1960 PLP 786 (PTD)

(5) Whether there .was any evidence to support the findings of fact that the assessee firm earned gross profits at 10% on sales made by the shop at Amritsar in the name of Pokardas Menghraj and not at 5.16% as disclosed by the closed, completed and adjusted accounts ; (6) Whether there was any evidence to support the finding of fact that the assessee firm earned gross profit at 10% on sales made by the shop at Sukkur in the name of Pokardas Menghraj and not at 6.14% as disclosed by the closed, completed and adjusted accounts ; (7) Whether there was any evidence to support the finding of fact that the assessee firm earned gross profit at 10% on sales made by the shop at Sukkur in the name of Dwarkadas Naraindas and not at 4.8% as disclosed by the closed, com pleted and adjusted accounts. If the answers to questions (4) to (7) be in the affirmative‑ (8) Whether in view of the enhancement of the value of the closing stock for the assessment year 1942‑43 through the adoption of higher rates of gross profit other than those disclosed by the accounts, the value of the opening stock for the assessment year 1943‑44 should have been increased to the same extent and the profit for the purpose of the assessment for that year decreased accordingly ; (9) Whether there were any finding of fact by the Tribunal to support its conclusion that the income of Rs. 71,450 in respect of the Cambay Mills accrued and arose in British India ; (10) Whether there was any evidence to support the finding that the said income of Rs. 72,450 accrued and arose in British India." Out of them, questions No. 1 to 8 are identical to those raised and discussed in References Nos. 1 and 4 of 1948 reported as (P L D 1957 Kar. 61). We have carefully considered this aspect of the case in the said references and for the reasons given therein, we hold that these questions being questions of fact and based on sufficient material, the Income‑tax Appellate Tribunal was perfectly justified in refusing to state the case and refer these questions to this Court for opinion. We are also not inclined to accede to the request of the applicants to require the Income‑tax Tribunal to refer the question whether the amount of Rs. 72,450 was received in British India. In fact, from the questions reproduced above this question was not at all raised and asked to be referred to this Court for decision. The order of the I. T. Tribunal however shows that this question was considered by them and they finally refused to refer it to Court. The contention of the learned counsel for the applicant in this reference is that no commission and interest was actually received in British India. Merely book entries were made and for this reason it cannot be said that the amount was actually received in British India. It is urged that according to clause (4) Sub‑Clause (m) of the said agreement, the interest and commission is only payable after settlement of accounts and there being no finding that at any time there was any such settlement of account between the parties, the Income‑tax authorities were not justified to hold that the interest and commission was received in British India. The relevant provision of the Income‑tax Act for consideration in this connection will be section 4 (1) (a) and section 14 (2) (c). They read as follows: " 4 (1) (a) 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) during such year, or" 14 (2) (c). The tax shall not be payable by an assessee in respect of any income, profits or gains accruing or arising to him within (an India State), unless such income, profits or gains are received or deemed to be received in or are brought into (British India) in the previous year by or on behalf of the assessee, or are assessable under (section 12‑B or) section 42 ". In the present case there is no difficulty in interpreting the words "received" or "deemed to be received." The contention of the learned counsel that the amount of commission and interest were actually not received in British India is not correct. According to the terms of the agreement the sale price of the goods supplied to the purchasers, was to be received by the petitioners and they were to pay these amounts to the lessees within the due date. This is an admitted fact that the petitioners before giving sale price to the principals used to deduct the amount due to them as commission and interest. They had complete control over the sale proceeds and by deducting such amount they were not merely making book entries but actually received the amount. Even if it be assumed for the sake of argument that these were only book entries then also the amounts in question will be considered as "received." Their Lordships of the Federal Court in The Ramkola Sugar Mills Ltd. v. The Commissioner of Income‑tax, Punjab and N.‑W. F. P., Lahore (P L D 1955 F C 418) considered a similar question and observed:‑ "By paying with the dividend income the debt due to the foreign company at Hamira, the appellant company at Nawanshahr made available to itself the amount which it would have otherwise been obliged to send to the foreign company at Hamira. True, it was done by book entry, but the money was the dividend‑income received by the agent of the Nawanshahr appellant‑company which the company was entitled to receive in the course of the business at Nawanshahr" and held‑ "That Rs. 75,000 was income received by the Nawanshahr company within the meaning of sections 4 (1) and 14 (2) (c) of the Income‑tax Act." This decision is binding on us, and it will serve no useful purpose to consider other authorities holding contrary view to this question. Even otherwise, as this question was not raised and asked to be referred to this Court, the applicant is not entitled to raise it before us. Under the circumstances, the Income‑tax Appellate Tribunal was justified in refusing to state a case and refer this question for the decision of this Court. The only other question that remains for consideration is the only arising from Reference No. 69 of

