Keshav Mills Ltd. Vs. Commissioner of
Income-Tax, Bombay [1953] INSC 6 (30 January 1953)
BHAGWATI, NATWARLAL H.
MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN BOSE,
VIVIAN
CITATION: 1953 AIR 187 1953 SCR 950
CITATOR INFO :
E&D 1959 SC 82 (8) F 1959 SC1165 (11) D
1961 SC 921 (9,11,20,21) R 1964 SC1766 (10) R 1965 SC1636 (7) R 1965 SC1862
(28) RF 1966 SC 870 (5) RF 1977 SC1802 (14)
ACT:
Indian Income-tax Act (XI of 1922), ss. 4 (1)
(a) and (c), 13 Non-resident-Accounts in mercantile system-Sale of goods in
British India through agents-Assessability of profits derived from such
sale-Provision of law applicable to such cases-Income-tax authorities, whether
bound to compute income according to mercantile system-Applicablity of s.13 to
non-residents.
HEADNOTE:
A non-resident company manufactured textile
goods at P outside British India and sold the goods ex-mills. A firm, R &
Co., guaranteed the sale-price of goods sold ex-mills by the company to
purchasers at Ahmedabad within British India. As the company maintained its
accounts according to the mercantile system, the company debited R & Co.,
with the price of goods sold and credited the sales account with the amount of
the bills. R & Co., collected the amounts of the bills from the purchasers
on behalf of the company and credited the sums realised in the company's
account with banks at Ahmedabad and also disbursed them to creditors of the
company in British India. These payments were credited by the company to R
& Co. During the relevant accounting year the company thus received Rs.
12,68,480. The company also received Rs. 4,40,878 from sales to purchasers in
British India. The amount of the sales bills for which hundis were drawn on the
purchasers in favour of banks were debited by the company to the accounts of
the respective merchants and credited to the sales account and the sums
received by the banks from the purchasers against delivery of the railway
receipts were credited by the company to the accounts of the respective purchasers.
In either case there was no change in the relationship of vendor and purchaser
between the company and the purchasers by reason of the entries made in the
company's books. The question as reframed by the High Court was whether these
two sums were sale proceeds of the goods sold by the assesses to merchants in
British India and whether they were received in British India and could be
included in the assessable income of the company in British India:
Held, per Mehr Chand Mahajan, S. B. Das and
Bhagwati J.J., (Vivian Bose J. dissenting) that the two amounts in question
were sale proceeds of the goods sold and delivered by the company to merchants
in British India ; that they were neither received by the company nor could be
deemed to have been received by it when the entries were made in the books of
account at P but had 951 merely accrued or arisen to it there; that they were
first received by R & Co. and by the banks through whom the railway
receipts were negotiated on behalf of the company in British India; and that
they were therefore liable to tax under s. 4(l) (a) of the Indian Income-tax
Act as having been received in British India on its behalf.
Though it is true that in the case of
residents, if the assessee employs the mercantile system regularly it is
obligatory on the income-tax authorities to compute the income according to
that system, it is doubtful whether that position would be available to a
non-resident who maintains his books of account outside British India according
to the mercantile system.
Section 13 would only be relevant where the
total profits of the assessee have to be computed and in that event the
assessee would be entitled to claim that they should be computed according to
the system of accounts maintained by him; it would not be relevant when stray
items of income are sought to be assessed in the taxable territories as
received in the taxable territories by a non resident.
Bose J.-In the case of accounts kept in the
mercantile system, the profit or loss at the end of the accounting year is
based not on a difference between what was actually received and what was
actually paid out, but on the difference between the right to receive and the
liability to pay. The taxation in such cases is not on income, profits or gains
which were received but on profits which "accrued or arose" to the
assessee in the accounting year. This view excludes s. 4(l) (a) and this means
that a resident is taxed in such cases under s. 4(l)(b) and a non-resident
under s. 4(l) (c). Applying s. 4(l) (c) to the present case, in the case of the
Rs. 4 lakhs odd the profits accrued or arose in British India where the right
to take delivery of the goods accrued and where the price was actually paid,
but what is really taxable under s. 4 (1) (c) is not the Rs. 4 lakhs odd, but
the figures entered in the accounting year -as the price of the various
transactions which the Rs. 4 lakhs represented. Similarly, in the case of Rs.
12 lakhs odd, it is the figure entered in the books in the accounting year
relating to the transactions which is taxable.
By the Full Court.-The expression
"deemed to be received" in s. 4 (1) (a) means deemed by the
provisions of the Act to be received.
Subramaniyan (Chettiar v. Commissioner of
Income-tax (2 I. T. C. 365), Ahmed Din Alladitta v. Commissioner of Incometax,
Punjab (2 I.T.R. 369), Kanwal Yayan Hanir Singh v. Commissioner of Income-tax,
Ajmer-Merwara (6 I.T.R. 675), Commissionerof Incometax v. Singari Bai (13
l.T.R. 224) distinguished.
