P L D 1958 Supreme Court (Pak (PLP)

MUHAMMAD MUNIR C. J.

‑‑This is a certified appeal from the judgment of a Bench of, the High Court of West Pakistan at Karachi delivered on a reference .under section 66 (1) of the income‑tax Act. The appellant is the Imperial Tobacco Company of India. Limited, which was assessed to income‑tax as a "resident" by an Income‑tax Officer in Pakistan. The assessment was for the year 1948‑49 for which the previous year was the financial year 1947‑

48. It is admitted that the registered office of the Company and there?fore the control and management of its affairs throughout the previous year was in Calcutta, though the company carried on some business in Pakistan in that year. The Income‑tax Officer, the Appellate Assistant Commissioner, the Appellate Tribunal and the High Court (Constantine J. dis?senting) have all held that the Company was rightly taxed as "resident" under the Pakistan Income‑tax Law. The result of this finding is that the Company's profits which accrued to it in India and not in Pakistan during the previous year have been taxed. This is a somewhat startling result, contrary to all principles of taxation, which could only be upheld if it clearly followed from the terms of the Statute which governed the assessment in question. To appreciate the question involved, it is necessary to refer to the provisions of our Income‑tax Law which deal with the taxability of income. Under section 3 of the Income‑tax Act, XI of 1922, income‑tax is charged "in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other associa?tion of persons or the partners of the firm or members of the association individually". By section 4, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which :‑

(a) are received or are deemed to be received in British India in such year by or on behalf of such person ; or (b). if such person is resident in British India during such year,‑ (i) 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 ; . . . . . . (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. Substituting "Pakistan" for "British India" and putting these two sections in a simpler and non‑technical language: tax is charged on the total income of the previous year of every person ; all income of a person is taxable if it is received in Pakistan during the previous year, irrespective of whether he is or is not a resident of Pakistan; if a person is resident in Pakistan during the previous year all income that accrues or arises is taxable irrespective of whether such income accrues or arises in Pakistan or without Pakistan ; if a person is not resident in Pakistan then only such income as accrues or arises to him in Pakistan during the previous year can be taxed. The principle underlying these provisions is that income may be taxed on two bases : (1) receipt of income and (2) accrual of income. If a person is not a resident in Pakistan all that can be taxed is the income that he receives in Pakistan or that accrues to him in Pakistan during the previous year. But if he is a resident in Pakistan the income is taxable if it is received by him in Pakistan or if it accrues to him in Pakistan or outside Pakistan during the previous year. On this principle the appellant Company's profits in India during the previous year could be taxed only if the Company were held to be resident in Pakistan during the previous year. The simple issue therefore is whether the Company having its registered office outside Pakistan through?out the previous year could be held to be resident in Pakistan. It was conceded that under the law as it exists now the Company cannot be taxed on income which accrues to it outside Pakistan. It is further admitted that before the insertion of subsection (3‑A) to section 2 of the Income‑tax Act, which defines "British India" the Company could not have been taxed on its profits that accrued to it without Pakistan, the reason being that by clause 4 of the Governor‑General's Order No. XX of 1947 issued on the 14th August 1947, the words "British India" wherever they occurred in the Income‑tax Act had been substituted by the words "all the Provinces of Pakistan". If therefore the definition of "British India" had not been inserted in December 1947 by the Pakistan (Adaptation of Income‑tax, Profits Tax, and Revenue Recovery Acts) Order and the Act had to be interpreted as adapted by the earlier Adaptation Order of 14th August 1947, the appellant on no account could have been held to be resident in the "Provinces of Pakistan". With these preliminary observations, let us approach the question whether the company, could be treated as "resident" for the purposes of section 4 (1) (b) (ii) of the Income‑tax Act. At the time of the assessment in question the residence of a company was defined by section 4‑A (c) as follows :‑