47. As stated above, the following question of law has been referred to us for answer: "Whether on the question stated above did the income of assessee in the chargeable accounting period from interest and commission accrued or arose in British India, or outside British India ?" Mr. Parmanand, counsel for the petitioner, contended that his client was selling agent for Cambay Mills and in that capacity, according to the terms of the agreement, the goods were to be sold "ex‑mill delivery" and therefore the sales and delivery of goods were completed at Cambay and nowhere else. It was also urged that under the terms of the agreement at the end of every six months an account was to be taken of the goods sold by the lessees and all the amounts found including commission and interest was payable thereafter. According to him, it has not been found as a fact by the Appellate Income‑tax Tribunal that any such accounts were ever taken and then the amount was deducted by the petitioner. He asserted that the source of the commission was the sale which was completed at Cambay and therefore the profits if any accrued or arose there. The fact that the interest and commission was deducted at Bombay will not in any way affect the matter. The learned counsel has sought protection under section 5 of the E. P. T. Act and urged that Cambay being an Indian State, the assessee is exempted from paying E. P. T. on the income that accrued or arose there. Section 5 of the E. P. T. Act reads as follows; "This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income‑tax by virtue of the provision of sub- clause (i) or sub‑clause (ii) of clause (b) of subsection (1) of section 4 of the Indian Income‑tax Act, 1922, or of clause (c) of that subsection : Provided that this Act shall not apply to any "business the whole of the profits of which accrue or arise without (British India) where such business is carried on by or on behalf of a person who is resident but not ordinarily resident in (British India) unless the business is controlled in India: Provided further that where the profits of a part only of a business carried on by a person who is not resident in (British India) or not ordinarily so resident accrue or arise in (British India) or are deemed under the Indian Income‑tax Act, 1922, so to accrue or arise, then except where the business being the business of a person who is resident but not ordinarily resident in (British India) is controlled in India, this Act shall apply only to such part of the business, and such part shall for all the purposes of this Act be deemed to be a separate business: Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in (British India) ; and where the profits or a part of a business accrue or arise in (Indian State) such part shall, for the purposes of this provision, be deemed to be a separate business the whole of profits of which accrue or arise in (Indian State) and the other part of the business shall for all the purposes of this Act, be deemed to be a separate business." This section has three provisos and the learned counsel for the assessees claims exemption under the third proviso and submits that the income relates to business the whole of the profits of which accrued and arose in Indian State. In support of this contention, he has placed reliance on an authority reported in Hira Lal Kalyanmal v. Commissioner of Income‑tax, Bombay (A I R 1943 Bom. 98). On behalf of the Income‑tax Department, it was contended that the place where the profits accrued or arose is to be determined on the facts of each case. It was contended that in the case under reference sales were effected at Bombay, sale profits were received at Bombay, the assessees' shop was at Bombay and com mission and interest were deducted and received at Bombay, and, therefore, the profits accrued and arose there, Mr. Aziz, counsel for the department, places reliance on another authority reported in The Commissioner of Income‑tax, Bombay v. Sarupchand Hukam chand (A I R 1931 Bom. 236). There is no doubt that the question where the income accrued or arose should be determined on the facts of each case. In the circumstances of a particular case it may accrue or arise at the place of source or may accrue or arise elsewhere. The interpre tation of the words "accrued" or `arose' has been the subject -matter of several judicial decisions and no conclusive test when or where income can be said to accrue or arise has been indicated. Fry, L. J., in 21 Q. B. D. 51 at page 59 while interpreting these words observed as follows: "In the first place, I would observe that the tax is in respect of `profits or gains arising or accruing'. I cannot read those words as