B.M. Kamdar, In re (1946 I.T.R. 14),
Pondicherry Railway Co. v. Commissioner of Income-tax (58 I.A. 239) and
Commissioner of 952 Income-tax v. Mathias (66 I.A. 23), Commissioner of Incometax
v. Kameswar Singh (1933 I.T.R. 94), Commissioner of Income-tax v. Chunilal
Mehta (1938 I.T.R. 521) referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
,#No. 151 of 1951.
Appeal from a Judgment and Order dated
14/15th September, 1949, of the High Court of Judicature at Bombay (Chagla C.J.
and Tendolkar J.) in Income-tax Reference No.
2 of 1949.
R. J. Kolah and N. A. Palkiwalla for the
appellant.
C. K. Daphtary, Solicitor-General for India
(P.A Mehta, with him) for the respondent.
1953. January 30. The judgment of Mehr Chand
Mahajan J., Das J. and Bhagwati J. was delivered by Bhagwati J. Bose J.
delivered a separate judgment.
BHAGWATI J.-This is an appeal from the
judgment and order of the High Court of Judicature at Bombay upon a reference
by the Income-tax Appellate Tribunal under Section 66 (1) of the Indian
Income-tax Act, 1922, whereby the High Court upheld the decision of the
Appellate Tribunal that two amounts of Rs. 12,68,480 and Rs. 4,40,878 were the
sale proceeds of goods sold by the appellant to merchants in British India,
were received in British India and were liable to income-tax in British India.
The appellant is a company registered in the
Baroda State, as it then was, prior to its merger with India. It manufactures
textile goods in Petlad in the Baroda State and after the goods are
manufactured they are sold by the company ex-mills. The company employs Messrs.
Jagmohandas Ramanlal & Co. as guaranteed brokers. That firm guarantees the
sale price of goods sold by the company ex-mills to the purchasers from
Ahmedabad and receives commission as consideration for the guarantee and the
work which it does for the company. The company is a non-resident and its
accounts are maintained according to the mercantile system.
953 In the assessment year 1942-43 (the
previous year being the calendar year 1941) the total sales of the goods by the
company amounted to Rs. 29,68,808. In making the assessment on the company for
that assessment year the following three amounts were considered for the
purpose of determining the company's liability to British Indian tax.
(a) Sale proceeds recovered through Messrs.
Jagmohandas Ramanlal & Co.......................Rs. 12,68,480 (b) Sale
proceeds through British Indian banks and shroffs received by means of drafts
or hu ndies drawn by the company...........Rs. 4,40,878 (Railway receipts
handed over to British Indian merchants by the banks on payment).
(c) Sale proceeds received by cheques on
British Indian banks and hundies on British Indian shroffs and merchants, and
collected by the banks and shroffs .................................. Rs.
6,719735 Total Rs. 23,81,093 As regards item (a) the company debited the
account of the firm of Messrs. Jagmohandas Ramalal & Co. with Rs. 13,41,744
which represented sales made by the company to merchants of Ahmedabad whose
payments were guaranteed by that firm, and credited the sales account with the
amount of the bills. Messrs. Jagmohandas Ramanlal & Co. collected the
amounts of the bills from the merchants at Ahmedabad and credited the sums
recovered in the company's accounts with banks and/or shroffs at Ahmedabad and also
made disbursements under instructions of the company to the creditors of the
company in British India. All these payments were credited by the company to
the account of Messrs. Jagmohandas Ramanlal & Co. and during the relevant
accounting year the company thus 954 received Rs. 12,68,480 against the total
debits of Rs. 13,41,744.
As regards item (b) the company received Rs.
4,40.878 by drawing hundies or drafts for the amounts of its sales bills
(including the forwarding charges and the cost of transit from the mills
premises to the station) on the merchants in favour of recoginised banks and
shroffs in British India, by sending the same to those banks or shroffs with
the railway receipts duly endorsed in favour of the merchants and by
instructing the banks or shroffs to recover the amounts including the costs of
transmitting the same to them. The amounts of these sales bills were debited by
the company to the accounts of the respective merchants and credited to the
sales account and the sums recovered by the banks or shroffs from the merchants
in British India against the delivery of the relative railway receipts were on
receipt of the same by the company credited to the accounts of the respective
merchants in their books of account.
As regards item (c), the company received Rs.
6,71,735 from the merchants by cheques and hundies drawn on banks and shroffs
in British India in favour of the company. These cheques and hundies were
negotiated by the company in Petlad and sent back for credit to its accounts
with those banks and shroffs. The said cheques and hundies were cashed in
British India and the sale proceeds remitted by the banks and shroffs to the
company. The amounts of the sales bills were debited to the accounts of the
merchants in the books of the company when the goods were invoiced to the
merchants and these accounts were credited with the moneys thus received by the
company from the merchants.
