P (PLP)

In the application for reference in the Excess Profits Tax case, six questions were alleged to arise out of the Tribunal's order. The first four of these were the same as in the income‑tax case and the remaining two questions were suggested to be: (vi) Whether in view of the facts and circumstances of the case the Bench was legally‑ right in holding that the assessee company is liable to pay Excess Profits Tax on Rs. 12,925 ? (vii) Whether now on the findings of the Bench that the present case is covered by section 4 (1) (a) of the Income‑tax Act, the Bench was legally right in holding that the assessee company was liable to pay any Excess Profits Tax particularly in view of the language of section 5 of the Excess Profits Tax Act of 1940 ? For the reasons given by them in their statement of the case, the Tribunal thought that only two questions arose in both the cases, namely :‑ (1) Whether on the facts of the, case the profits made by the assessee on sales of Rs. 1,45,332 made at Lahore through Sir William Roberts (Shahdara) Timber Co., Ltd., accrued or arose in British India within the meaning of section 4‑A (c) of the Indian Income‑tax Act ? . (2) Whether on the facts of the case as found by the Tribunal, any portion of the profits or sales of shooks made at Lahore of Rs. 1,45,332 fall to be apportioned in terms of section 42 (3) of the Indian Income‑tax Act ? Among the questions suggested by the assessee two questions should be specially noticed at this stage. One of these was question No. (v) in the income‑tax case which asked whether the application of a flat rate of 30 per cent. profits to the sale of shooks was justified by law or evidence and the other which was the very first question in that case inquired whether on the facts found by the Tribunal they could have arrived at the result that the profits and gains on the sales of shooks in British India could be said to have been received in British India by the assessee or on behalf of the assessee. The Tribunal have refused to refer these two questions, because they consider that these were purely questions of fact and did not raise any question of law. The assessee alleges that the statement of the case is not complete and that questions Nos. (i) and (vi) in its application for reference arise directly and that in the form in which the assessee had required the Tribunal to state them they raised issues of law which the Tribunal were bound to refer. Accordingly, the assessee has urged that the statement of the case be remitted back to the Tribunal with the direction that these two questions should also be stated for this Court's opinion. In order .to dispose of this contention it is necessary to examine the whole legal position, to bring out the issues on which the correct decision of the case depended and to consider whether the two questions which the Tribunal have declined to state are purely questions of fact or in the circumstances of the case questions of law. We have already pointed out that the shooks which are manufactured in Kashmir are partly sold in British India through the Lahore Company. The statement recites that the latter company is the agent of the former company, though it does not mention the facts on which the finding as to agency is based. From the manner in which this case has been dealt with it seems to be obvious that the Income -tax Officer considered subsection (1) of section 42 of the Act to be applicable and that the assessment has in fact been made through the Lahore Company as the agent of the Kashmir Company. This could be the only meaning, if what the Appellate Assistant Commissioner states in his order, namely, that the Kashmir Company "has been assessed through Messrs. Sir William Roberts & Co., Lahore, as its agents" is correct. It is true that the Tribunal have held the case to be outside the provisions of section 42, because the profits have been held by them to have been received in British' India by or on behalf of the Kashmir Company. They have riot, however, examined the effect of this as finding on the method of assessment to Excess Profits Tax, a matter to which we shall refer presently. With a view to comprehending the precise legal position it is necessary to examine the scheme of the Act in so far as it has a bearing on the present case. By section 3 of the Income‑tax Act, tax has to be charged for a financial year in respect of the total income of the assessee for the previous year. Section 4 defines what total income is in the following manner :‑

" (1). Subject to the provisions of this Act, 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, or (iii) having accrued or arisen to him without British India before the beginning of such year and after the 1st day of April 1933, are brought into or received in British India by him during such year, or (a) 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." Clause (c) of section 41 declares a company to be resident in British India in any ye r (d) if the, control and management of its affairs is' situated wholly, in British India in that year or (b) if its income in British India in that year exceeds its income arising without British India in that year: As the terms of section 42 of the Act are material to the determination of the points involved in this case, subsections. ( i) and (3) of that section also need reproduction: They are in these terms :‑ (1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India, or through or from any property in British India, or through or from any asset or source of income in British India, or through or from any money lent at interest and brought into British India in cash or, in kind, shall be deemed to be income accruing or arising within British India, and where‑. the person entitled to the income, profits or gains is riot resident in British India, 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 assessee in respect of such income‑tax; (3) in the case of business of which all the operations are not carried out in British India the profits and gains of the business deemed under this section to accrue or arise in British India shall be only such profits and gains as are reasonably attributable to that par; of the operations carried out in British India." It is clear from the terms of the sections reproduced above that tax for a particular financial year has .to be paid on the total income of the assessee for the previous year and that total income under section 4 of the Ac` has to by educated either on the receipt