Commissioner of Income-Tax/ Excess
Profits Tax, Bombay City Vs. Messrs. Bhogilal Laherch [1953] INSC 90 (18
December 1953)
CHAND MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN
HASAN, GHULAM JAGANNADHADAS, B.
CITATION: 1954 AIR 155 1953 SCR 444
ACT:
Indian Income-tax Act (Xlof 1922), s.
42(1)-Scope of.
HEADNOTE:
A Hindu undivided family was carrying on
business in Bombay, Madras and the Mysore, being treated as a single assessee
and its relevant accounting period was 10th October, 1941, to 8th November,
1942. During this period, the Mysore branch purchased goods from the Bombay
head office and the Madras branch of the value of Rs' 2 lakhs odd. The In tax
'Officer estimated these purchases of the Mysore in British India at Its. 3
lakhs and its profits at Rs 75,000 on the sale of these goods in Mysore. In
view of the provisions of s. 42 of the Indian Income-tax Act, half of this
profit, i.e., to the extent of Rs. 37,500, was deemed to accrue or arise in
British India because of the business connection of the L non-resident branch
in British India:
Held, that, on the facts and circumstances of
the case, the Income-tax Officer was right in applying the provisions of s. 42
1 of the Income-tax Act and holding that Rs. 37,500 were deemed to accrue in
British India and in including in the assessment a portion thereof.
Held also, that s. 42 sub-ss. (1) and (3),
cover Cases of both residents as well as non-residents.
Commissioner of Income-tax v. 'Western India
Life Insurance Co. [1945] (13 I.T.R. 405) dissented from. Sutlej Cotton Mills
Ltd. V.-Commissioner of Income-tax, West Bengal (A.I.R. 1950 Cal. 551),
Commissioner of Income-tax/Excess Profits Tax, Madras v. Parasuram Jethanand
(A.I.R 1950,Mad. 631), Commissioner of Income-tax. Bombay V. Ahmedbhai Umarbhai
& Co. ([1950] S.C.R. 335), referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 160 of 1950.
Appeal against the judgment and Decree dated
the 30th March, 1951, of the High Court of judicature at Bombay (Chagla C. J.
and Tendolkar J.) in Income Tax Reference No. 34 of 1950.
C. K. Daphtary, Solicitor-General for India,
(Porus A. Mehta, with him) for the appellant.
R. J. Kolah for the respondent.
1953. December 18. The judgment of the Court
,was delivered by MAHAJAN J.-This is an appeal from the Judgment of the High
Court of Judicature at Bombay delivered on a reference under section 66 (1) of
the Indian Income-tax Act, 1922, whereby the High Court answered the first
referred question in the negative.
The assessment in question concerns the year
194344. A Hindu undivided family was carrying on business in Bombay., Madras
and the Mysore State. Its business was taken over by a registered firm on 17th
March, 1942. For the purpose of this appeal however this circumstance is not material.
The case has been dealt with on the assumption that a single assessee carried
on, business from 10th October, 1941 to 8th November, 1942, the relevant
accounting year. According to the accounts of the assessee, during this period
the Mysore branch purchased goods from the Bombay head office and the Madras
Branch of the value of Rs. 2,45,455. The Income-tax officer estimated these
purchases of the Mysore branch in British India at Rs. 3,00,000 and its profits
at Rs. 75,000 on the sale of these goods in Mysore. In view of the provisions
of section 42 of the Act, half of this profit, i.e., to the extent of Rs.
37,000, was deemed to accrue or arise in British India, because of the business
connection of the non-resident, branch in British India.
It was contended that the assessee being a
person resident in India, section 42 could not be invoked in the case, because
that section had-application only to 446 cases of non-residents. The Income-tax
Tribunal following the decision of the Bombay High Court, in Commissioner of
Income-tax 'V. Western ,India Life, Insurance Co. Ltd.(1), upheld this
contention, 'and ruled that no part of the Mysore profit could be taxed in
British India. At the instance of the Commissioner of Income-tax/Excess Profits
Tax, Bombay City, three questions were referred to the High Court under section
66 (1), the first of these being "Whether in the circumstances of the case
can the profits on the sale of goods in the Mysore State be deemed to accrue or
arise in British -India under' section 42 (1) of the Indian Income-tax
Act"The High Court returned an answer to the question' in the negative
after resettling it in these terms :"Whether on the facts and in the
circumstances of the case the Income-tax Officer was right in applying the provisions
of section 42 (1) of the Income-tax Act, and holding that Rs. 37,500 were
profits deemed to accrue in British India and in including in the assessment a
portion thereof." This appeal is before us on a certificate granted by the
High Court, and the only question canvassed here is whether section 42 (1) of
the Indian Income-tax Act has application to the case of a resident assesses or
whether its scope is limited to a non-resident assessee alone.