The Income-tax Officer brought to tax the
profits derived by the company represented by the said three items in the
assessment year on the basis that the sale proceeds having been received in
British India the profits were received in British India. The Appellate
Assistant Commissioner on appeal held that profits 955 from items (a) and (c)
were exempt from British Indian tax while those represented by item (b) were
rightly taxed. The Department filed an appeal to the Appellate Tribunal against
the decision of the Appellate Assistant Commissioner in regard to items (a) and
(c) and the company filed an appeal in respect of item (b). The Appellate
Tribunal held in regard to item (a) that the merchants in British India were
not absolved either in law or in fact from their responsibility to pay to the
company its dues by virtue of the debit entries in the account of Messrs.
Jagmohandas Rainanlal & Co. and in regard to item (b) that the payment of
the amounts due was a condition precedent to' the delivery of goods by the
banks in British India on behalf of the company. The Tribunal therefore held
that profits arising from items (a) and (b) were rightly subjected to tax. As
regards item (c) the Tribunal held that Rs. 6,71,735 "were received by the
assessee company directly from the merchants in British India by cheques and
hundies drawn on banks and shroffs in British India in favour of the company
but were negotiated in Petlad and sent for credit to the company's account. The
amounts were received at Petlad and once they were received there, they could
not be held to have been received again in British India ".
The Department asked the Tribunal to refer to
the High Court the question of law arising on item (c) and the company asked
the Tribunal to refer to the High Court the question of law arising on items
(a) and (b) and the Tribunal therefore referred the following question of law
to the High Court:" Whether on the facts and in the circumstances of the
case, the sums of Rs. 12,68,480, Rs. 4,40,878 and Rs. 6,71,735, or any of them,
which, represents receipts by the assessee company of its sale proceeds in British
India, include any portion of its income in British India?" The High Court
held that Rs. 12,68,480 were received in British India and included the profits
and gains of the business of the assessee company. It held that Rs. 4,40,878
also were received in British India 956 and the company was liable in respect
of that amount. In regard to the item of Rs. 6,71,735, the High Court found
that the facts stated by the Tribunal were not sufficient to enable it to reach
a decision and therefore directed that the Tribunal should submit a
supplementary statement of case setting out the several aspects set out in the
judgment.
The High Court reframed the question in
regard to the two items of Rs. 12,68,480 and Rs. 4,40,878 in the manner
following:(1)Whether the sums of Rs. 12,68,480 and Rs. 4,40,878 were sale
proceeds of the goods sold by the assessee to merchants in British India or
were debts due by the said merchants ? (2)Whether if they were sale proceeds,
they were received in British India ? and answered them by stating that they
were sale proceeds and they were received in British India. There was also a
third question which was comprised in the reference and that question was
framed as under:Whether the profits of the assessee's business are included in
the sums of Rs. 12,68,480 and Rs. 4,40,878 ? This question was also answered by
stating that they were included in these two sums. The company obtained leave
from the High Court to appeal against the decision in regard to the two sums of
Rs. 12,68,480 and Rs. 4,40,878 and hence this appeal.
It is common ground that the company is a
nonresident and its accounts have been regularly kept according to the,
mercantile system. Its balance sheets were also prepared on that basis. The
company was assessed to tax in British India on the basis that these two sums
of money were received in British India by or on behalf of the company.
In regard to the item of Rs. 12,68,480, even
though the amounts of the sales bills were in the first instance debited by the
company in its books to the account of Messrs. Jagmohandas Ramanlal & Co.
the sale proceeds in accordance with 957 the terms of the sales bills were paid
by the respective merchants to Messrs. Jagmohandas Ramanlal & Co. in
British India and were either credited by Messrs. Jagmohandas Ramanlal &
Co. in the company's accounts with banks or shroffs in British India or were
disbursed by them in accordance with the instructions of the company in British
India. In regard to the item of Rs. 4,40,878 even though the amounts of the
sales bills were debited in the first instance by the company to the accounts
of the respective merchants in the books of account at Petlad the relative
railway receipts were sent by the company to banks or shroffs in British India
together with drafts or hundies in connection with the same with instructions
that delivery of the railway receipts should be given to the respective
merchants against payment and the amounts of the sales bills were thus paid by
the respective merchants to the banks or shroffs in British India and were
transmitted under the instructions of the company by the banks and shroffs in
British India to the company at Petlad. Prima facie therefore the amounts of
the sales bills in both the cases whether they were paid to Messrs. Jagmohandas
Ramanlal & Co. or to the banks or shroffs, through whom the railway
receipts were negotiated were paid by the merchants in British India and were
received by Messrs. Jagmohandas Ramanlal & Co. and the banks or shroffs on
behalf of the company in British India. The receipt of these amounts thus fell
within section 4 (1) (a) of the Act and the profits or gains of this business
thus were received in British India by or on behalf of the company.