or. the accrual basis or on both bases. If income, profits and gains, from whatever source derived, are received or are deemed to be received in British India in the previous year by or on behalf of 'a person, that person is liable' to income‑tax whether he is or is not resident in British India. The test under' this provision is the place of receipt of income and not the residence of the person receiving it. But, on general principles a person, who is a resident of British India, is liable to tax in respect of his total income, whether that income accrues to him in British India or elsewhere and this position is recognised by clause '(b) of section 4 (1) which declares that all persons resident in British India during the previous year are liable to have included in their total income, any income which accrues or arises or is deemed to accrue or arise to them in British India during the previous year or which accrues or, arises to them without British India during such year, or which having accrued or arisen to them without British India during a particular period is brought into or received by them in British. India during the previous year. In the case of a person who is not resident in British India, only such income is liable to be included in his total income as has accrued or arisen or is deemed to have accrued or arisen to him in British India during the previous year. This is recognized by clause (c) of the first subsection of section

4. In the present case, therefore, if the profits and gains from the sales of shooks were received in British India or could be deemed to have been received in British India in the previous year they could be included in the total income of the person who received them if they were received in British India by him or by someone else on his behalf during the previous year, irrespective of 'whether their owner was or was not a resident of British India. Accordingly, if the Tribunal's finding that such profits were received in British India during the previous year by or on behalf of the Kashmir Company is correct, no other question would arise in the case and the profits in question would be liable to tax under section 3 read with section 4 (i) (a). But; as already pointed out, besides the income received in British India some other incomes are liable to be included in the total income of a person. Such cases are mentioned in clauses (b) and (c) of subsection (1) of section 4, according to which in 'the case of a person resident in British India, the income that accrues or arises or is deemed to accrue or arise to him in British India during the previous year, or which accrues or arises to him without British India during such year, has to be included in his total income. If the person concerned is not a resident in British India, by reason of clause (c) he is liable to have included in his total income all such income as accrues or arises is deemed to accrue or arise to him In British India during the previous year. Sections 3 and 4 contain the main provisions relating to the taxability of income, but so far as the liability of non‑residents is concerned, the Legislature reverts to it again in section 42 which provides that income, profits or gains accruing or arising in any of the manners mentioned therein, shall be deemed to be income, profits or gains accruing or arising; within British India and that where the person entitled to such income, profits or gains is not resident in British India, that income or those profits or gains shall be chargeable to tax either in his name or, in the name of his agent in British India, and in the latter case the agent shall be deemed to be the assessee in respect of such income‑tax. This section must, therefore, be considered to be an explanation clause to clause. (c) to subsection (1) of section 4, according to which a person who is not a resident in British India during the previous year, is liable to tax on income that accrues or arises or is deemed to accrue or arise to him in British India during the pre vious year. When this clause is read with section 42, the result is that even persons who are non‑residents but to whom income accrues in any of the manners stated in that section become liable to pay tax This resift is attained by section 42 directing that income, profits and gains 'accruing or arising directly or indirectly through any of the means mentioned therein have to be deemed to be income accruing or arising within British India and the moment such income, profits or gains acquire that description they become taxable under section 3 read with clause (c) to subsection (1) of section 4, which directs to be included in tie total income of a non‑resident not only income that accrues or arises to him but also income which is' deemed to accrue or arise to him in British India. It is, therefore, obvious that if section 42 applies to this case, effect will have to be given to subsection (3) of that section which qualifies the general provision in subsection (1). Under subsection (3) in the case of a business of which all the operations are not carried on in British India, the profits and gains of the business deemed under that section to accrue or arise in British India shall be only such profits and gains as are reasonably attributable to that part of the operations which is carried on in British India. The Appellate Assistant Commissioner was throughout under the impression that the Kashmir Company had been assessed through the Lahore Company under subsection (1) of section 42, and, if he was right in that assumption, he was, if taxability in the present case was determined only by accrual, bound to apply the provisions of subsection (3), because the profits had accrued on the sale of shocks which had been manufactured in and imported from Kashmir and in the case of such business it is settled law that profits cannot be said exclusively to accrue where the product is sold. The leading authority on this, subject is the recent decision of the Supreme Court of India in Commissioner of Income‑tax, Bombay v. Ahmedbkai Umarbhai Co., Bombay ((1950) 18 I. T. R. 472) In that case the assessees were a firm resident in British India who carried on the business pf manufacturing and selling groundnut oil. They had three mills in Bombay and one at Raichur in the Hyderabad State where oil was manufactured. The oil that was manufactured at Raichur was sold partly in Raichur and partly in Bombay. The assessees contended that a part of the profits derived from