P. v. Raghava Reddi and Another v. Commissioner of Income-tax

HlDAYATl:LLAH J.-The appellant is a firm at Gudur (Andhra Pradesh), which was doing business in Mica under the name and style of tho Continental Export and Import Company. During the yea.rs of account, 1948-49 and 1949-50 (corrlll!ponding to the assPssment years, 19'19-50 and 1050-51 ), the aBl!Ot'BCC firm exported Mica to Japan. Mica was not directly exportable to Japanese huyers during these years, as Japan was under mili­ tary occupation, but to a State Organisation called fuki·Cho (Board of Trade). To negotiate for order and to handle its other affairs in Japan in connec­ tion therewith, the aesesseo firm engaged San­ Ei Trading Co. Ltd., Tokyo, as its agents. The Japanese Company was ~dmittedly a 'non·resident' Company. Two agreements were entered into by the assessee firm and the Japanese Company, the first for the quarter, July to September 1948, during which period a commis.~ion of 4 per cent on the gross sale proceeds was payable to the Japanese Company, and tho second, for an indefinite period, with the commission reduced to 2 per cent. During the years of account the amount com· mission Jue to thl' Japanese Company 11·us respec- . J n "' ''"' Ii ) I J.>o 11 •)-.)_8 ° Tl1c0 n tive y 1"8. _h,-..,.,.:· - a11~ \i" • • ,-'- -o. .::n. amounts(i.ucluJcJ Ill the prwc of .\Ilea expurtoJ)wcro received by tho a8sessoe firm iu Imliu, but due to 2 s.c.R. SUPREME COURT REPORTS 599 the restrictions imposed by the Exchange Control laws, they oould not be sent to the Japanese Company. The agreements between the assessee firm and the Japanese Company, therefore, provided for this contingency by the inclusion of the follow­ ing term: "In view of the difficulties in this oountry it is requested that the first party credits all these amounts to the account of the second party with them without remitting the same until definite instructions are received by the first party." During the two account years, a total amount of Ra.13,319-12-4 was paid to the Japanese Company either directly or through others, to whom the assessee firm was instructed by the Japanese Com­ pany to pay the amount. The Income-tax authorities treated the aasessee firm as the 'statutory agent' of the Japanese Company, and as868sed tax on the two amounts in the respective years of assessment. The order of the Income-tax Officer was oonfirmed on appeal; but the Tribunal set aside the order on the ground that the income to the Japanese Company had accrued or arisen in Japan and could not be said to have been received by the Japanese Company in the taxable territories, since a. 4(l)(a) was subordinate to s. 4(l}(c). The Tribu­ nal thus concluded : "The referrence in section 4( 1 )(a) to income 'received in India' can, in our opinion, refer only to the situation more specifically provided for in section 4(l)(b) as 11ub·section(a) provides a genera.I cover for both the imme­ diately following eub-l!OOtions (b) and (c). Section 4( I)( a) cannot therefore by it.self add a new liability to non-residents the extent of which is clearly delimited under section 4(1) ( o) of the Act "to only incomes that accrue to them within the taxable territories. To read J961 --P. V. Bah•• R.afl v. Oommiasiunerof lncomr~ Hidtualullalo J. 1162 P. Y. Rqliara R1dJ i v. c ..... tuio111r of /~-lo Hid .,.iull ah J. Goo SUPREME OOURT REPORTS [1002) SUPP. any further in section 4(l)(a) will totally nullify the effects of section 4 (I ) ( (·). Income that has accrued 011(·!' abroad cannot by any means accrue again in fndia. If euch income iB later rl'mitt.-d to In1lia and receiv<'d by or on bclialf of :<tu·h 11ou­ residents in India suoh sub.icq1H·11t. recei1•t cannot be chargeable under tlw Act." The &l!lleSllmont was. theroforo, or<1"rnd to lw ean­ t,>elled. The CommisRioner of Incomrdax, It •wev•:r, obtained a reference to tho High Court (lf ~fadra.8 on tho question : "Whether tho afuresaid sum of H~. :!(),:!i);°).l).fl and Rs. ll,::!72-0-0 being selling commio· sic;n credited to tho aforl·said 11011-rc:<iuent company's account in the Books of the aesessee are chargeable in the hands of tho asaeseee under s. 4 (l)(a) for the asscssmc11t years 1949-50 and 1950-51 ?" The High Court answtired the question ,i.,a.i11>t the aslle88ee firm. The High Court observed th~t 1 hl: learned Advocate for the assesseo firm "conft•sscd his inability to support the decision of the tribunal on the grounds on which it rests". The High Court further obtrerved that the answer to the qul"8tio11 did nut "admit of any doubt or difficulty". The High Court, however, granted n el·rtifirute, uud these appeals have bticn filed. In our opinion, the High court was right in the auswer it gave tu the question, for reasons which we sh1ill persently indicate. Under s. 42, all income, profits 01· gains accru­ ing or a.rising, whether directly, or indirectly