The company however sought exemption from
liability to tax on the grounds (a) that the accounts of the company were kept
on the mercantile or book profit basis under which the accrual of profit as
shown in the account was the criterion of taxability and section 4(l) (a) had
no application at all; (b) that it was obligatory on the authorities under
section 13 of the Act to accept that system of maintaining accounts except
under the proviso to that section and that the method of computation there was
made the very basis of 124 958 chargeability and section 10 read with section
13 operated to save these amounts from chargeability and (c) that the amounts
having been treated as received when credit entries were made in the books of
account, and chargeability having crystallised on the date when the income
accrued or was treated as received, there was no further scope for a charge
when the amounts were subsequently actually received and the subsequent
handling of the amounts by the company and the receipt thereof in British India
were of no consequence.
The mercantile system of accounting or what
is otherwise known as the double entry system is opposed. to the cash system of
book keeping under which a record is kept of actual cash receipts and actual
cash payments, entries being made only when money is actually collected or
disbursed.
That system brings into credit what is due,
immediately it becomes legally due and before it is actually received and it
brings into debit expenditure the amount for which a legal liability has been
incurred before it is actually disbursed. The profits or gains of the business
which are thus credited are not realised but having been earned are treated as
received though in fact there is nothing more than an accrual or arising of the
profits at that stage.
They are book profits. Receipt being not the
sole test of chargeability and profits and gains that have accrued or arisen or
are deemed to have accrued or arisen being also liable to be charged for
income-tax, the assessability of these profits which are thus credited in the
books of account arises not because they are received but because.
they have accrued or arisen.
Mr. Kolah appearing for the company drew our
attention to the following cases:Subramaniyan Chettiar v. Commissioner of
Incometax(1), Ahmed Din Alladitta v. Commissioner of Income-tax, Punjab(2),
Kanwal Nayan Hamir Singh v. Commissioner of Income-tax, Ajmer-Merwara(3) and
(1)(1927) 2 I.T.C. 365.
(2)[1934] 2 I.T.R. 369.
(3) [1938] 6 I.T.R. 675.
959 Commissioner of Income-tax v. Shrimati
Singari Bai(1).
The assessees there were all residents in
British India and maintained their books of account according to the mercantile
system. Except in the case of Commissioner of Income-tax v. Singari Bai(1)
where the assessment was in respect of the total income or profits, stray items
of income treated as received in British India were sought to be charged for
tax and they were all assessed for tax not on the basis of actual receipts in
British India but on the basis of their having accrued or arisen in British
India.
The cases were decided with reference to the
law as it stood before the amendment in 1939 which under section 4(l) rendered
liable to tax 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, arise or to be received in British India. The question
that arose for the determination of the courts was whether under the mercantile
system, profits which were credited in the books could be taxed even though
they had in fact not been received and the conclusion reached by the courts was
that these profits credited in the books of account were earned and could be
charged as having accrued or arisen within British India even though they were
in fact not received. In none of these cases were the courts concerned with a
non-resident claiming to have received profits or gains outside British India
under the mercantile system of accounting and claiming exemption from liability
to tax under section 4 (1) (a) in respect of profits actually received in
British India.
It follows from the above that the mercantile
system of accounting treats profits or gains as arising or accruing at the date
of the transaction notwithstanding the fact that they are not received or
deemed to be received and under that system, book profits are, assessed as
liable to tax.
If an assessee therefore regularly adopts the
mercantile system of accounting he would be liable to tax on the profits thus
credited by (1)..[1945] 13 I.T.R. 224.
960 him in his books of account subject to
all deductions for bad debts as provided in section 10 (2) (xi). Section 4 (1)
(a) has nothing to do with this basis of taxation. Section 13 which is an
integral part of the computation of the total income of the assessee and is compulsory
on the income-tax authorities as well when computing the total income (vide
section 2 (15) ) does not lay down any exemption from liability. It only sets
up a mode of computation of the income which is liable to assessment and
imposes upon the income-tax authorities an obligation to accept the mode of
accounting regularly adopted by the assessee except in the cases where the
proviso to that section comes into operation. The profits earned and credited
in the books of account being thus taken as the basis of computation, the
system of accounting postulates the existence of debts in so far as moneys re a
in due and payable by the parties to whom they have been debited and when it is
realised that these debts are not recoverable the assessee gets a deduction for
the bad debts under section 10 (2) (xi). This however does not mean that the
transaction as it has been recorded in the books of account under the
mercantile system of accounting or the double entry system is metamorphosed or
the relationship between the parties assumes a different character. What was in
its inception a transaction of sale and purchase is not converted into another
transaction as between creditor and debtor. The relationship as between vendor
and purchaser still subsists and there does not come into existence a new
relationship as between creditor and debtor with all its necessary
consequences. The transaction as it has been recorded in the books of account
has got to be worked out to its fullest extent. Merely because the goods have
been supplied and the price thereof has been debited to the purchaser the
rights and obligations of the vendor and purchaser inter se are not in any
manner affected. The vendor is bound to fulfill all his obligations under the
contract and continues to be liable for all the consequences of his default
including rejection of his goods by the purchaser or a claim for damages 961
for breach of warranty by him. The purchaser is equally entitled to reject the
goods or to claim the damages as on breach of warranty by the vendor and all
these rights and obligations have got to be worked out in spite of the fact
that the entries 'are made in the books of account by the vendor in accordance
with the mercantile system of accounting adopted by him. The vendor could not
say that he is under no further obligation to the purchaser and that the
purchaser must pay the price of the goods debited to him as a debt arising out
of the book entry. The count in any action filed by the vendor against the
purchaser would be a count for the price of goods sold and delivered and would
not be a count on an as sumps it for recovery of a debt due by the debtor to
him.
