1960 PLP 994 (PTD)

CORNELIUS, J.‑

I am of the opinion that this appeal should be allowed, and that in place of the answer which has been given by the Judicial Commissioner's Court to the question referred by the Income‑tax Appellate Tribunal, there should be substituted an answer in the negative. I base this conclusion upon the require ments of the statute, viz., the Income‑tax Act, 1922, and the existing state of the relevant authorities dealing with the question of the taxability of income received within the territory from abroad. We were not referred to any authority of a Court in Pakistan on the subject, but a large number of authorities from the Courts in India which are of binding effect unless overruled by this Court, having been pronounced prior to the Partition of the sub‑continent, are available by way of guidance. There are also several authorities of the Privy Council and of superior Courts in the United King dom, relating to provision of a similar nature in other Acts. The leading case on the subject is that of the Gresham Life Assurance Society ; ((1902) A C 287) where the money in question lead been earned abroad in the shape of interest, dividends and permium income, and had been applied for the purposes of the Society at the place where it had been received. The annual accounts of the Society in the United Kingdom showed monies thus received abroad, as well as monies expended abroad, for the purposes of a profit and loss account. An argument was raised in that case by the Attorney‑General on behalf of the Income‑tax Commissioners which is so closely parallel to that advanced in the present case, that the words in which it is stated in the report cited above may very advantage ously be reproduced here :‑ "In accordance with modern language money is received wherever its benefit or value is obtained. Where debts are paid out of money abroad which would otherwise have to be paid out of money here, there is a receipt here because the debtor is discharged." The reply to this argument is contained in a number of Indian cases which I shall presently mention. It was not noticed in any of the five speeches delivered in the Gresham Life Assurance Society Case. The argument setting up a case of constructive receipt was however repelled. Lord Halsbury L. C. being of the view that it was necessary for the money to be received in the country in order to bring it within the terms of the statute proceeded to observe that if the legistature had intended that bringing such money into account was to be equivalent to its being received, it would have been easy to say so, and concluded that no amount of bookkeep ing or treatment of the assets in that case, wherever they might be, would be equivalent to receiving the amount in the United King dom, Lord Macnaghten thought that the entering of the amount by the Society in the statement of its affairs was not material, for "every man and every company having foreign or colonial invest ments, of course knows of the interest arising from them, takes note of it, and enters it in any statement of affairs which may require to be made up", but that was a very different thing from bringing the interest home. Lord Shand said that while it was true that the Society had received the money abroad by the hands of their agents, it was "equally true that as they left that interest where it was gained, it was never received in this country." Lord Brampton thought that there must be actual receipt to satisfy the words of the statute and that entries in account‑books of foreign assets were not sufficient to show receipt of those assets in the United Kingdom. From the judgment of Lord Lindely, it is desirable that I should reproduce a passage at somewhat greater length, touching the question of receipt of money. The passage reads as follows ‑‑ "First, let us consider what is meant by the receipt of a sum of money. My Lords, I agree with the Court of Appeal that a sum of money may be received in more ways than one, i.e. by the transfer of a coin or a negotiable instrument or other docu ment which represents and produces coin, and is treated as such by businessmen. Even a settlement in account may be equiva lent to a receipt of a sum of money, although no money may pass, and I am not myself prepared to say that what amongst businessmen is equivalent to a receipt of a sum of money is not a receipt within the meaning of the statute which your Lordships have to interpret. But to constitute a receipt of anything must be a person to receive and a person from w horn he receives, and something received by the former from the latter and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt whatever else it may be worth." With reference to the relevant statute, Lord Lindley observed that "the locality of the receipt is made all important, and it is only by ignoring it or by introducing the expression `constructive receipt'‑which may mean anything‑that the claim of the Crown can be supported." The taxing section which is relevant in the present case, i.e., section 14 (2), (c) Income‑tax Act makes it clear that income accru ing within an "Indian State" is not taxable unless such income, pro fits or gains are received or deemed to be received in or are brought into British India". It was made clear in the arguments before us that the alternative expression, viz., "deemed to be received" was not relevant to the consideration of the present question and it was necessary, in order that the income should be liable to tax, that it should have been received in or brought into British India. (The tax relates to the assessment year 1943‑44 when "British India" was still in existence. The assessee‑company was resident in "British India", and the disputed item of income accrued as dividend declared by a Company resident in an "Indian State", viz., Kapurthala.) Cases in which money has been held to have been received in the territory although in a different shape from that in which it was received abroad may be briefly considered at the outset. In the case of Subramamaya Chettiar ((1935) 3 I T R 346) ; payment was made by a company resident in British India, to a creditor resident in British