V.V.R.N.M. Subbayya Chettiar Vs.
Commissioner of Income-Tax, Madras  INSC 44 (21 December 1950)
FAZAL ALI, SAIYID MUKHERJEA, B.K.
AIYAR, N. CHANDRASEKHARA
CITATION: 1951 AIR 101 1950 SCR 961
CITATOR INFO :
R 1958 SC 779 (6) E&R 1960 SC1147
Indian Income-tax Act (XI of 1922), s. 4A
(b)--Hindu undivided family--Residence--Tests--Occasional visits to India and
attending to family affairs there, effect of--Burden of proof----" Control
and management ", "situated ", "wholly" and
"affairs ", meanings of.
The words used in s. 4A (b) show: (i) that,
normally a Hindu undivided family will be taken to be resident, in the taxable
territories, but such a presumption will not apply if the case can be brought
under the second part of the provision, (ii)the word "affairs" means
affairs which are relevant for the purpose of the Income-tax Act and which have
some relation to income, (iii) the question whether the case falls within the exception
depends on whether the seat of the direction and control of the affairs of the
family is inside or outside British India, and (iv)the onus of proving facts
which would bring his case within the exception which is provided by the latter
part is on the assessee.
The expression "control and
management" in s. 4A (b) of the Income-tax Act signifies the controlling
and directive power, the "head and brain" as it is sometimes
called;" situated" implies the functioning of such power at a particular
place with some degree of permanence; and "wholly" seems to recognise
the possibility of the seat of such power being divided between two distinct
and separate places and that a Hindu undivided family may have more than one
residence in the same way as a corporation may have.
The karta of a Hindu undivided family lived
with his wife and children and carried on business in Ceylon, which had become
their place of domicile. [He owned some immoveable property and had a house and
investments in British India. In the year of account he visited British India
and stayed there for periods amounting in all to 101 days and during his stay
started two firms in British India, personally attended to a litigation
relating to the family lands, and appeared before the Income-tax authorities in
proceedings relating to assessment of the income of the family:
Held, that these facts were not necessarily
conclusive to establish the existence of a centre of control and management of
the affairs of the family in British India, but they were by no means
irrelevant to the matter in issue, and inasmuch as the assessee had not
discharged the onus which lay upon him under the law by producing all the
material evidence which he was called upon to produce to show that normally and
as a matter of 962 course the affairs in India were also being controlled from
Colombo, the normal presumption under the first part of s. 4A (b) must be given
effect to and the assessee must be treated as a resident in British India
during the year in question. It was however open to the assessee to prove in
future years by proper evidence that the seat of eontrol and management of the
affairs of the family was wholly outside British India.
De Beere v. Howe (5 Tax Cas. 198), Swedish
Central Railway Co. Ltd. v. Thompson (9 Tax Cas. 373) referred to.
APPELLATE JURIDICTION: Civil Appeal No.
XXXVIII of 1949.
Appeal from a Judgment of the High Court of
Judicature at Madras (Gentle C.J. and Patanjali Sastri J.) dated August 22,
1947, in a reference under section 66 (1) of the Indian Income-tax Act made by
the Income-tax Appellate Tribunal (Re/. No. 25 of 1946).
K. Rajah Aiyar (K. Srinivasan, with him) for
M.C. Setalvad (G. N..Joshi, with him) for the
1950. December 21. The Judgment of the Court
was delivered by Fazl ALI J.--This is an appeal from a judgment of the High
Court of Judicature at Madras on a reference made to it under section 66 (1) of
the Indian Income tax Act by the Income-tax Appellate Tribunal in connection
with the assessment of the appellant to income-tax for the year 1942-43.
The question of law referred to the High
Court was as follows :-"Whether in the circumstances of the case, the
assessee (a Hindu undivided family) is 'resident' in British India under
section 4A (b) of the Income-tax Act." The circumstances of the case may
be briefly stated as follows. The appellant is the karta of a joint Hindu
family and has been living in Ceylon with his wife, son and three daughters,
and they are stated to be domiciled in that country. He carries on business in
Colombo under the name and style of the General Trading Corporation, and he
owns a house, some immoveable property and investments in British India.