It is clear that under these circumstances
there is no receipt of the moneys at all, either actual or constructive, in cash
or in kind, by actual payment or by adjustment or settlement of accounts. There
is also no scope for the argument that even though these sums may not be said
to be either actually or constructively received they should be "deemed to
be received". The expression "deemed to be received" only means
deemed by the provisions of the Act to be received. The phrase statutory
receipt might be conveniently employed to cover income which is 'deemed to be
received' and instances of such statutory receipts are to be found in the
provisions of the Act, e.g., section 18 (4), section 58 (E), section 58 (J)
(3), section 7(2), section 16(1) (c) and sections 19 (2) (vii) and 16(2). (See
the observations of Beaumont C.J. in Commissioned, of Income tax, Bombay v. New
India Assurance Co. Ltd.(1). An amount cannot be "deemed to be
received" merely by the volition or sweet will of an individual. In all
the cases which we have mentioned above the profits earned which were credited
in the books of account according to the mercantile system of accounting were
at best "treated as having been received" which is neither
"received" nor "deemed to be received" and therefore not
within the purview of section 4 (1) (a).
(1) [1938] 6 I.T.R. 603 at p. 614.
962 If then profits which have been thus
credited cannot be said to be received nor deemed to have been received when
the entries were made in the books of account, the contention urged before us
by Mr. Kolah that there could not be a second receipt of the amount in British
India does not survive. It is true that the words used in section 4(l) (a)
relate to the first receipt after the accrual of the income.
Once it is received by the party entitled to
it, in respect of any subsequent dealing with the said amount it cannot be said
to be " received" as income on that occasion. [Per Kania J. in B. M.
Kamdar (1)]. The "receipt" of income refers to the first occasion
when the recipient gets the money under his own control. Once an amount is
received as income, any remittance or transmission of the amount to another
place does not result in "receipt", within the meaning of this
clause, at the other place. This was definitely established by the Privy;
Council in Pondicherry Railway Co. v. Commissioner of IncomeTax 2) and in
Commission ei, of Income-tax v. Mathias (3). If, therefore, the income, profits
or gains have been once received by the assessee even though outside British
India they do not become chargeable by reason of the moneys having been brought
in British India, because what is chargeable is the first receipt of the moneys
and not a subsequent dealing by the assessee with the said amount. In that
event they are brought, by the assessee as his own moneys which he has already
received and had control over and they cease to enjoy the character of income,
profits or gains.
This ratio however does not apply to the
facts of the present case before us. The moneys were neither received by the
company nor could be deemed to have been received by it when the entries were
made in the books of account at Petlad. They had merely accrued or arisen to it
and so far as the receipt thereof is concerned they were first received in
British India when they were received by Messrs.
Jagmohandas Ramanlal (1)[1946] 14 I.T.R. 14
at P. 39, (2)[1931] 58 I.A. 239.
(3) [1939] 66 I.A. 23.
963 & Co. or by the various banks or
shroffs in British India through whom the railway receipts were negotiated. The
first receipt of the moneys was therefore when they were paid as such by. the
merchants to Messrs. Jagmohandas Ramanlal & Co. or to the various banks or
shroffs as above.
Whatever paid by the merchants to these
several parties were the sale proceeds of the goods which had been sold and
delivered by the company to them and they were received within the meaning of
section 4 (1) (a) of the Act by these several parties on behalf of the company
in British India at the time when these payments were made by the merchants to
them.
Mr. Kolah pressed into service the argument
based on section 13 of the Act that the mercantile system of accounting
regularly adopted by the assessee was obligatory on the income-tax authorities
for computation of his income. While agreeing generally with that submission in
case of residents, we doubt whether that position would be available to a non-resident,
who maintains his books of account outside British India according to the
mercantile system.
The section would only be relevant where the
total profits of the assessee have to be computed, in which event he would be
entitled to claim that they should be computed according to the system of
accounts maintained by him. But the section would hardly be relevant where
stray items of income are caught in taxable territories as received in taxable
territories by a nonresident. The entries in the present case were put in
merely to prove that the sale proceeds were received outside British India
where the entries were made.
That contention however could not be
sustained, as section 4 (1) (a) is concerned with cases of actual receipt and
not with cases of paper receipts.
