P L D 1971 Dacca 185 (PLP)

A. S. CHOWDHURY, J.‑The Income‑tax Appellate Tribunal, Dacca Bench, Dacca has referred the following questions for our opinion under section 66 (1) of the Income‑tax Act (herein after called "the Act"). "(1) Whether on the facts and in the circumstances of the case income could be deemed to have accrued or arisen to the applicant in Pakistan whithin the meaning of sub section (1) of section 42 of the Income‑tax Act, 1922. (2) Whether on the facts and in the circumstances of the case commission received by the applicant on the goods sold by Kanknarrah Co. Ltd., was assessable in Pakistan." Facts relevant for the purpose of considering the question referred to us are as follows:‑ Jardine Henderson Ltd., is incorporated in India, having its registered office in the city of Calcutta. By virtue of an agreement made on 19‑3‑47, the assessee became Managing Agent of the Kankarrah Co. Ltd. (hereinafter referred to as "managed company"). In accordance with the terms of the said agreement, the assessee was vested with the powers of general management of the property of the company including its business transactions. With regard to its remuneration it was stipulated that it would receive a commission of 2 per cent. on the gross profits arising from the sale of goods produced at the mills of the company and any other goods sold by the company, and also an office allowance of Rs. 200 per mensem. The assessee's case is that the managed company had no business in Pakistan and the commission received by it from the managed company's business in India was not assessable in Pakistan, inasmuch as, the commission was to be calculated on the basis of the sale of goods which were manufactured and sold in India. The managed company, however, had some properties which were under requisition, and, although the assessee looked after the said properties it derived no income for such properties in Pakistan. In that view of the matter the assessee‑company submitted a return showing that it earned no income in Pakistan. The Income‑tax Officer, however, did not accept the contention of the assessee‑company and took into consideration the commission as well as the office allowance received by it and made the assessment under reference. The appeal before the Assistant Commissioner as well as the Appellate Tribunal ended unsuccessfully for the assessee. Thereafter, on an application under section 66(I), the question set out above were referred to this Court for our opinion. Mr. S. M. Husain, learned Advocate for the assessee, submits that it is not liable to pay any tax, for, it has not earned directly or indirectly any income whatsoever in Pakistan. His contention is that it is clearly laid down in the agreement in question that the assessee would be paid 2 % of the income derived out of the goods in India. This has no reference whatsoever to the management of the company in Pakistan. He concedes that for the purpose of assessment a sum of Rs. 2,400 paid to the assessee as office allowance can be taken into conside ration, for, that amount was given also for the purpose of the managed property in Pakistan. Mr. Afzalul Haque, on the other hand, submits that the questions referred to us are covered by the decision of our Supreme Court in the case of Macneill & Barry Limited v. Commissioner of Income‑tax East Pakistan Dacca in Civil Appeal No. 27‑D of 1967. The salient feature of the case is that the assessee is the managing agent of the managed company which has no business in Pakistan. It has some property in Pakistan for which it received no income but the assessee‑company will earn income at a certain ratio for the goods manufactured by the managed company and sold in India. Keeping this in view, we shall try to find out the position in law. At this stage, we would read subsection (1) of section 42:‑ "All income, profits or gains accruing or arising whether directly or indirectly, through or from any business connec tion in taxable territories or through or from any property in taxable territories or through or from any asset or source of income in taxable territories or through or from any money lent at interest and brought into taxable territories in cash or in kind, or through or from the sale, exchange or transfer of a capital asset in taxable territories shall be deemed to be income accruing or arising within taxably territories and where the person entitled to the income, profits or gains is not resident in taxable territories shall be chargeable to income‑tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this act the assessees in respect of such income‑tax." Mr. Husain argues that an income accruing to an assessee from any business connection would be an income liable to taxation but in this case this condition is not fulfilled. Mr. Afzalul Haque's contention is that the agency of the managed company as held by the assessee is the business connection through which it derived an income indirectly and as such it is liable to assessment. Mr. Haque's further contention is that in view of the services rendered by the assessee it was paid an amount by the managed company and the procedure for payment was laid down in a certain specified manner. He submits that it would not be correct to look at the actual source from which the payment of the commission earned by the assessee is made divorced from this special feature obtaining in the case that it embodied an obligation on the assessee to render services in Pakistan. Mr. Haque relies on an earlier decision of the Supreme Court in the case of Ociavius Steel & Company Ltd. v. The