sales in British India of the oil manufactured at Raichur was attributable to the manufacturing operations at Raichur and that such profits should be excluded from assessment to Excess Profits Tax under the third proviso to section 5 of th‑j Excess Profits Tax Act, 1940. The department, on the other hand, contended (i) that the manufacturing operations carried on at Raichur did not constitute a part of the assessee's business within the meaning of the third proviso to section 5, and (ii) that even, if such operations could be regarded as a part of the business the profits derived from sales in Bombay could not be said to have accrued or arisen in that State. All the six Judges, who heard the appeal, agreed in holding that the activity which the assessees carried on at Raichur was a part of their business within the meaning of the third proviso to section 5, that the profits of a part of the business, viz., the manufacture of oil in their mills at Raichur, accrued or arose at Raichur and that such profits were not assessable to Excess Profits Tax. Dealing with the question of accrual of profits, Kania, C. J. observed:‑-- "The next contention of the appellant was that even if a part of the business was in an Indian State the profits accrued or arose only on the sale of the oil in Bombay and no part of the profits of manufacture therefore arose in an Indian State. In my opinion this argument. is also unsound. On the sale of goods the assessee receives money. While the receipt of the price is thus in Bombay, it is an entirely different thing to say that therefore the whole profits of the manufacture and sale arose in Bombay. This argument overlooks the distinction between accruing or arising on the one hand and receipt on the other. Again, the question of profits has to be determined not on receipt of the price of each lot sold by the assessee but the result of all the operations in connection with the manufac ture and sale .of oil during the accounting year. An individual transaction may result in profit but that will not make the assessee liable if the result of his accounting year's activities is a loss. It is therefore improper in a case of this kind to consider the sale of oil as the deciding factor either to ascertain profits or to determine the place of the accrual of profits. Several cases were cited at the Bar dealing with a trader's business where he bought and sold goods. In my opinion those are not relevant to determine the question before us because in the present case the business is of a different nature. The reasoning of Mahajan, J. ran in a similar strain. He said at page 495 of the report :‑ " On behalf of the Commissioner it was contended that the place where the profits accrue or arise is not ordinarily the place where the source that produces the profits is situate and that the High Court had erred in taking the view that in respect of sales of oil in British India produced by the mill at Raichur any profits accrued at the place of manufacture. It was said that profits in such 9 case, only accrue at the place of sale and not at the place of manufacture. I am unable to accede to this contention. It is true that no profits are realized until the oil is sold but the act of sale merely fixes the time and place of receipt of profits. Profits are not wholly‑made by the act of sale and do not necessarily accrue at the place of sale. Act of sale is the culminating process in the earning of profits but it goes without saying that the act 'of sale could not be performed unless tile goods were produced at Raichur and it could be wrong from a business point to say that all the profit s' resulted from that operation. It was the operation of manufacture at Raichur that enabled the assessee to' sell oil and some portion of the profits must necessarily be attributable for the manufacturing process. To the extent that the, profits are attributable to the manufacture of‑oil it is not possible to say that they accrue or arise at any place different from the place where the manufactured article‑came into existence." ' In the present case, the business activity of the assessee consisted of (1) the extraction of timber, (2) the manufacture of shooks and (3) the sale of shooks. The first two activities were., carried on outside British India, but the third activity qua the transactions in question was confined to British India. I, therefore, the assessee's case fell under clause' (c) to subsection (1) of section 4, the provisions of section 42, including those' of subsection (3) to that section were immediately 'attracted by reason of the fact that the Kashmir Company effected the sales in British India through a business connection. Therefore in the present case if the liability were determined only by clause (c) to sub section (1) of section 4, the answer to the questions referred by the Tribunal would be that the profits on the sale of shooks did not exclusively accrue or arise in British India and that such profits should have been apportioned in terms of subsection (3) of section)

42. In their statement of the case and their order under section 33, however, the Tribunal state that the profits not only accrued or arose in British India, they were also received in British India. Now, if their finding be correct that the profits in question were received in British India during the previous year by or on behalf of the assessee, there the profits were taxable under clause (a) to subsection (1) of section 4, irrespective of whether the assessee was or was not a resident. The question of the residence of the assessee became material in this case only in connection with the assess ability of the income accruing to it outside British India, i.e., the State of Kashmir. If the result of taxing the profits on receipt basis made the income of the assessee in British India exceed its income in Kashmir, the assessee could rightly have been treated, as it actually, was, by the Tribunal as a company resident in British India under clause (c) to section 4 (A) of the Income‑tax Act. But in that case the two questions that have been referred by the Tribunal would not have arisen, because, as already pointed out, where a person is assessed on receipt basis under clause (a) to subsection (1) of section 4 his residence' is wholly immaterial. The basis; of taxability in' such a case is the place of receipt of profits and not the place of their accrual or the residence of the assessee. The real point, therefore, that arises in the case is whether the