Having regard to the observations made above
we have come to the conclusion that the High Court ",as right in holding
that the two sums of Rs. 12,68,480 and Rs. 4,40,878 were the sale proceeds of
the goods sold and delivered by the appellant to merchants in British India,
that they were received by Messrs, 964 Jagmohandas Ramanlal & Co. and by
the banks and shroffs through whom the railway receipts were negotiated, on
behalf of the appellant in. British India, that they were liable to tax under
section 4 (1) (a) of the ,*Act as having been received in British India on its
behalf, that there is nothing either in the facts and circumstances of the case
or in law why they should be exempted from such liability, that the answers
given to the questions which were ultimately considered by the High Court were
correct, and the appellant was rightly held liable for the tax on these two
amounts subject to all just deductions and allowances. The appeal therefore
fails and must stand dismissed with costs.
BOSE, J.-I respectfully disagree.
Section 3 of the Indian Income-tax Act
provides that the " total income " is to be charged in accordance
with the provisions of the Act. We have therefore to see what " total
income " means.
" Total income " is defined in
section 2(15). It means (not " includes " but means) the total amount
of income, profits and gains "referred to in sub-section (1) of section 4
computed in the manner, laid down in this Act." Therefore, the computation
of all income refeffed to in section 4(l.) has to be "in the manner laid
down in the Act ".
Section 4 (apart from the provisos and
explanations is divided into three clauses, (a), (b) and (c). Clause (b) deals
with residents and (c) with nonresidents. As (a) is general, it is legitimate
to infer that it refers to both. Therefore, the words " received" and
" deemed to be received " must be construed in the same sense in both
cases except of course where it is otherwise provided in the Act, for
sub-section (1) is made subject to the provisions of the Act.
Now the words "deemed to be
received" can be excluded from consideration at once because I agree that
they are confined, and are intended to be confined to what I may call the
deeming sections in the Act, that is to say, to cases where the deeming must be
done 965 under the express provisions of the Act. That leaves us with the word
"received" (I am of course only dealing with section 4(l) (a) which
deals with " receipts' and not with section 4(l) (c) which refers to
"accruals" and "arisals" and to that which is deemed to
"accrue" or "arise").
Now this, in my opinion, is to be contrasted
with the words "accrue" and "arise" which are used in
clauses (b) and (c).
Though there may be overlapping in some
cases, I do not think the three are intended to mean the same thing. The Privy
Council thought in Commissioner of Income-tax v.
Mathias(1) that there is some variation in
meaning between them and in Commissioner of Income-tax v. Chunilal B. Mehta(2)
they drew attention to the antithesis between "accruing and arising
in" and "received in", though they also said in the earlier case
that there is not a complete disjunction between them and that they are not
three mutually exclusive qualifications (page 56); that is, that there may be
some overlapping in certain cases.
Next, we turn to section 6 which divides the
various sources of income under various heads for the purposes of computation
and chargeability and states that each head shall be " chargeable"
"in the manner hereinafter appearing". It is to be observed that the
word "shall" has been used and not " may " thereby implying
that there is no option in the matter. So far as business is concerned, the
head is No. (iv) "Profits and gains of business etc." That carries us
on to sections 10 and 13 which prescribe the method of computation. Here again,
the language is imperative and in the case of a business the method of
computation has to be in accordance with the method of accounting regularly
employed by the assessee: see Commissioner of Income-tax v. Kameshwar Singh(3).
Now in the present case, the method of
accounting was the mercantile system. The essential difference (1) [1939] 7
I.T.R. 48 at 56. (3) [1933] 1 I.T.R. 94 at 100 and 101.
(2) [1938] P I.T.R. 521 at 527, 125 966
between this and the cash basis system is that in the latter actual receipts
and disbursements are taken into account.
In the former, sums which are due to the
business are entered on the credit side immediately they are legally due and
before they are actually received and expenditures are entered the moment a
legal liability to pay arises and before the actual disbursements. The profit
or loss at the end of the accounting year is therefore based, not on a
difference between what was actually received and what was actually paid out,
but on the difference between the right to receive and the liability to pay. I
find it impossible in such a case to say that the taxation -is on income, or
profits and gains which were "received". It can only be oil profits which
" accrued " or "arose" to the assessee in the accounting
year: see the Privy Council in Feroz Shah v. Commissioner of Income-tax(').
That, in my opinion, excludes section 4(l) (a) and that in turn means that in
such a case a resident is taxed under section 4(l) (b) and a non-resident under
section 4(l) (c).
Now, this to my mind is of vital importance.
The primary object of the Income-tax Act is to tax and not merely to ascertain
an income. The computation of the income is subsidiary and is only for the
purposes of ascertaining the quantum of the tax: see Commissioner of Income-tax
v.
Kameshwar Singh(2). Therefore, if the
legislature chooses to lay down different methods of computation and say that
the taxation shall be on the amount so computed, it is essential that these
methods be adhered to. In some cases this may be to the advantage of the
assessee and in others it may operate to his disadvantage. But that is
immaterial.
