Mcgregor & Balfour Ltd. Vs. The
Commissioner of Income-Tax, West Bengal [1959] INSC 23 (16 March 1959)
HIDAYATULLAH, M.
SINHA, BHUVNESHWAR P.
KAPUR, J.L.
CITATION: 1959 AIR 771 1959 SCR Supl. (2) 355
CITATOR INFO :
D 1960 SC1016 (16,18) R 1961 SC1233 (7,10) F
1975 SC2016 (13,21)
ACT:
Income-tax-Company carrying on business in
England and India-Refund of excess Profits tax paid in England-If can be taxed
in India-Indian Finance Act, 1946, s. 11(4).
HEADNOTE:
The appellant carried on business in England
and in India.
For the previous years it paid excess profits
tax in both countries and it obtained deduction of the amounts so paid from its
profits and gains for the purposes of the Indian Income-tax Act. In the
assessment year 1947-48 it obtained a repayment of RS. 2,31,009 out of the
excess profits tax paid in England. The Income-tax authorities acting under S. 11(14),
Indian Finance Act 1946, included this amount received in England in the
taxable profits of the appellant.
The appellant contended that the repayment
not being within the taxable territory it could not be taxed.
Held, that the amount received as repayment
of the excess profits tax was rightly taxed. Under S. 11(14) the amount of
repayment was deemed to be 'income' for purposes of the Indian Income-tax Act
and that ' income ' was to be treated as the income for the previous year
during which the repayment was made. Section 11(14) created a liability
irrespective of the considerations arising from the general provisions of the
income-tax law. The distinction between incomes within and without taxable
territories was made unnecessary by S. 11(14).
Eglinton Silica Brick Co. Ltd. v. Maryian,
(1924) 9 Tax Cas. 92; A. & W. Nesbitt Ltd. v. Mitchell, (1926) " Tax Cas.
217 and Kirke's Trustees v. The Commissioners of in-land Revenue, (1926) 11 Tax
Cas. 323, applied.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 265 of 1956.
Appeal from the judgment and order dated
August 26, 1954, of the Calcutta High Court in Income-tax Reference No. 107 of
1952.
S.Mitra, Dipak Choudhry and B. N. Ghosh, for
the appellants.
C.K. Daphtary, Solicitor-General of India, K.
N. Rajagopala Sastri, R. H. Dhebar and D. Gupta, for the respondent.
356 1959. March 16. The Judgment of the Court
was delivered by HIDAYATULLAH, J.-Messrs. Mcgregor & Balfour, Ltd.,
Calcutta (hereinafter called the Company) is a Company incorporated in the
United Kingdom. Its head office is also there. It, however, does business in
India also. In some of the previous years, the Company was required to pay
excess profits tax both in England and in India. When it did so, it obtained
deduction of the amounts from its profits and gains for purposes of the Indian income-tax
Act, under s.12(2) of the Indian Excess Profits Tax Act.
In the assessment year 1947-1948 which
corresponded to the accounting year of the Company ending on October 31, 1946,
'it obtained a repayment of Rs. 2,31,009 out of the excess profits tax paid in
England. This was under s. 28(1) of 4 & 5, Geo. VI, Ch. 30. For purposes of
the levy of the Indian Income-tax, this sum was included in the taxable profits
of the Company by the Income-tax Officer. He purported to act under s. 11(14)
of the Indian Finance Act, 1946 (hereinafter called the Act). The income of the
Company in India was held to be Rs. 6,34,937 (including the sum of Rs.
2,31,009) while the in-' come outside the taxable territory was held to be Rs.
4,29,620. Applying s. 4A(c)(b) of the Indian Income-tax Act, the Income-tax
Officer assessed the Company on its total world income.
The appeals of the Company - made
successively to the Appellate Assistant Commissioner and the Income-tax
Appellate Tribunal were dismissed. The Tribunal, however, referred the
following questions of law to the High Court at Calcutta under s. 66 of the
Indian Income-tax Act:
"(1) Whether on the above facts and
circumstances of this case the Tribunal was right in holding that the sum of
Rs. 2,31,009 was income of the assessee during the assessment year under
consideration and was liable to be assessed under the Indian Income-tax Act ?
and (2)If so, whether this amount could not be taken into consideration for
determining the residence of the 357 assessee under s. 4A(c)(b) of the Indian
Income-tax Act ? " This reference was heard by Chakravarti, C. J., and
Lahiri, J., who by their judgment dated August 26, 1954, answered the first
question in the affirmative and the second in the negative. They, however,
granted a certificate under s. 66A of the Indian Income-tax Act, read with Art.