963 He has also shares in two firms situated
at Vijayapuram and Nagapatnam in British India. In the year of account, 194142,
which is the basis of the present assessment, the appellant is said to have
visited British India on seven occasions and the total period of his stay in
British India was 101 days. What he did during this period is summarized in the
judgment of one of the learned Judges of the High Court in these words :-"During
such stays, he personally attended to a litigation relating to the family lands
both in the trial Court and in the Court of appeal. He was also attending the
income-tax proceedings relating to the assessment of the family income,
appearing before the income-tax authorities at Karaikudi and Madras. On one of
these occasions, he obtained an extension of time for payment of the tax after
interviewing the authority concerned...... " The other facts relied upon
by the income-tax authorities were that he did not produce the file of
correspondence with the business in Colombo so as to help them in determining
whether the management and control of the business was situated in Colombo and
he had started two partnership businesses in India on 25th February, 1942, and
remained in India for some time after the commencement of those businesses.
Upon the facts so stated, the Income-tax
Officer and the Assistant Commissioner of Income-tax held that the appellant
was a resident within the meaning of section 4A (b) of the Income-tax Act, and
was therefore liable to be assessed in respect of his foreign income. The
Income-tax Appellate Tribunal however came to a different conclusion and held
that in the circumstances of the case it could not be held that any act of
management or control was exercised by the appellant during his stay in British
India and therefore he was not liable to assessment in respect of his income
outside British India. This view was not accepted by a Bench of the Madras High
Court consisting of the learned Chief Justice and Patanjali Sastri J. They held
that the Tribunal had misdirected itself in determining the 964 question of
the" residence" of the appellant's family and that on the facts
proved the control and management of the affairs of the family cannot be held
to have been wholly situated outside British India, with the result that the
family must be deemed to be resident ,fin British India within the meaning of
section 4A (b) of the Income-tax Act.
In this appeal, the appellant has questioned
the correctness of the High Court's decision :Section 4A (b) runs thus:-"For
the purposes of this Act---A Hindu undivided family, firm or other association
of persons is resident in British India unless the control and management of
its affairs is situated wholly without British India." It will be noticed
that section 4A deals with "residence" in the taxable territories, of
(a)individuals, (b)a Hindu undivided family, firm or other association of
persons, and (c) a company. In each of these cases, certain tests have been
laid down, and the test with which we are concerned is that laid down in
section 4A (b). This provision appears to be based very largely on the rule
which has been applied in England to cases of corporations, in regard to which
the law was stated thus by Lord Loreburn in De Beers Howe(1).
"A company cannot eat or sleep, but it
can keep house and do business. We ought, therefore, to see where it really
keeps house and does business...... The decision of Chief Baron Kelly and Baron
Huddleston in The Calcutta Jute Mills v. Nicholson and The Cessna Sulphur
Company v. Nicholson(2), now' thirty years ago, involved the principle that a
company resides for purposes of income-tax where its real business is carried
on. Those decisions have been acted upon ever since. I regard that as the true
rule, and the real business is carried on where the central management and
control actually abides." It is clear that what is said in section 4A (b)
of the Income-tax Act is what Lord Loreburn intended to (1) 5 Tax Cas. 198. (2)
(1876) 1 Ex. D. 428, 965 convey by the words "where the central management
and control actually abides." The principles which are now
well-established in' England and which will be found to have been very clearly
enunciated in Swedish Central Railway Company Limited v.
Thompson(1), which is one of the' leading
cases on the subject, are :-(1) that the conception of residence in the case of
a fictitious "person ", such as a company, is as artificial as the
company itself, and the locality of the residence can only be determined by
analogy, by asking where is the head and seat and directing power of the
affairs of the company.
What these words mean have been explained by
Patanjali Sastri J. with very great clarity in the following passage where he
deals with the meaning of section 4A (b) of the Income-tax Act :-"Control
and management" signifies, in the present context, the controlling and
directive power, "the head and brain' as it is sometimes called, and
"situated" implies the functioning of such power at a particular
place with some degree of permanence, while "wholly" would seem to
recognize the possibility of the seat of such power being divided between two
distinct and separated places." As a general rule, the control and
management of a business remains in the hand of a person or a group of persons,
and the question to be asked is wherefrom the person or group of persons
controls or directs the business.
(2) Mere activity by the company in a place
does not create residence, with the result that a company may be
"residing" in one place and doing a great deal business in another.
(3) The central management and control of a
company may be divided, and it may keep house and do business m more than one
place, and, if so, it may have more than one residence.
(4) In case of dual residence, it is
necessary to show that the company performs some of the vital organic (1) 9 Tax
Cas 373 966 functions incidental to its existence as such in both the places,
so that in fact there are two centres of 'management It appears to us that
these principles have to be kept in view in properly construing section 4A(b)
of the Act.