Tribunal were right in holding that the profits in question were received in British India by or on behalf of the assessee, i. e., the Kashmir Company. The assessee asked the Tribunal to refer this question to this Court, but they refused to do so on the ground that the question was purely one of fact. It is true that this question is ordinarily one of fact, but where the point is whether the finding about the receipt of the profits was based on any ‑material, the question at once becomes one of law. In recording their finding on this aspect of the case the Tribunal seem to have been influenced merely by the consideration that the sale of shooks took place in British India where the sale price was paid. This, however; is never a determining circumstance. We have already said that the Lahore Company has been treated by the Tribunal as the agent of the Kashmir Company though it is not dear, nor is it stated, on what material the Tribunal arrived at this finding. In order to determine whether the profits in question were received in British India by or on behalf of the Kashmir Company, it was necessary to 'examine the nature of the connec tion between the two companies qua the transactions in question. On the present statement of the case, all that can be said is that the sales were effected by the Lahore Company who also received the price. It nowhere appears from the, statement of the case whether the Lahore Company sold to their customers as principal to principal or on behalf of an undisclosed principal, or as agent of a disclosed principal. Nor does the statement disclose how the Lahore Company was held to have received the profits on behalf of the Kashmir Company. If a foreign company sells its goods in British India through a servant or a salesman as was the casein Hira Mills Ltd, Cawnpore v. Income‑tax Officer, Cawnpore, ((1946) 14 I T R. 417), who also receives the price on behalf of the company, it may be that clause (a) to subsection (i) of section 4 becomes applicable. Profits may also be said to have been received in British India where they are received by a person in British India on behalf of a foreign company in pursuance of an authority given to him for the purpose and are subsequently remitted by him to his principal abroad: This was the position in Pondicherry Railway Co., Ltd. v. Commissioner of Income‑tax, Madras (A. I. R. 1932 P. C. 165). But the peculiar feature of that case was that the agent received and under standing instructions distributed a part of the profits after they had been determined by the working agent of the foreign company. In the present case, we do not know on what material the finding as to. agency has been recorded and what was the nature of the business connection between the two companies. Before, therefore, we finally dispose of this reference, we would require the Income‑tax Appellate tribunal to re‑state all the relevant facts in regard to the receipt of profits on behalf of the assessee. We direct the Tribunal to state the case on the first question which had been framed by the assessee in its application for reference and which the Tribunal refused to refer on the ground that it was a question of fact. Neither in their order under section 33, nor in the statement of the case have the Tribunal given their reasons for the view that the payment of sale -price of the shooks to the Lahore Company amounted to a receipt of the profits by or on behalf of the Kashrpir company.‑ The question on which the case is to be‑re‑stated is :‑‑ "Whether there was any material to support the Tribunal's finding that the entire profits on the sale of shooks were received in British India during the previous year by or on behalf of Sir William Roberts Timber Co. Ltd., Baramula ?" We cannot accede to the assessee's request that 'the question relating to the Tribunal's power to reject the accounts in the circumstances of the case and apply a flat rate of profits is a question of law which the Tribunal should be directed to state. In the application for reference in the Excess Profits Tax case one of the questions that the Tribunal were required to state was whether on the findings of the Bench that the present case was covered by section 4 (1) (a), of the Income‑tax Act, the Bench was legally right in holding that the assessee company was liable to pay any Excess Profits Tax. In view of what we have already said it appears to us that this question did arise in Iris case and that the Tribunal were not right in declining to refer it to this Court. By section 5 of the Excess Profits Tax Act that Act only applies to businesses of which any part of the profits is chargeable to income tax by virtue of the provisions of sub‑clause (i) or sub‑clause (ii) of clause (b) of subsection (1) of section 4 of the Indian Income tax Act or of clause (c) of that subsection. By the third proviso to section 5 where the profits of a part of a business accrue or arise in an Indian State, such part shall be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other, part of the business shall be deemed to be a separate business: It is, therefore obvious that the Excess Profits Tax Act does not touch profits that are merely received into British India and that, subject to certain qualifications, it is concerned only with profits that are computed in the total income of an assessee by reason of their accrual in the circumstances mentioned in clauses (b) and (c) of subsection (1) of section 4 of the Income‑tax Act. Accordingly, even if the Tribunal were right in taxing the profits from the sales of shooks under clause (a) of sub section (1) of section 4 of the Income‑tax Act because of their having been received into British India, they could not, for that reason alone, hold such profits liable to Excess Profits Tax, and were bound to give effect to the third proviso to section 5 of the Excess Profits Tax Act and allocate a part of the profits to the business in British India where the shooks were sold and a part to the business in the State of Kashmir .where the shooks were manufactured. For these reasons we direct the Tribunal to refer to this Court this part of the case in their supplementary statement. The matter may be referred either in the form of the question suggested by the assessee or in the form of another suitable question. Any documents to which the Tribunal may have to refer in their statement will be appended to the statement. Statement to be submitted within two months. A. H Reference answered. Cast directed to be stated