135 of the Constitution to appeal to this Court. No appeal has been filed on
behalf of the Department, and the second of the two questions must be taken to
be finally settled in this case.
The contentions of the Company in this
appeal, thus, concern only the first question, and they are two: It was said
firstly that s. 11(14) of the Finance Act could not be made applicable to the
assessment year 1947-1948, because the provision was not incorporated in the
Indian Income-tax Act or repeated in the subsequent Finance Acts. This argument
was not seriously pressed before us, and beyond mentioning it, Mr. Mitra for
the Company did not choose to elaborate it. We think that Mr. Mitra has been
quite correct in not pursuing the matter. The section framed as it is, does
apply to subsequent assessment years just as it did to the assessment for
1946-1947, and prima facie, it was not necessary to follow one of the two
courses detailed above.
Since the point was not pressed before us, we
need not give our reasons here.
It was said nextly that the High Court was in
error in construing s. 11(14) of the Finance Act as a provision which created a
liability proprio vigore, as if it was a charging section. It was contended
that the repayment was not within the taxable territory, and in view of the
answer to the second question as to the applicability of s. 4A(c)(b), there
could be no tax upon it. On behalf of the Department it was argued that the
sub-section created a charge by itself and the fiction therein created being
sufficient and clear, it was not necessary to consider where the income arose.
Section 11(14) of the Finance Act reads as
follows:
" Where under the provisions of
sub-section (2) of 358 section 12 of the Excess Profits Tax Act, 1940 (XV of
1940), excess profits tax payable under the law in force in the United Kingdom
has been deducted in computing for the purposes of income-tax and supertax the
profits and gains of any business, the amount of any repayment under
sub-section (1) of Section 28 of the Finance Act, 1941, (4 & 5, Geo. 6, c.
30), as amended by Section 37 of the Finance Act, 1942 (5 & 6, Geo 6, c.
21), in respect of those profits, shall be deemed to be income for the purposes
of the Indian Income- tax Act, 1922, and shall, for the purpose of assessment
to income-tax and super-tax, be treated as income of the previous year during
which the repayment is made." This section may be compared with R. 4(1) of
the Rules which are applicable to cases 1 and 11 of sch. D of the Income-tax
Act, 1918 (8 & 9, Geo. V, c. 40):
" Where any person has paid excess
profits duty, the amount so paid shall be allowed as a deduction in computing
the profits or gains of the year which included the end of the accounting
period in respect of which the excess profits duty has been paid; but where any
person has received repayment of any amount previously paid by him by way of
excess profits duty, the amount repaid shall be treated as profit for the _year
in which the repayment is received." The English rule above quoted deals
first with the deduction of the amount paid as excess profits duty from the
profits or gains of the year which includes the end of the accounting period in
respect of which the excess profits duty has been paid a matter dealt with in
s. 12(2) of, the Indian Excess Profits Tax Act, and next with the assessability
to tax of the amount repaid from the excess profits duty previously charged -a
matter dealt with in sub- ss. (11) and (14) of s. 11 of the Finance Act.
The object and purpose of the legislation in
each case is the same, and though the two provisions are not ipsissima verbal
they are substantially in the same words and also in pari materia. The
concluding words of the English rule " the amount repaid shall be treated
as profits of the year in which the repayment is received ", and which
have been interpreted by 359 English Courts may specially be compared with the
concluding words of sub-s. (14) of s. 11 of the Finance Act, which run:
" any repayment...... shall, for the
purposes of assessment- to income-tax and super-tax, be treated as the income
of the previous year during which the repayment is made." There can be no
doubt that the intention underlying the two provisions is the same, and the
language is substantially similar.
Now, the English rule was interpreted by the
English Courts to create a liability irrespective of considerations arising
from the general provisions of the income-tax law. In Eglinton Silica Brick
Co., Ltd. v. Marrian (1), the assessee company which had gone into voluntary
liquidation in 1904 was carried on by the liquidator till 1921 when the
business was sold to another company which took it over on October 5, 1921, and
the business of the appellant company then ceased.