The words used in this provision clearly show
firstly, that, normally, a Hindu undivided family will be taken to be resident
in the taxable territories, but such a presumption will not apply if the case
can be brought under the second part of the provision. Secondly, we take it
that the word "affairs" must mean affairs which are relevant for the
purpose of the Income-tax Act and which have some-relation to income. Thirdly,
in order to bring the case under the exception, we have to ask whether the seat
of the direction and control of the affairs of the family is inside or outside
British India. Lastly, the word "wholly" suggests that a Hindu
undivided family may have more than One "residence" in the same way
as a corporation may have.
The question which now arises is what is the
result of the application of these principles to this case, and whether it can
be held that the central control and management of the affairs of the
assessee's family has been shown to be divided in this case.
It seems to us that the mere fact that the
assessee has a house at Kanadukathan, where his mother lives, cannot constitute
that place the seat of control and management of the affairs of the family. Nor
are we inclined in the circumstances of the present case to attach much
importance to the fact that the assessee had to stay in British India for 101
days in a particular year. He was undoubtedly interested in the litigation with
regard to his family property as well as in the income-tax proceedings, and by
merely coming out to India to take part in them, he cannot be said to have
shifted the seat of management and control of the affairs of his family, or to
have started a second centre for such control and management. The same remark
must apply to the starting of two partnership businesses, as mere"
activity" cannot be the test of residence.
967 It seems to us that the learned Judges of
the High Court have taken rather a narrow view of the meaning of section 4A(b),
because they seem to have proceeded on the assumption that merely because the
assessee, attended to some of the affairs of his family during his visit t.o
British India in the particular year, he brought to himself within the ambit of
the rule. On the other hand. it seems to us that the more correct approach to
the case was made by the Appellate Assistant Commissioner of Income-tax in the
following passage which occurs in his order dated the 24th February, 1944 :-"During
a major portion of the accounting period (year ending 12th April, 1942) the
appellant was controlling the businesses in Burma and Saigon and there is no
evidence that such control was exercised only from Colombo. No correspondence
or other evidence was produced which would show that any instructions were
issued from Colombo as regards the management of the affairs in British India
especially as it was an unauthorized clerk who was looking after such affairs.
The presumption therefore is that whenever he came to British India the
appellant was looking after these affairs himself and exercising control by
issuing instructions............... It has been admitted that there are affairs
of the family in British India. Has it been definitely established in this case
that the control and management of such affairs has been only in Colombo ? I
have to hold it has not been established for the reasons already stated by
me." There can be no doubt that the onus of proving facts which would
bring his case within the exception, which is provided by the latter part of
section 4A(b), was on the assessee. The appellant was called upon to adduce
evidence to show that the control and management of the affairs of the family
was situated wholly outside the taxable territories, but the correspondence to
which the Assistant Commissioner of Income-tax refers and other material
evidence which might have shown that normally and as a matter of course the
affairs in India were also being controlled from Colombo were not produced. The
position therefore is this.
On the one 968 hand, we have the fact that
the head and karta of the assessee's family who controls and manages its
affairs permanently lives in Colombo and the family is domiciled in Ceylon.
On the other hand, we have certain acts done
by the karta himself in British India, which, though not conclusive by
themselves to establish the existence of more than one centre of control for
the ' affairs of the family, are by' no means irrelevant to the matter in issue
and therefore cannot be completely ruled out of consideration in determining
it. In these circumstances, and in the absence of the material evidence to
which reference has been made, the finding of the Assistant Commissioner, that
the onus of proving such facts as would bring his case within the exception had
not been discharged by the assessee and the normal presumption must be given
effect to, appears to us to be a legitimate conclusion. In this view, the
appeal must be dismissed with costs, but we should like to observe that as this
case has to be decided mainly with reference to the question of onus of proof,
the decision in this appeal must be confined to the year of assessment to which
this case relates, and it would be open to the appellant to show in future
years by proper evidence that the seat of control and management of the affairs
of the family is wholly outside British India.
MUKHERJEA J.--I agree with my learned
brother, Fazl Ali J., both in his reasoning and in his conclusion.
CHANDRASEKHARA AIYAR J. I concur in the
judgment of my learned brother, Fazl Ali J.
Agent for the appellant: M.S.K. Sastri.
Agent for the respondent: P.A. Mehta.