through or from any business connection in the taxable terri­ tories are deemed to be income accruing or arising within tho taxable territories, nm! if the person entitled to the income, profit<! or gain8 is nut resident in the taxable territorie~, it io charg1·able tn income-tax either in his namo ur in the name ol his 2 s.C.R. SUPREME COURT HEPORTS 601 agent, and in the latter case, such ag<'nt is deemed to be; for all the pnrposos of the Act, the asscssoc> in respect of such income-tax. Tho provisos to the ~ection enable tho application of s. 18, and t.he tax may be recovered by deduction under tint section and the agent or any person who appre­ hends that he may be asses8ed as sud1 an agent is also enab!t•d to retain out of the money payable to tho 11011-residont person u. sum equal to his estimated liability. The section thu~ creates a vicarious liability, in so for as th" rig< 0 nt is con­ cerned, for the tax which the non-resident hris to pay : but as a safeguard for him, he is <·nabletl to retain from tho money ho has to pay, a sum cquril to his own liability in the event of his being treated as tho assessee. Section 43 lays down who can be deemed to be an ag(\nt, and it is provided that any person having any business conm·ction with a non­ resident person or through whom the non-resident is in receipt of any income, profits or gains id to b<' deemed to be such an agent, if lho Income-tax Officer has caused a notice to be served of his intention of treating him as the agent of the non­ resident person. Such persons are ·conveniently described as "statutory agents." In the present case, there is no doubt that the asscssee firm must be treated as a statutory agent. In Turner 1lforrison &: Co. Ltd. v. Com1nissirmer of lncome-t<iX ('), this Court held that a person who is not an agent of the non-resident person can be appointed an agent for the purposes of s. 43, pro· vided there subsists a 'business connection' between him and the non-resident person. It was also held that such agent was vicariously liable for-the tax on income described in ss.40 and 4:.l. There can be no question in this ca.so that a 'business connection' subsisted during the yea.rs in question, and the appalla.nt firm could be treated as an assessee for purposes of s. 42. What was contended was that (1) [1953] 23 l,T.R. 152. 196'!, L"' V. llaghal'a /lP1l•i •• Co1nmis~irm<~r of /ncomt~iav l/ida;·atu/l11h .J. 196! B, V. B.,A ... &dii v. c.-iuio7111' q/ lflCOJJk'·(QX H~/aJiJ. the view of the Tribunal of s. 4( I) is the right view of the la.w. Section 4(1), prior to its amendment in 1950 by the Adaptation ef La.we Order, 1950, rea.d : ''4. (I) Subject to the provisions of this Act, the tots.I income of &ny previous year of any pel'l!On includes a.I! income, profits a.nd gs.ins from w.ba.tever source derived which- ( a.) a.re received or are deen:ed to be reoei· ved in Britiah India. in such year by or on behalf of such person, or (b) if such person, is resident in British India. during sur.h year,- ( i) a.cc rue or a.rise or are deemed to 11.ccrue arise to him in British India. during such yea.r, or (ii) a.corue or a.rise to him without British India. during such year, or (iii) ha. ving accrued or a.risen to him without British India. before the beginning of such.year a.nd after the let day of Ailril, 1933, are brought into or received in British India. by him during euch yea.r, or (c) if such person is not resident in British India. during such yea.r, aocrue or a.rise or a.re deemed to a.ooure or arise to him in British India. duriIJ!( such year:" The oontention ii that this income cannot be deemed to be received in the taxable. territoriea (then British India.) in the years of account. It is urged tha.t the. Japanese Company did not ac:tua.l· ly re-0eive it in British India., a.nd that there was only a. relation of debtor and creditor between the a.seessce firm a.nd the Ja.pa.nese Company. Till the money was actually paid over to the Japanese 2 S.C.R. SUPREME COURT REPORTS 603 Company, a mere entry in the account books of the firm was not a receipt by the Japanese Com­ pany, and a mere l'lntry of an item in the account books has not been deemed to be a receipt by any provision of the Act, which, it is said, always states clearly when a fiction is to be applied. It is also argued that cl. (a) of s. 4(1) is delimited by ol.