The income-tax assessment for the year 192122
was apportioned between the two companies and inasmuch as the assessee company
had suffered a loss, it was reduced to nil in its case. The assessee company
then received pound, 7,224 and pound, 1,150 in 1952 after it had ceased to
carry on business as repayments of excess profits duty, and this income was
assessed under R. 4(1) above mentioned. The question was whether this was
right.
The case was considered by the Lords of the
First Division, and they are their opinion against the assessee firm. The Lord
President (Clyde) with whom Lords Skerrington, Cullen and Sands agreed (Lord
Sands dubitans) explained the two parts of the rule as follows:
" The principle is obvious. It is that
if a taxpayer has made profits assessable (directly, or indirectly through the
operation of the three years' average) to income tax, and -the Revenue takes a
share of those profits in the name of Excess Profits Duty, it is only fair that
the profits actually assessed to Income Tax should suffer some corresponding
deduction..........." (1)(1924) 9 Tax Cas. 92, 98.
360 The problem which arose in the case of
repayment of Excess Profits Duty was different. Nobody knew or could know how
soon, or how late, repayment might fall to be made; nor whether the business
whose profits were assessed to Excess Profits Duty would be in the same hands
when repayment (if any) came to be made. By that time the business might have
ceased to be in existence. Repayment might therefore have to be made to a
person who was not carrying on the original business. The original trader might
have given up business, died, and an executor might have come in his place. The
solution provided for all these cases is that contained in the second part of
the paragraph, according to which the amount repaid to any person is to be I
treated as profit for the year in which the repayment is received.' It is
obvious that the amount of the former trading profits so repaid could not
actually be trading profits for such year. None the less, the amount repaid is
to be treated as if it were that which-in fact-it is not, and cannot be. The
amount repaid consists of trading profits which reach the taxpayer out of their
proper time. However belated his fruition of them, they have not lost their
original character as trading profits. In my opinion, this is what explains the
position of paragraph (1) of Rule 4 as part of the Rules under Cases I and 11
of Schedule D, which are concerned with the profits of trades and vocations.
That some artificial rule should be formulated was in the circumstances
inevitable, and the highly artificial character of the rule adopted is shown by
the words in which it is expressed-, the amount repaid shall be treated as
profit for the year in which the repayment is received. In short, the amount
repaid is deemed to be something that it is not, and could not in the actual
circumstances possibly be. Nor is this in any way unreasonable or contrary to
what might be expected, if regard be had to the subject-matter. For, as has
been seen, the Excess Profits Duty was itself a part of the trading profits
computed by methods familiar under the Income Tax Act. It was not merely a part
of something which entered into the computation of profit; it was actual 361
computed profit. And, but for the disparity between the ' accounting period'
and the three years' average, it would have been directly assessable to Income
Tax." A similar view was taken in the Court of Appeal by Lord Hanworth, M.
R., Scrutton, L. J., and Romer, J. (Scrutton, L. J., dubitans) in A. & W.
Nesbitt Ltd. v. Mitchell (1).
There too, the assessee company after
suffering losses in the accounting period May 1 to November 25, 1920, went into
liquidation and ceased to trade. On April 22, 1924, the repayment of Excess
Profits Duty took place, and this was assessed to income-tax. The Master of the
Rolls described the amount received as repayment in these words:
" But in respect of what is that payment
made ? It is not a legacy, it is not a sum which has fallen from the skies ;
it, is a sum which is repaid because there
was too large a sum paid by the Company to the Revenue Authorities over the
whole period during which Excess Profits Duty was paid, and that sum means and
is intended to represent a repayment of a sum which was paid by them in respect
of the duty charged upon the excess profits of their trading. It comes back,
therefore, not having lost its character but being still the repayment of a
sum-too much, it is true,-but a sum taken out of the profits which were made by
the Company in the course of its trading, profits which at the time they were
made were subject to Income Tax and subject to Excess Profits Duty, and that is
the character of the repayment that has been made." Dealing with the rule,
the Master of the Rolls observed :
"I have pointed out, this is a case
where the Company has received payment of an amount previously paid by way of
Excess Profits Duty and having that characteristic attaching to it; and we are
told by the Statute that when such a sum is repaid it is to be treated as a
profit for the year in which the repayment is received. It is said it may be
treated as a (1) (1926) 11 Tax Cas. 211. 217, 218.