The importance lies in this. All that can be
taxed in a given year are the profits and gains which are received or which
arise or accrue in the " previous year", and if the Act directs that
the profits are to be computed in a given case on "accruals" or
"arisals" and not on actual receipts it is essential that that be (1)
[1933] 1 I.T.R. 219at 224 and 225. (2) [1933] 1 I.T.R. 94 at 100.
967 done; and it follows from that that the
tax in such a case can only be on the accruals or arisals and not on the actual
receipts, for clearly you cannot tax on that which you are forbidden to compute
in a case where the tax can only be levied on what is computable. under the
Act.
It is important to draw the distinction for
this reason.
The rate of tax varies from year to year,
therefore if the book profits which are directed to be taxed in a given year are,
say, Rs. 10,000 and the actual receipts only Rs. 100, it makes a lot of
difference which figure is taken; nor does it even itself out in the long run,
for if the rate of taxation increases in the following year and the state of
the business is just the reverse, namely that the book profits are only Rs. 100
whereas the actual receipts arising from the previous year's transactions are
Rs. 10,000, it will make a considerable difference to the assessee in the
aggregate of tax payable over the years, whether he pays oil the basis of book
profits or actual receipts in the two years.
I am not able to draw a distinction between a
resident and a non-resident in these matters. I can find no ground for holding
that in the case of a resident the mercantile system must be adopted for
computing the profits if that is the system of accounting regularly employed
but that that need not be done in the case of a non-resident. If the assessee
had been a resident company, the taxation would, in my opinion, have been under
section 4(l) (b) on profits and gains which had accrued or arisen and not under
section 4 (1) (a) on profits which had been received. The same principle must,
in my opinion, be applied in the case of a nonresident and therefore section 4
(1) (c) is attracted, provided the profits and gains have actually accrued or
arisen in the taxable territories or they can, because of section 42, be deemed
to have accrued or arisen there. If section 4 (1) (c) is not attracted, then
the tax cannot be levied.
Now, applying section 4 (1) (c), the question
is where do the profits and gains arise or accrue, in a case 968 like the
present ? This is not free from difficulty and various views have been, and can
be, taken. But as these expressions have not been defined and as they are not
words of art, I think they should be construed in their ordinary meaning which
businessmen would ordinarily and easily understand in a business transaction.
When goods are sold it is to my mind evident that the profit or the loss on any
particular transaction arises out of the sale, for until there is a sale there
can be no profit. The profit may not be wholly attributable to the sale but
that is another matter. It is to my mind unquestionable that they arise, in
part, at any rate, out of the sale. Therefore, if the goods are sold in the
taxable territories, then, to my mind, the profits, or a portion of them, arise
there. As the Privy Council pointed out in Commissioner of Income-tax v.
Chunilal B. Mehta(1), in determining where
the profits arise the place of the formation of the contract is not the sole
criterion, other matters, as for example acts done under the contract are also
material.
I am not here attempting to go behind the
decision of the Supreme Court to the effect that the place of sale is not
necessarily the place of the receipt of the profits. I am construing the word
"arise " and not "receive".
That brings me to the next question, where
were the goods in the present ease sold ? That is a, mixed question of fact and
law and must vary in each case and must, in my opinion, be answered in a
commonsense way and not necessarily in the artificial manner laid down by the
Sale of Goods Act to determine where and when the property passes. What are the
facts here ? In the case of the Rs. 4 lakhs odd, the control over the corpus of
the goods was retained by the assessee right up to the moment the price was
paid; and the price was paid not outside British India but to his nominees in
this country, namely, to the assessee's banks in British India.
These banks retained the documents of title
and had the right to refuse (1) [1938]61.T.R.521 at533.
969 delivery until the money was actually
handed over.
Therefore, the right to get possession of the
goods and to take delivery accrued or arose in British India where the money
was actually paid, and that to my mind must be taken to be the place where the
profits accrued and arose for income-tax purposes, not because the money was
received there, for we are not concerned with actual receipts, but because the
right which accrued at the date of the transaction was to receive the money in
British India and hand over the goods there on the receipt of the money. As I
have said, the substance of the transaction must be viewed and that cannot be
made to depend upon the method of bookkeeping. Even if there are no books the
profits on such a transaction would accrue in the place where the money is to
be paid and the goods are to be handed over. I cannot see how that can alter by
reason of the method of accounting employed. Accordingly, I agree that the
method of accounting adopted by the assessee cannot affect the substance of the
transactions between the parties or affect their nature. The rights and
liabilities of the parties inter se cannot be made to depend on the way in
which one of them chooses to keep its books. But that is not the case when we
come to the question of taxation for income-tax purposes. There the method of
accounting is vital. But even there the substance of the transaction must be
viewed, for the substance cannot alter by a mere method of accounting. It is
evident that if the assessee had been resident in British India and these
transactions had been omitted from tile books, the sums which ought to have
been entered would be taxable as items which had escaped assessment even if
there had been no actual receipts in that or in any following year. Therefore,
it is not the entry in the books which attracts the taxation but the profits on
the transaction itself, and when the mercantile system is used the profits
arise when the right to receive them accrues and not when the entry is made. If
the system is properly employed the entry is made as soon as the right to
receive the price arises and so for all practical 970 purposes that is the date
ordinarily referred to, but a man cannot manipulate the amount of his tax by
choosing to enter or not to enter items which ought to be entered on a
particular date, as and when he pleases.