"A company is resident in British India in any year (a) if the control and management of its affairs is situated wholly in British India in that year, or (b) if its income arising in British India in that year exceeds its income arising without British India in that year account not being taken in either case of income chargeable under the head `Capital gain'. Part (b) of this provision is not relevant to the case and the status of the company as a resident or non‑resident has to be determined with reference to part (a) of the definition. We have already pointed out that under clause (4) of the Pakistan Adaptation Order, No. 20 of 14th August 1947, the words "British India" wherever they occurred in the existing laws had in the case of Pakistan been substituted by "all the provinces of Pakistan". Had the matter stood there, the relevant part of the definition as adapted by clause (4) would have read : "a company is resident in "all the provinces of Pakistan" in any year if the control and management of its affairs is situated wholly in "all the provinces of Pakistan" in that year. But by the subsequent Adaptation Order No. 2 of 10th December 1947, which adapted the Income?-tax, Act, British India" was defined by subsection (3‑A) to section 2 as meaning "as respects any period before the 15th day of August 1947, the territories then referred to as British India but including Berar, and as respects any period after the 14th, day of August 1947, the territories for the time being comprised in the provinces of Pakistan". This definition was in force when the assessment in dispute was made, but Act I of 1953 omitted this subsection and instead substituted "taxable territories" for "British India" throughout the Act. The "taxable territories" were defined as meaning "as respects any period before the 15th day of August 1947, the territories then referred to as British India, but including Berar, and as respects any period after the 14th day of August 1947, the territories for the time being comprised in Pakistan". Thus the definition of "resident" in the case of a company as it stands today is : "a company is resident in taxable territories in any year (a) if the control and management of its affairs is situated wholly in taxable territories in that year . . . . .". Under the Pakistan Income‑tax Law the taxable territory can only be Pakistan, and if this definition were to be applied today a company would be resident in any year in Pakistan only if the control and manage?ment of its affairs were situated wholly in Pakistan in that year. On this definition, it was conceded by the learned advocate for the Commissioner of Income‑tax that the Department would have no authority to tax the company as a resident Company. And from that admission the further result must follow that even if the words "British India" were retained in the Act the conclusion must be the same because "taxable territories" have been defined by the Act in exactly the same terms as the words "British India" had been. The whole principle underlying the definition of "British India" for purposes of the Income‑tax Act is that where residence for a particular year in "British India" has to be determined, then in the case of Pakistan residence in Pakistan after 15th August 1947 would be treated as residence in "British India", or to say the same thing in another form, if a company has been resident in British India before 15th August 1947, and therefore, in Pakistan for the rest of the year, the two periods can be added together to determine the residence of the company in Pakistan. This interpretation is in accordance with, and gives full effect to the principle that statutes are not to be construed as abrogating International Law unless their language clearly leads to that result, and that extra‑territorial operation of a statute over foreigners is not to be presumed as having been intended unless it is expressly so stated. Says Odgers in his 1952 edition of Craies on Statute Law at p. 436; `It is quite clear', said Lord Westbury in Attorney General v. Campbell 1872 L R 5 H L 524, 531 that `you cannot apply an English Act of Parliament to foreign property while it remains foreign property'. This rule of law is `the natural consequence' of the proposition of international jurisprudence, that `every nation possesses an exclusive sovereignty and jurisdiction within its own territory . . . . . For it would be wholly incompatible with the quality and exclusiveness of the sovereignty of all nations, that any one nation should be at liberty to regulate . . . . things not within its own territory. It would be equivalent to a declaration that the sovereignty' over a territory was never ex?clusive in any nation, but only concurrent with that of all nations, that each could legislate for all . . . . . The absurd results of such a state of things need not be dwelt on". Thus, the Pakistan authorities' power to tax the foreign income of a company, the registered office of which has throughout the previous year been in Calcutta is not to be easily inferred, and unless the words of the statute unmistakably lend themselves to a contrary result, full effect must be given to the principle recognized by our own Income‑tax Law, that if a foreigner earns or receives income in Pakistan, that income alone is liable to Income‑tax and not the income earned by him in the country of his origin or elsewhere outside Pakistan. This result follows literally from the application of the definition of "British India" to section 4 A (c). What is not to lie overlooked and must prominently be borne in mind is that the previous year in the present case is the financial year beginning with 1st April 1947, and ending with 31st March 1948. This year is split up in two periods; the first period extending up to and including 14th August 1947, and the second commencing from the 15th August 1947 and ending on 31st March 1948. The definition of "British India" merely means this that whenever the point of time mentioned in the Act is before the 15th August 1947, the territory referred to at that time is the territory that then constituted British India and that where the reference is to a period subsequent to that date the territories meant are the territories of Pakistan. On this construction, the territories of Pakistan will have to be substituted for "British India" where it first occurs in section 4‑A (c) because the point of time con?templated is the end of the previous year, that is, a point occurring in the period commencing from 15th August 1947. For the same reason, for "British India" which occurs next in that provision the territories then included in British India will have to be substituted for the period up to 14th August 1947, and territories of Pakistan) from. 15th August 1947 to the 31st March 1948. This adaptation be comes necessary because, as already pointed out, the year for which residence has to be determined in this case is the year in which the dates 14th August 1947, and 15th August 1947, which occur in the definition of "British India", fall. Thus if the expression "all the provinces of Pakistan", "the territories for the time being comprised in the provinces of Pakistan and the Capital of the Federation," and "the territories for the time being comprised in Pakistan", which from time to time have been used in the adapta?tions and amendments of the Income‑tax Act, be considered, as they should be, as mere variations in the description of Pakistan, and the definition of "British India" be transposed into section 4‑A (c), the provision for the previous year 1947‑48 will read like this; "A company is resident in Pakistan in the year 1947‑48 (a) if the control and management of its affairs was situate in British India before the 15th August 1947 and in Pakistan after the 15th August 1947." This construction is consistent with the words and the sense of the definition of "British India" as well as with the principle observed in section 4 of the Income‑tax Act, and the rule of International Law that a legislature has authority to tax its citizens wherever they be, and to tax the foreigners only if they earn or receive income in the country for which that legislature has the authority to make laws. The interpretation adopted by the Departmental Authorities and by the High Court, is opposed to these principles and leads to this absurdity that the Pakistan Income‑tax authorities tax the foreign income of a company even if that company had its registered office for only a day during the previous year in Pakistan. For the reasons given above, we allow this appeal and hold that the assessee company was not resident within the meaning of section 4‑A (c) of the Income‑tax Act as to be taxed by the Pakistan Income‑tax authorities under section 4 (1) (b) (ii). The Department must pay the appellant's costs. A. H.???????????????????????????????????????????????????????????????? Appeal allowed.