46 362 profit; but it ought not to be treated
as an assessable profit. The answer, to my mind, is that it is paid back not by
way of a sum which has no origin or ancestry ; it is a sum which represents a
repayment of the amount previously paid by that company in the form of Excess
profits duty upon their trading. If it is to have that character and is to be
treated as such a profit, although it be a repayment of sums paid in respect of
profits, it is to be treated as a profit for the year in which the repayment is
received. The word ' treated' indicates that it is to be deemed to be something
which in fact it is not, or whether it is so or not it is to be treated as a
profit, and therefore it is, to my mind, impossible to discuss the question of
whether or not difficulties may arise or whether it may be criticised as
financially not quite sound that it should be treated in this method in that particular
year; but we are told by the Statute that it is to be treated as a profit
for-the year in which the repayment is received." In a case similar on
facts as the ones cited above (Kirke's Trustees v. The Commissioners of Inland
Revenue (1)), the House of Lords Viscount Cave, L. C., Lord Atkinson, Lord Shaw
of Dunfermline, Lord Sumner and Lord Carson) placed the same construction upon
the latter part of R. 4(1). The following passage in the speech of Lord Sumner,
explaining the extent of the fiction in the latter part of the Rule, is
extremely instructive :
" The express mandatory terms of the
sentence show, in carefully chosen language, that he is to submit to something
by reason of his having previously enjoyed this advantage in the shape of
repayment of an amount previously paid by way of Excess Profits Duty. Something
which is not a profit, but is only a money repayment, something which may not
result in a profit, because although trading goes on there is so great a loss
on the year that this repayment does not make up the deficit, something which
may not be a trading profit, because trading has ceased altogether,
nevertheless is to be treated as profit and as profit for the year.
Treated' is a, fresh word free from legal
technicality.
(1) (1926) 11 Tax Cas. 323, 332.
363 It is the widest word that could be
chosen. The Legislature avoided saying 'shall be assessed as' or I shall be
brought into the computation of profit and loss , and simply says that
something which is not profit but mere payment shall be treated as profit,
which it c may or may not be, and as profit for the year. I think, therefore,
that the word treated is an apt word to impose a charge ".
See also in this connection Olive and
Partington Ltd. v. Rose (1).
These cases were relied on by Chakravarti, C.
J., and Lahiri, J., in the judgment under appeal, and the learned Judges
pointed out that the addition of the words " for the purposes of
assessment to income-tax and super-tax " rather strengthen the reasoning
in its application to the words of the Indian Statute. We agree with this
statement. It is to be noticed that the sub-section creates two fictions. - By
the first fiction it makes the amount of any repayment ' income' for the
purposes of the Indian Income-tax Act, and goes on to say that that ' income '
shall be ' treated ' for purposes of assessment to income-tax and super-tax, as
the income of the previous year.
Mr. Mitra, for the Company contends that no
doubt the amount may be treated as 'income ' for the purposes of the Indian
Income-tax Act, but the Department is still under a duty to prove that the
Company is liable to tax at all. According to him, this will have to be treated
as income received outside the taxable territory, because if the fiction
contemplated its being treated as 'within the taxable territory ', it would
have said so specifically. In our opinion, this submission cannot be accepted.
That this would have been taxable income but
for the provisions of s. 12(2) of the Excess Profits Tax Act, goes without saying.
The income character of the receipt is restored by the fiction, and it is to be
brought under assessment without any further proof than this that it has been
received as repayment of the United Kingdom tax, in respect of which a
deduction was made in the earlier years.
The distinction between (1) (1929) 14 Tax
Cas. 701.
364 incomes within and without taxable
territories is made unnecessary by demanding that this amount by way of
repayment shall be brought to tax and ' treated' as income within the previous
year. The effect thus is that the sub- section charges the said amount with a
liability to tax by its own force or to borrow the words of Lord Sumner, is apt
to ' impose a charge'.
In our opinion, the amount received as
repayment of excess profits tax must be deemed to be 'income' for the purposes
of the Indian Income-tax Act and for assessment it must be treated as income of
the previous year. The answer to question No. 1 given by the Calcutta High
Court was thus correct.
The appeal fails, and is dismissed with
costs.
Appeal dismissed.
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