(c). Clauses (a) and (cl of s.4(1) are not interdep­ endent. In Turner MorriB<Yn'B case ('), it was observed by this Court that, "the whole object of that section (s.42) is to make certain income, profits and gains to be deemed to arise in India. so as to bring them to charge. The receipt of income, proJits and gains being one of the tests of liability, where the income, profits and gains are actually received in India it is no longer necessary for the revenue authorities to have recourse to the fiction;" After referring· to certain authorities in which this was so held, this Court pointed out : "Section 4( 1 )(a) in terms is, unlike Sec­ tion 4(l)(b) or 4 (l)(c), not confined in its application, to any particular category of a.ssessees. Section 4 ( l )(a) is general and applies to a resident or a non-resident person." It was rightly pointed out by the High Court in judgment under appeal that ; "Actual or deemed receipt, of income in the taxable territories by or on behalf of non­ residents attracts tax under section 4(1) (a) even though the income may not be charge­ able under section 4(l)(c) by reason of its having aoorued or arisen outaide. Receipt of income within the taxable territories by its~lf attracts tax whether the recipient is a resident or non-resident and whether the income \II [1953] '3 I.T.R. 152. 11152 P. V. Rag/ma RedJ/J • Commissiontr of lncomt•tax Hid41atollah J, '"' l'. JI. R•tMflO lit"1; V,· Co.w;»io11er d 1 .... 1,,\ accrued or a.rose within tho taxable territoric~ or outside. So much is plain on the language of section 4(1)(a.) and (c)." In our opinion, clauses (a) and (c) of s.4( I) can bo road diejunctivcly, and cl.(a), which provides for receipt of income, profits and gains in the taxable territories cannot ho subjected to the limitation that tho income must also accrue or arise iu the taxable territories. To make cl.(<L) depend on cl. c is to make the "accrual" the test, while cl. (a) only conside~·receipt in the taxable territories sufficient. The .clauses are capable of being road independcnt'fj', though, sometimes, they may operate together. Thie leaves over the question which wa.q car· uetltly argued, namely, whether the amounts in the two account years can be said to be reooi vccl by the Japanese Company in the taxable territoriC's. 'Die argument is that the money was not act.ually received, but the a.sseaseo firm was a debtor in respect of that amount and unless the entry can be deemed to be a payment or reooipt cl. (a) can­ not apply. We need not consider the fiction, for it is not neoell88.ry to go to the fiction at all. The agreement, from which we have quoted the relevant term, provided that the Japanese Company desired that thl' &111e88Ce firm should open an account in the name of the Japanese Company in iheir books of account, credit the amounts in that account, and deal with those amounts according to the instructions of the Japanese Company. Till the money was so credited, there might be a. relation of debtor and creditor ; but after the a.mounts were credited, the money was held by the &e!le88ee firm as a. depositee. The money then belonged to the Ja.pn.neee Company and was held for and on beht\lf of the Company and was at its <lisposa.l. The char· acter of the money ch1mged from a debt to a deposit in such the samo wa.y as if it was credited 2 s.c.R. SUPREME COURT REPORTS 605 J9t2 in a Bank to the account of the Company. Thus, the amount mnst he held, on the terms of the aO'reement, to have been received by the Japanese C;mpany, and this attrncts the application of s.(4)(l)(a). Indeed, the Japanese Company did <li;poses of a part of those arnrmnts by instructing the assessee firm that they be applied in a particular way. Jn our opinion, the High Court was right in answering the question against the assessee. P. V. Rathava Rttldi v. The appeals fail, an<l 11.re dismissed with costs, one hearing foe. Appeal dismi88ed. COMMTSSIO';ER OF INCOME.TAX KER.ALA v. 'TELEN RUBBER INDUSTRIES LTD . . srxHA, c .. r., J. L. KAruR, M. HmAvATULLAH, .J.C. SHAH and J. R. MunHOLKAR, JJ.) Incon1e Tax-Lo.<J~ incurred in Travancore Stat£ in 1946- ·if!JJlication of India la•o,9 to tl1f' /.._'Jtate-Asse-9.r;ee, if entitled to rarry Joru·ard the fnss to six ~1ears once the rigf,,t lapsed under 1';fafe lau)~~-'l'ravanrore l11cnrne-tax .. Act, I 121 M.FJ. (Travancore XX!lf of 1121 M. fi:.) .<. 32-India1' lnrome-tax Act, 1922 (11 of 1922), s. 21-ludinn Finance Art, J.?50 (2•j of 1950), •· 12-Taxntion lntr-< (Part B St,.le-<) (RemomI nf D(fjicultie") Ord<>r, 1950, para 3. The respondent company was incorporated in the former State of Travancore. The dispute was ahout the right of the respondent assessee company to c3rry for\vard the loss of the years 1946 under the provisions of the Travancore Act read with s. 24 (2) of the Indian Income-tax Act and the Taxation laws (Part B States)(Rcmoval of Difficulties) Order, 19:10, to the assessment year 1951-52 in the assessme"nt of the company for its year of account. The Income-tax Officer held that the loss of the year 1946 could not be carried for­ \vard to that year, since it had lapsed after two years under s. 32 of the Travancore Act ands. 24 (2) was not applicable, in dew 6f para 3 of the order. Held, that the Taxation laws (Part B State) (Removal of Difficulties) Order, 1950, passed under s. 12 of the Indian Commissioner of lruome-tax Hid ryatuilah J. 1962 J anum:Y Ili.