India, by means of bundies issued in British India on a firm in Penang, Federated Malay States, where the payment was eventually made. It was held that the money thus received by the creditor firm in Penang was received, for the purposes of Indian Income‑tax, in British India. A hundi, it may be observed, being a negotiable instrument is money's worth. In the case of Chidam baram Chetiar ((1935) 4 I T R 309) ; a house was acquired by the assessee from a person who lived abroad, the price being paid to such person, out of the assessee's monies available abroad. It was held that the price of the house was thereby received in British India. In the case of Manickam Chatiar ((1936) 5 I T R 534) ; a debtor paid to the assessee in British India, a debt which was due outside British India ; pay ment was made in the shape of jewels and transfer of a money decree and these were regarded as tangible assets, equivalent to money received in British India. In the case of Shrimati Intermani Jatia (19 T C 342) ; it was found that at shops in British India, there were entries of monies received from a shop in the Bahawalpur State, by means of hundi and cheques. These sums were held to have been received icy British India. Three cases from the United Kingdom may be mentioned. In the case of the Scottish Provident Institution (6 T C 34) ; income from investments in the United States had been converted into American bearer bonds, which were subsequently realised in the United Kingdom. This was accepted in the Court of Session of Scotland as amounting to receipt of the money in the territory. But in the case of the Scottish Widows Fund (5 T C 502) ; where such bearer bonds were not realised, but the coupons for half‑yearly interest attached to the bonds were removed and sent to America, where they were encashed, and the proceeds were re‑invested in America, the same Court held that this interest income was not received in the United Kingdom. The bonds themselves, though they represented a debt, were not presently payable, but on a date in the future and then in New York, where also the interest, was payable. The Lord President followed the case of the Gresham Life Assurance Society, and observed that the House of Lords had held itself to be "bound by the strict word of the Statute, and that word is `receipt', and nothing less than actual receipt will do." A bearer bond, in the relevant respect, is money's worth in the sense that it may be realised by sale in the open market. But a more complicated set of facts appears in the case of the Scottish Mortgage Company of New Mexico (2 T C 165). The business of this Company was to invest money abroad out of monies borrowed by way of capital in the United Kingdom. The modus operandi in respect of income earned abroad was to re‑invest such money abroad, and in the books kept in the United Kingdom to show (1) an equal sum as having been remitted abroad out of borrowings, for investment, and (2) a similar sum as accruing by way of income, which was applied to payment of interest on debentures and a dividend, extinction of a certain debit balance, and satisfaction of certain expenses. As it would be illegal to pay interest on debentures and a dividend to share-holders out of capital sums it was necessary that there should be, by a book‑keeping transaction, conversion of so such of the capital into an equivalent amount of income. It was therefore held that the book entries operated to create a certain sum into income, and this being equivalent to the interest earned abroad, must be regarded as a receipt of that sum from abroad. I proceed now to consider certain cases which arose in the pre‑Partition Indian jurisdiction, dealing with the question of taxability of income accrued abroad, if the benefit was received in British India. In four of these cases, the benefit received was in the shape of extinction of debt. The first case is that of Multanchand Johurmal ((1930) 58 Cal. 999) The assessee was a firm in Calcutta (British India) with a branch in Cooch‑Behar (an Indian State). A creditor of the Calcutta firm, who resided in Cooch‑Behar, was paid his dues in Cooch‑Behar, out of monies accrued in that place. In the books of the Calcutta firm, entries were made which purported to show remittances to Calcutta from the Cooch‑Behar firm, and extinction of the debt due to the aforesaid creditor. Rankin, C. J., held that the money in question was not received in British India either or, actually, or constructively. The money was lying in Cooch- Behar and was paid to the creditor there, and there was no remittance. It is important also to note that the firm in Calcutta and the firm in Cooch‑Behar were owned by the same joint. Hindu family, which was the assessee in the case. The next case for examination is that of Murugappa Chettiar ((1940) 8 I T R 297) where the assessee‑firm had branches in British India as well as in Malacca (East Indies). Money earned by the Malacca branch was remitted by hundi to a creditor of the British India branch who lived in an Indian State, viz. Pudukotah. The argument was raised that as the assessee firm's liability was thereby reduced in British India, the relevant amount should be held to have been received in British India. The Court repelled the argument holding that transmission had been between two places outside British India, and unless profits made abroad were received in British India, they could not be taxed under the Act. The case of Sarupchand‑Hukamchand (I L R 1945 Bom. 528) is very similar. The assessee was a partnership firm, which had places of business at Bombay and Calcutta in British India, and at Indore in the Holkar State. The Bombay accounts showed that debts due to two named creditors had been in part extinguished by cross‑entries as below :‑ "Debited to your account as per your instructions and credited to the Indore shop." As a matter of fact, the creditors were paid at Indore, out of the cash of the Indore firm. The question for decision was whether the corresponding sum had been received in, or brought into British India. It was answered in the negative, and the following brief passage from the concluding portion of the judgment of Kania