Now, the Rs. 4 lakhs odd represent actual
receipts but that is not what is taxable -when the computation is based on the
mercantile system. What should be taxed, or rather taken into account for the
purposes of taxation, are the figures entered in the accounting year as the
sale price of the various transactions which the Rs. 4 lakhs represent. The
profits which arise out of these transactions do not, on my view, escape tax
because the profits accrue or arise in the taxable territories. But the figure
on which the tax is to be computed is not the 4 lakhs odd which represent the actual
receipts but another figure which unfortunately we have not been given. I am of
course assuming that the figures were duly entered in the books at the proper
time in accordance with the mercantile system of accounting. If they were not,
then the Income-tax authorities have power to tax income which, for one reason
or another, has escaped assessment Turning to the Rs. 12 lakhs. We know that
the figure entered in the books relating to these transactions was Rs.
13,41,744. i am not clear whether that was
entered in the accounting year with which we are concerned, though I gathered
that that was the case. The actual receipts, which followed later, amounted to
only Rs. 12,68,480. In my opinion, if anything is computable for the purposes
of tax, it is the former figure (assuming all the entries are in the accounting
year) and not the latter. But in order to determine whether the profits on
these transactions are taxable at all, we must examine the transactions.
In these cases the sales were to merchants resident
in Ahmedabad. But according to the assessee's affidavit, " In respect of
buyers from Ahmedabad, the apllicant Mills have no account of such buyers. The
971 price is debited to the account of the said Jagmohandas Ramlal and company
and credited to the sales account in the books of the applicant:" and
later, Jagmohandas " discharges its debts by making payments to the
applicants from time to time towards the balance in their said account in the
books of the applicant Mills. The said amounts are paid by the said firm by
paying the same to the credit of the applicant Mills with British Indian banks
or shroffs." Now, it is evident from this that Jagmohandas & Company
do not merely guarantee payment by the Ahmedabad buyers but actually make the payments,
or the equivalent of payments, to the assessee company. So little do the
'buyers matter that their transactions are not even reflected in the accounts.
All we have is Jagmohandas. It does not, in my opinion, matter whether the
actual buyers remained primarily and legally responsible to the assessee or
not. The fact remains that in practice Jagmohandas & Company actually met
the obligations of the buyers and discharged their liabilities to the assessee.
it is, equally clear that Jagmohandas & Company must have recouped
themselves in some way from the buyers. The question is how. If the whole of
the transactions occurred outside British India and the buyers or their agents
went to Petlad and received the goods there and paid Jagmohandas & 'Company
outside British India, then I am clear that the profits and gains did not
accrue or arise in British India, simply be-cause the (foods were ultimately
brought there. But if Jagmohandas & Company or their agents were paid in
British India, the profits and gains, in my opinion, arose there in the same
way as in the 4 lakhs case. If Jagmohandas & Company were the actual agents
of the assessee as were the banks in the other case, and the payments were made
in the taxable territories, then the accrual and arising was direct. If,
however, they were not the agents in the strict sense of the term, then I am of
opinion that section 42 would be attracted because at the very least there
would be a "business connection", 972 provided of course the payments
were made in the taxable territories.
Now, here again., I am looking to what was
actually done in order to determine what the rights were, for it is evident
that what was done was done in pursuance of some agreement, express or implied,
between the parties which agreement regulated their rights, and those rights in
turn determine the place where the profits accrued or arose, or must, because
of section 42, be deemed to have accrued or arisen.
In my view, the question referred by the
Incometax Appellate Tribunal in its statement of the case does not reflect the
true position because it concentrates on the actual receipts. If the cash basis
system of accounting was germane here, then I would agree that the Rs. 4,40,878
was part of the assessee's income in British India, and so also in the other
case, provided the payments were made in British India. But it is misleading to
enquire what would have happened in circumstances which are not material in
this case because of the mercantile system of accounting which was employed.
As regards the High Court. The learned Judges
refrained the question and answered it without sending the case back to the
Income-tax Appellate Tribunal for a further statement of the case. That was not
strictly proper. But, in my opinion, the refrained questions suffer from the
same defect.
In my opinion, the case should be sent back
to the Incometax Appellate Tribunal for a refraining of the questions along the
lines I have indicated and for a further statement of the case.
Appeal dismissed.
Agent for the appellants: Rajinder Narain.
Back