It is common ground that if section 42 of the
Act has no application to the case of a resident assessee, the whole of the
Mysore profit, namely Rs. 75,000, cannot -be included in the assessment of the
year 1943-44. On the other hand, if such an assessee is within the ambit of the
section, in that event the sum of Rs. 37,000 or any part of it would be liable
to assessment during the assessment year in question.
Section 42 of the Act is in these terms:
"(1) All income, profits or gains
accruing or arising, whether directly or indirectly, through or from any business
connection in the taxable territories' (1) [1945]13I.T.R.465.
447 or through or -from any money lent at
interest and brought into the taxable territories in cash or in kind or through
or from the sale, exchange or transfer of a capital asset in the taxable
territories, shall be chargeable to income-tax either in his name or in the
name of his agent, and in the latter case such agent shall be deemed to be, for
all the purposes of this Act, the assessee in respect of such income-tax :
Provided that where the person entitled to
the income, profits or gains is not residentin the taxable territories, the
income-tax so chargeable may be recovered by deduction under any of the
provisions of section 18 and that any arrears of tax may be recovered also in
accordance with the provisions of this Act from any assets of the nonresident
person which are, or may at any time come within the taxable territories
Provided further that any such agent, or any person who apprehends that he may
be assessed as such an agent, may retain out of any money payable by him to
such non-resident person a sum equal to his estimated liability under this
sub-section, and in the event of any disagreement between the non-resident
person and, such agent or person as to the amount to be so retained, such agent
or person may secure from the Income-tax Officer a certificate stating the
amount to be so retained pending final settlement of the liability, and the
certificate so obtained shall be his warrant for retaining that amount Provided
further that the amount recoverable from such agent or person at the time of
final settlement shall not exceed the amount specified in such certificate
except to the extent to which such agent or person may at such time have in his
hands additional assets of such non-resident person.
(2) Where a person not resident or not
ordinarily resident in the taxable territories carries on business ,with a
person resident in the taxable territories, and it appears to the Income-tax
Officer, that owing to the close connection between such persons the course 448
of business is so arranged that the business done by the resident person with
the person not resident or not ordinarily resident produces to the resident
either no profits or less than the ordinary profits which might be expected to
arise in that business, the profits derived there from or which may reasonably
be deemed to have been derived there from, shall I* chargeable to income-tax in
the name of the resident person who shall be deemed to be, for all the purposes
of this Act, the assessee in respect of such income-tax.
(3) In the case of a business of which all
the operations are not carried out in the taxable territories the profits and
gain's of the business deemed under this section to accrue or arise in the
taxable territories shall be only such; profits and gains as are reasonably
attributable to that part of the, operations carried out in the taxable
territories." Before its amendment in the year 1939 the first part of the
section tin thus:
"42(1). In the of any person residing
out of British India, all profits or gains accruing or arising to such person,
whether directly or indirectly, through or from any business connection or
property in British India, shall be deemed to be income accruing or arising
within British India, and shall be chargeable to income-tax in the name of the
agent of any such person, and such agent shall, be deemed to be, for all the
purposes of this Act, the assessee in respect of such income-tax:" The
rest of the section was substantially in the same terms. Inspite of its
amendment in 1939 the marginal note to the section continued to refer to
"non-resident" as before, though the words 'residing out of British
India" were deleted from the body of subsection (1). The retention of this
marginal note gave rise to conflicting decisions on the question whether the
section, in spite of the change made in its language in 1939 still continued to
have application to cases of " non-residents" alone. In order to
clarify this matter, by Act XXII, of 1947, the marginal note was amended and it
now is in these terms:449 "Income deemed to accrue or arise within British
India." It is significant that the changes made in section 42 in the year
1939 were consequential to the entire recasting of section 4 of 'the Act.,
Section 4 as it stood prior to 1939 charged income-tax on all income, profits
or gains, from whatever source derived, accruing or arising or received in
British India or deemed under the provisions of the Act to' accrue, or arise,
or' to be received in British India. It further' provided that the" income
profits and gains accruing or arising , without British India to a person
resident in British,' India, shall, 'if they are received in or brought into
British India, be' deemed to have accrued or arisen in British India and to be
income, profits and gains, of the year in which they are so received or
brought, not withstanding the fact that they did not so, accrue or arise in
that year. By the amendment in the year 1939, the total income of any previous'
year of any person was defined as including 'all income, Profits and gains from
whatever source derived which a) are received or are deemed to be received in
British(a) India in such year by or on behalf of such person, or (b) if such
person is resident in British India during such year,(1) accrue or arise or are
deemed to accrue or arise to him in British India during such year; or (ii)
accrue or arise to him without British India during such year ; or............