Ag. C. J., states the ratio decidendi with clarity. Dealing with the question what is intended to be conveyed by the word `received' in the section, it was stated as follows:‑ "It does not amount to merely `lessening of liability in British India' as contended by the Commissioner. It means `receipt in British India of the amount' or by appropriate book entries, of an asset, which can be pointed out as resulting from the receipt." Chagla J., in a concurring judgment, in which he cited a large number of authorities, said:‑ "There is not a single case cited before us which goes to show that the Court has ever held that although no profits were received in British India in specie or in the form of tangible assets, on the theory of constructive remittance, the assessee was made liable." A more recent case, decided by the Madras High Court after the Partition is that of W. A. Beardsell & Co. (25 I T R 1). There the assessee firm was resident in Madras, and the money in question had accrued in an Indian State, viz., Bhopal, and under a direction from the assessee‑firm had been remitted direct to a firm in Manchester in the United Kingdom, to be credited against a large debt due by the assessee firm to the Manchester firm. The Madras High Court held that there was discharge or an obligation outside the taxable territory with monies held outside the taxable territory. Reliance was placed for the argument of constructive remittance on certain entries in the books at Madras, but it was held that these "merely evidenced the payment at Manchester, that is the extinguishment of the liability in part by such a payment." A case in which money earned abroad was converted into machinery which was imported into India for use by the assessee is that of the Ahmedabad Advance Mills (A I R 1940 PC 36). The Judicial Com mittee thought that the argument that thereby foreign income was brought into British India was "extravagant." In their opinion, things bought with money earned outside cannot be said to be income, and only income can be taxed. Now, in the present case, the relevant facts are as follows :‑ "The assessee Company had close business connections with the foreign Company, viz., the Hamira Company. On the 31st October, 1942, there was a debit outstanding against the assessee Company in the books of the Hamira Company amounting to about Rs. 78,

900. On that day, a dividend of Re. 1 per share was declared by the Hamira Company, acid the assessee Company holding 75,000 shares became entitled to receive a sum of Rs. 75,

000. By agreement, this amount was "paid by cancellation of the foreign company's claim against the assessee company" (vide the statement of the case). Entries were made in the books of both firms to show that this payment had been made. The question is whether the sum of Rs. 75,000 can be held on these facts, to have been received in or brought into British India. It is sufficiently obvious that if it can be supposed to have been brought into British India, it must also be supposed to have been sent back to Hamira, for the purpose of meeting the claim at Hamira. In other words, a double remittance must be presumed, by reason of the fact that the debt and the income applied for its satisfaction both accrued in Hamira." There need be no doubt whatsoever that the dividend income accrued in Hamira. It is settled law that the local situation of shares in a company is the place where they can be effectively dealt with, and that is ordinarily the place where the share register of the Company is kept, viz., in this case, presumably Hamira. A leading case on the subject is that of the Erie Beach Company (L R1930 AC 161). It is also clear that the declaration of dividend created a debt due to the assessee‑firm ; and that this debt was locally situated in Hamira and was payable in Hamira. In the Trinidad and Tobago case (L R 1945 A C 1) this question arose in relation to a dividend declared in Trinidad, to which a firm in the United States was entitled. The Judicial Committee observed as follows on this aspect of the case :‑ "The dividend declared in the resolution of the appellants, board created a bebt due from the appellant to Barber. It was, so far as local situation may be attributed to a debt, a debt which was locally situated in Trinidad. It was a debt due from a Trinidad company, created and payable in Trinidad." As regards the debt due from the assessee‑firm, there can be no manner of doubt that it was locally situated in Hamira, and was payable there. Accordingly, the position resulting from the agreement between the assessee‑firm and the Hamira company may be stated thus‑a debt due to the assessee‑firm, created i and payable in Hamira, was set off against a larger debt due from the assessee‑firm also locally situated in Hamira. In the situation thus created, any sign of a remittance from Hamira to British India must necessarily be far to seek. There would be nothing left to remit. This was not a case in which an equivalent amount of money was made available, to the assessee firm, for employment as income in British India, by means of book‑entries, as was found in the case of the Scottish Mortgage Company of New Mexico (cited above). There were merely book‑entries, and perhaps also entries in a profit and loss account, but the authorities from the case of the Gresharn Life Assurance Society (cited above) onwards have been clearly and consistently to the effect that such action is in accordance with the proper duty of a company to maintain accounts of its affairs, wherever they may be situated, and to present in its annual statement of affairs, a true picture of its monetary position, taking into account all income accrued and expenditure incurred at every place where it has business dealings. This principle was adopted and followed in the case of the New India Assurance Company ((1938) 40 Bom. L R 803) and is not to be regarded as foreign to the Pakistan jurisdiction. Action of this kind by an assessee has never been regarded as furnishing by itself proof of receipt of l the relevant monies from abroad. Some observations in the Trinidad and Tobago case (cited above) have been made ground of strong