Commissioner of Income‑tax, Dacca (P L D 1960 S C 371). In that case the appellant was a company with its head office located in Calcutta. It was ren dering services as managing agent to one Electric Supply Company and five different offices. Although the nature of the managing agency agreement with all the companies was similar, the basis of the remuneration varied from company to company. In that case it was argued since the managing agency functioned from Calcutta outside taxable territories, it was not liable to assessment in Pakistan for the income earned by it in Calcutta. In that case it was held that managing agency was a business and that since is was a business it would come within the ambit of subsection (1) of section 42, for, this would then be treated as a business connection. Mr. Husain's contention, however, is that the managing agency may be a business but the assessee does not earn income for looking after the properties. It is true in Octavius Steel and Company the basis of payment of com mission was on percentage on sale of tea grown in Pakistan. But it will be found that the contention of Mr. Afzalul Haque finds support in the observation of the Supreme Court. On the question of managing agency, as just noticed by us, it was observed: "There could be no question but that a managing agency is a business. It was clear also that the managed companies were each of them individually a business. The management of one business by another business can hardly be regarded as anything else but a business. It was clear that the managed businesses were being managed on a business basis, that is, by a remuneration proportionate to the income earned so that the managing business was encouraged to expand the business of the managed business to the same extent as the latter might have done for itself and the connection between the appellant‑company and the managed businesses was a business connection." We are clearly of opinion that on the principle laid down in that case, the assessee‑company has a business connection in Pakistan within the meaning of the expression "business connec tion" occurring in subsection (1) of section

42. The question, however, is: Has it earned any income out of that business connection in Pakistan ? Mr. Hussain argues that the basis of the remuneration is not available in Pakistan. Mr. Haque contends that the income is on account of the services rendered. Therefore, the basis of payment not being available in Pakistan would not make any difference. It is true sub section (1) of section 42 has gone so far as to include income which has accrued or arises directly or indirectly through a business connection in taxable territories. The expression deemed to be' occurring in subsection (1) of section 42 was considered by Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council (1952 A C 109). In that case his Lordship observed "If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, along imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs." Keeping these observations in view, Mr. Afzalul Haque has been rightly invited our attention that in the case of Octavius Steel & Co. referred to above, the Supreme Court observed that for an income to be taxable in Pakistan, it was not necessary for it is to be receivable in Pakistan. Cornelius, C. J. who delivered the judgment of the Court observed. "The statute does not require that income in order to be taxable should also be receivable. It speaks of accruing and arising and it has long been settled that the aspect of accrual or arising is to be understood in contradiction to the act of receiving, which ordinarily follows and may often follow long after the accrual or arising of the income". We are of opinion that this obser vation supports the contention of Mr. Haque, for, in this case the income has accrued as a result of the services rendered in Pakistan, although it was receivable in India on the basis of sale of goods which were not manufactured or sold in Pakistan. A In view of the wide import of the principle laid down by their Lordships of the Supreme Court it appears that the view taken by the Tribunal is covered by it and the Tribunal is right in considering that the present case was covered by the decision in question. In the case of Macneill & Barry Ltd., which was decided on the principle laid down in the case of Octavius Steel & Co., it was observed, "this order leaving no manner of doubt that the managed‑company with its principal office in London is concerned only with profit and loss accruing to it as a result of the business transacted on its behalf by the assessee‑company in India and Pakistan. The contention that the assessee‑company controls and supervises the business of the managed‑company from its head office in Calcutta is, therefore, factually incorrect. Indeed full control of business operations of the managed company is in their hands . . . . ." This observation would also apply in the present case for the full control of all the affairs of the managed‑company are in the hands of the assessee company as would appear from a perusal of the agreement between the assessee‑company and the managed‑company. Since we are of opinion that the instant case is covered by the decisions of the Supreme Court as indicated above, the questions referred to us should be answered in the affirmative and we order accordingly. In the facts and circumstances of this case, we are of opinion that we should not burden the assessee with costs and we therefore leave the parties to bear their own costs. NURUL ISLAM, J.‑I agree. Questions answered in the affirmative.