(c) if such person is not resident in British
India during such year, accrue or arise or are deemed to accrue or arise to him
in British India during such year;......" This legislative change in the
Act made all income accruing or arising or deemed to accrue or arise in British
India during the previous year to a resident the subject of a charge, apart
from income accruing or arisingwithout British India during the previous year.
450 The term "deemed" brings within
the net of chargeability income not actually accruing but which is supposed
notionally to have accrued. It involves a number of concepts. By, statutory
fiction income which can in no sense be said to accrue at all may be considered
as so accruing. Similarly, the fiction may relate to the place, the person or be
in respect of the year of taxability.
Section 42(1) defines what income is deemed
to accrue within the taxable territories. It is only by application of this
definition that one class of income "deemed to accrue to a resident within
taxable territories" within the meaning of section 4(1) (b) () can be
estimated. The words "In the case of any person residing out of British
India" were deleted from section 42(1) during the pendency of the
amendment. Bill of 1939 in the Council of State presumably with the object of
making the section applicable to any person who had any income which in a
primary sense arose in British India, even though technically it had arisen
abroad, irrespective of the circumstance whether that person was resident,
ordinarily resident or not ordinarily resident.
By section 8 of Act XXIII of 1941, clause (c)
was added to section 14 of the Act. No effect was to be given to this amendment
before the year ending 31st March, 1943. The relevant part of section 14, after
this amendment is in these terms:"The tax shall not be payable by an
assessee in respect of any income, profits or gains accruing or arising to him
within, a Part B State, unless such income, profits or gains are received or
deemed to be received in or are brought into the taxable territories in the
previous year by or on behalf of the assessee, or are assessable under section
12-B or section 42." In view of these legislative changes in the
provisions of sections 4, 14 and 42 of the Act, the conclusion is irresistible
that the object of recasting section 41(1) in general terms was to make the
definition of "deemed income" given in the section generally
applicable to all classes of assessees. This sub-section has been drafted in
the widest terms and there is nothing whatsoever in 451 its language residents
only. Wherever the legislature intended to limit the operation of any part of
this section to non-residents alone, it said so in express terms. Subsection
(2) and the latter portion of sub-section (1) expressly concern themselves with
the case of nonresidents, while sub-sections (1) and (3) are so framed that
they cover both residents and non-residents.
A Bench of the Bombay High Court in
Commissioner ,,of Income-tax v. Western India Life Insurance Co.(1), held that
notwithstanding its amendment in 1939 the section applied only to
non-residents. Reliance was placed, inter alia, on the circumstance that the
marginal note appended to the section indicating that it applied to
non-residents alone, had not been deleted. To avoid this criticism and to
remove doubts the legislature by Act XXII of 1947 changed the marginal note
also.
It seems to us that any other construction of
the section would create an anomaly, inasmuch as the Part B State income
failing under section 42 would not be assessable in the hands of a resident,
but it would be assessable in the, hands of a non-resident, because the
Income-tax Act while it ropes in world income of a resident, exempts income
accruing within the Part B States from its ambit except when such income is
received or is brought into taxable territory or comes within the ambit of
section 42. Such a construction would be contrary to the policy of the Act.
It is unnecessary to dwell on, this point at
any great length in view of the circumstance that the decision in 'Commissioner
of Income-tax v. Western India Life Insurance Co.(1), has been dissented from
and for good reasons, in subsequent cases.