reliance by the Com missioner of Income‑tax in his "concise statement of the case" presented to this Court, and it is necessary therefore to examine the facts and the decision in that case. The assessee was a company known as the Trinidad Lake Asphalt Operating Company Ltd., which was owned almost wholly by the Barber Asphalt Corporation of New Jersey, U. S. A. The latter owed a debt of over a million dollars to the assessee‑company for asphalt supplied. The assessee company declared a dividend in favour of the Barber company in the exact sum due as a debt for Asphalt supplied, and by the same resolution decided that payment should be made by cancellation of the debt. This was done by means of book‑entries. Under the law of Trinidad, a resident agent" was liable to be assessed and to pay tax on any income derived from any source in the Colony, which was transmitted by him to a 'non‑resident. The non-resident was himself liable to the tax, but as was pointed out by the Judicial Committee the law was enacted to overcome difficulties of collection. The Barber Company being resident outside Trinidad, recovery from them was not possible, since the Courts of one country will not enforce the revenue laws of another. The question therefore before the Judicial Committee was whether the .book entry constituted a transmission within the meaning of the statute, and it was answered by them in this way. They held that the set‑off was in fact a payment and receipt, in respect of both of the price of asphalt supplied and of the dividend declared, and proceeded to their conclusion in the following words :‑ "There is actual, not merely notional or constructive payment of the indebtedness on either side. There is thus a 'transmis sion' of funds whether the transmission is only across a table or is across the ocean. Transmission involves indeed, an intermediate space, but does not depend on the extent of the space." Later, after discussing various modes of payment in the modern practice, they observed :‑ "The only evidence or material embodiment of the transaction may consist of entries in the books on each side made in pursuance of their agreement, but what has happened is, if so intended, equivalent to a receipt of money, in Lord Lindley's words, and a receipt of anything by a person who is at a distance from the sender involves a transmission". The Judicial Committee were not required to adjudicate upon the question whether the money was received in the United States. Their observations carefully avoid any reference to this question, which, if it had arisen, would have afforded a parallel to the present case. For here we are not concerned to ascertain whether by the transaction in Hamira, a "transmission" was effected. Our concern is with the question whether any money was thereby brought into or received in British India. Taxability based on a special law designed to hit transmission of money from the territory is wholly different from an impost Lald upon money brought into or received in the territory. The Trinidad and Tobago case might have been in point if it had dealt with the liability of the Barber Company to United States tax in respect of the dividend accrued to it in Trinidad. The position of the assessee‑firm here in relation to the transactions in Hamira is precisely that of the Barber Company qua the transactions in Trinidad, in the precedent case. On the well- settled principles appearing from the English and Scottish cases already cited, it is, in my opinion, permissible to conclude that, under the law of the United Kingdom at least, the income accrued in Trinidad would be thought to have been left there, and applied there. There is no case which could serve to find a conclusion that there was a remittance to or receipt by the Barber Company in New York, as a result of the transaction. And as I have already pointed out, if a notional remittance be postulated, then it is necessary also to suppose a constructive remittance back. The authorities are uniformly opposed on principle, where there is no actual receipt, to having recourse to "constructive receipt". Invariably, a tangible acquisition has been looked for, and the furthest that the Courts have gone in construing such an acquisition out of book‑entries is where a conversion of capital into income was effected thereby the Scotish Mortgage Company of New Mexico case (cited above). Accordingly, it seems to me to be clear that the transac tion in the present case, to the extent that it operated on anything tangible, was concluded in Hamira. The book entries in British India, therefore, cannot be regarded as evidencing a receipt or bringing in, for as a result of the transaction there was nothing Left to be received in, or brought into, British India. It remains to consider the argument which found favour with the learned Judicial Commissioners. It has been stated in their judgment in the following words :‑ "So merely because a payment has the effect of lessening the liability does not mean that payment has not been made or the amount has not been received. The liability of a person is lessened when the amount is paid irrespective of the form that the payment takes; so our view is that Rs. 75,000 was actually received in Nawanshahr." The argument is precisely the same as one which was put forward in the Gresham Life Assurance Society case by the Attorney‑General, and which has been quoted already from the report of the case. The reply to it is contained in the several rulings which I have already cited from the pre‑Partition Indian jurisdiction, dealing with the satisfaction of debts arising out of the territory, out of income accrued outside the territory. These rulings are, in my opinion, based on clear and sound reasoning, and I respectfully agree with them. It only remains for me to say that, since the assessee‑company and the Hamira firm were separate entities, the mere fact of their having several Directors in common, does not affect the principle upon which I think the question raised in this case should be answered. ORDER OF THE COURT In accordance with the view of the majority of the Judges, the appeal is dismissed with costs. Appeal dismissed.