
The noble and learned Viscount said: Clause 4 deals with the position that arises when a policy has been protected with the consent of the company or society without necessarily resorting to the Commissioner. It was felt by the societies or companies concerned that they should be entitled to withdraw protection in cases where they had originally granted protection on the application of the holder of the policy without resort to the Industrial Assurance Commissioner. It is proposed now, in accordance with an undertaking which my right honourable and learned friend gave in another place, at a late stage of the Bill, to remove the existing Clause 4 and substitute the rather longer clause appearing on the Order Paper, which carries out the purpose I have named.
Amendment moved—
Leave out Clause 4, and insert the said new clause.—(The Lord Chancellor.)
On Question, Amendment agreed to.
Clause 5:
Cancellation of forfeiture notices and reinstatement of policies forfeited before passing of the Act.
5.—(1) Where in relation to any policy of assurance to which this Act applies a notice has been served before the passing of this Act under Section twenty-three of the Industrial Assurance Act, 1923, but the policy to which the notice relates has not been forfeited, the notice shall be of no effect.
(2) Where a policy of assurance to which this Act applies has been forfeited on or after the first day of September, nineteen hundred and thirty-nine, and before the passing of this Act, an application may lie made by or on behalf of the owner of the policy, within three months of the passing of this Act, to the company or society with which the policy was effected and, if the company or society is satisfied that the default in respect of which the policy was forfeited was due to circumstances arising directly or indirectly out of the war, it shall reinstate the policy and endorse it, or serve on the owner of the policy a notice, to the effect that it is a policy protected under this Act, and thereupon this Act shall have effect as if it had been in force when the default occurred and an application for protection in respect of the default had been duly made and granted thereunder:
Provided that, if the company or society is satisfied that the owner of the policy is no longer unable by reason of circumstances arising directly or indirectly out of the war to pay the premiums on the policy, it may serve a notice in the prescribed form on the applicant declaring that he will not be protected as respects any default in the payment of future premiums, except as the result of an appeal to the Commissioner or a future application for protection, and thereupon this Act shall have effect as if an order determining the protection had been made under the last foregoing section.
THE LORD CHANCELLOR THE LORD CHANCELLOR moved, in subsection (2), to substitute "applicant" for "owner of the policy," where those words occur for the second time. The noble and learned Viscount said: This is a drafting Amendment to correct a mistake made in another place.
Amendment moved—
Page 5, line 32, leave out ("owner of the policy") and insert ("applicant").—(The Lord Chancellor.)
On Question, Amendment agreed to.
THE LORD CHANCELLOR: The next five Amendments are all consequential on the new Clause 4 which your Lordships have just inserted.
THE LORD CHAIRMAN: With your Lordships' permission I shall put the Amendments en bloc.
Amendments moved—
Page 5, leave out from the beginning of line 38 to the end of the subsection.
Page 6, line 8, leave out from "subsection") to ("it") in line 9.
Page 6, line 10, leave out ("in the case of a refusal").
Page 6, line 13, leave out from ("Commissioner") to the end of line 15.
Page 6, line 24, leave out from("Act") to the end of line 26.—(The Lord Chancellor.)
On Question, Amendments agreed to.
Clause 5, as amended, agreed to.
Clauses 6 to 9 agreed to.
Clause 10:
Interpretation.
10. The following expressions have the meanings hereby respectively assigned to them:—
"Owner" means, in relation to a policy of assurance effected with a registered friendly society other than a collecting society, the person who is for the time being the person entitled to receive the sums payable under the policy on maturity;
THE LORD CHANCELLOR THE LORD CHANCELLOR moved, at the end of the definition of "owner," to insert "and means, in relation to any policy of assurance which has been forfeited, the person who would be so entitled if the policy were still in force." The noble and learned Viscount said: This is the Amendment which I mentioned a few moments ago as making it necessary to leave out the last five lines of Clause 2. This is really a drafting Amendment, and I beg to move.
Amendment moved—
Page 9, line 9, at end insert the said words.—(The Lord Chancellor.)
On Question, Amendment agreed to.
THE LORD CHANCELLOR THE LORD CHANCELLOR moved to add to the clause:
"(2) References in this Act to the forfeiting of a policy of assurance shall, except where the context otherwise requires, be construed, in a case where the policy provides that, on a default in the payment of premiums, the policy shall be converted into free-paid-up policy for a reduced amount, as including references to such a conversion."
The noble and learned Viscount said: This is a purely drafting Amendment which I ask your Lordships to make.
Amendment moved—
Page 9, line 24, at end insert the said new subsection.—(The Lord Chancellor.)
On Question, Amendment agreed to.
Clause 10, as amended, agreed to.
Remaining clauses agreed to.
House adjourned at twenty-four minutes before five o'clock.