In Sutlej Cotton Mills Ltd. v. Commissioner
of Incometax, West Bengal(2 ) a Bench of the Calcutta, High Court considered
this matter at some length and reached the ,decision that sub-sections (1) and
(3) of section 42 ,covered cases of both residents as well as non-residents.
The same view was taken by a Bench of the
Madras High Court in Commissioner of Income-tax/Excess (1) [1945]13 I.T.R.405.
(2) A.I.R. 1950 Cal. 551.
452 Profits Tax, Madras,v,. Parasuram
Jethanand (1). Again the matter was -discussed in this court in Commissioner of
Income-tax, Bombay v. Ahmedbhai Umarbhai & Co.(2) by, Patanjali Sastri J.,
as he then was, and also by Mukherjea J. in the same case. This is what
Patanjali Sastri J. said on this point:"It is noteworthy that the first
part of sub-section (1) of section 42 providing that certain classes of'
income,, are to be deemed accrue or arise in British India is not confined in
its application to nonresidents, but is in general terms so as to be applicable
to both residents and non-residents. Before its amendment in 1939 the
subsection began with the words 'in the case of any person residing out of
British India' which obviously restricted the application of the provision to
non-resident person but in its amended form the sub-section has been recast
into two distinctparts, the first of which is not so restricted, and the second
part alone, which begins with the words 'and, where the person entitled to the
income profits and gains is not resident in British India, is made applicable
'to nonresident persons, thereby showing that the former part applies to both
residents and non-residents. The opening words of the first proviso also point
to the same conclusion, for these words would be surplusage if the subsection
as a whole applied only to non-residents. A contrary view has, no doubt, been
expressed by a Division Bench of the Bombay High Court, in Commissioner of
Incometax v. Western India Life Insurance Co. Ltd.(3). Though reference was
made in that case to the alteration in the structure of subsection (1) its
significance, as it seems to me, was not properly appreciated. The facts that
the marginal note to the whole section refers to 'non-reside' and that the
section itself finds a place in Chapter IV headed 'Liability in special cases'
were relied upon as supporting the view that sub-sections (1) as a whole
applies only to non-residents. As pointed out 'by the Privy Council in Balraj
Kunwar v. Jagatpal Singh(4), marginal notes in an Indian statute, as in an (1)
A.I.R. 1950 Mad. 631.
(2) [1950] S.C.R. 335.
(3) [1945] 13 I.T.R. 405.
(4) 26 All. 393, 406.
453 Act of Parliament, cannot be referred to
for the purpose, of construing the statute, and it may be mentioned in this
connection that the, marginal note relied on has since been replaced by the
words 'Income deemed to accrue ;or arise within', British India which makes it
clear that the 'main object, of sub-section (1) was to define that expression
(see section 12 (a) of Act XXII Of 1947). Nor can the title of a chapter be
legitimately used to restrict the plain terms of an enactment." The same
view was expressed by Mukherjea J. ,Nothing that has been said by Mr. Kolah
before us justifies reconsideration of these opinions.
Mr. Kolah argued that when the world income
of a resident was, brought within the net of chargeability by section 4 in 1939
it was then wholly unnecessary to include such an assessee in the ambit of
section 42. In our judgment, this contention is fallacious. Whatever income
arises in a primary sense to a resident in taxable territories is chargeable
under section 4 (1) (b) (1). Hence it was necessary to make section 42
applicable to such a case.
Whatever other consideration may arise in
estimating the foreign income -of a resident will not be applicable to income
deemed to accrue within taxable territory. Moreover, as above pointed out, in
view of the provisions of section 14 (c) resident assessees but for section
42(1) would not be liable to assessment regarding income accruing to them in
Part B States, even if there is a business connection in taxable territory. Mr.
Kolah was unable to suggest any reasonable explanation for the deletion of the
words "any person residing out of British India" from section 42(1)
as it stood before 1930. The Only purpose in deleting these words could be to
bring residents within the a ambit of the section. There is no reason whatsoever
for not giving to the plain words of the section the meaning that on the face
of it they bear.
For the reasons given above we are of the
that the answer by the High of Bombay to the first question referred to it was
wrong. We therefore allow this appeal with costs and answer 7-93 S.C.India/59
454 this question referred to the High Court in the affirmative.
Appeal allowed.
Agent for the appellant: G. H. Rajadhyaksha.
Agent for the respondent: Rajinder Narain.
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