meaning `received by'. If the enactment were limited to profits and gains, `received by' the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this country. The result would be that no income‑tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the Kingdom and might have accrued in the Kingdom. I think, therefore, that the words `arising or accruing' are general words descriptive of right to receive profits." In Commissioner of Income‑tax, Bombay Presidency v. Bansilal Motilal (A I R 1930 Bom. 381), the following remarks have been made in respect of these words :‑ Marten, C. J. observed: "Now in the first place I think it clear that the use of the word 'or' means what it says, and that accordingly the two expressions `accruing or arising' are different from the expression `received' and are intended to catch income which would not necessarily be received in British India. I also think that these expressions `accruing of arising' indicate some origin or source of growth for the income in question. Thus Murray's Dictionary defines `accrue' to mean: `(inter alia) arise or spring as a natural growth specially interest. To grow or arise as the produce of money invested.' " Blackwell, J., observed: "I respectfully agree with these expressions of opinion by these learned Judges, which are equally applicable to the words used in section 4 (1) of the present Act. I think that the words `accruing or arising' are used with reference to the place from which the income is derived and the use of the word `source' in the expression `from whatever source derived' confirms me in this opinion. In the present case the interest is derived from a loan which was made in British India, that loan, as to the principal being repayable in British India, and I entertain no doubt that the interest accruing due upon, or arising from, that loan accrues or arises in British India." It would thus appear that the learned Judges have interpreted these words in a different manner on different occasions. It will, there fore, be necessary in the present case to find out where the income actually accrued or arose. The findings of facts, as given in the statement of facts are :‑ (1) that there was no shop of the petitioner at Cambay State, (2) that all the contracts for the supply of goods appeared to have been made by the Assessee in British India, (3) that the sale proceeds were received at Bombay. (4) that the commission and interest was deducted at Bombay, from the sale proceeds. Moreover it further appears from the agreement that the petitioner was not entitled to the commission immediately on the supply and delivery of the goods ex‑mill. They had to perform certain other duties. The petitioners were to be responsible for the due fulfil ment by the purchasers of all contract and for the loss or damage arising from its breach. They had to guarantee to the lessees the solvency of the purchasers. If the goods sold were not taken delivery of by the purchasers they were to pay the purchase price of the goods immediately on the expiration of the credit allowed to their principals. The lessee was to draw on the petitioners for the price of the goods so despatched. It was in consideration of the petitioners carrying out all these obligations that they were allowed by way of remuneration for their services as such selling agents a commission in respect of all the contracts. They were also to maintain at Bombay accounts of the transactions concluded through them and their principal was to pay for the expenses of maintaining such accounts. Under clause 5 of the agreement in certain circumstances the amount due to the assessees was payable at Bombay. Even the arbitration of disputes between the parties was to take place at Bombay. From all these acts taken together it is apparent that the source of income of commission and interest was the work carried on at Bombay. This conclusion is further strengthened by the fact that the commission and interest was in fact deducted and received at Bombay. It is not shown that the amount deducted and received at Bombay represented any sales outside British India. Presumably it could not be so. We have carefully examined the authorities cited by the parties. In The Commissioner of Income‑tax, Bombay v. Sarupchand Hukamchand (A I R 1931 Bom. 236), the assessees were carrying on business in Bombay etc., as general agents of Hukamchand Mills, Ltd., they were entitled to a commission of 1% subsequently increased to 1 % on all clothes produced by the Mills. Under the terms of the agree ment, the assessees started a shop at Bombay to sell cloth produced by the mill and they were entitled to a commission on all sales affected by them but commission was not deducted and received at Bombay but at Indore. The Income‑tax Department assessed them in respect of remuneration earned by them on the sales effected by the Bombay shop. The question involved was whether this income accrued or arose in British India within the meaning of section 4 of the Income‑tax Act. Beaumont, C. J., made the following observations: "The only question raised in this reference is whether the assessees are liable to be assessed on the commission payable to them in respect of the sales of cloth at the Bombay shop. Now, as I pointed out, under section 16, the assessees might have deducted the commission on the sales of the shop so as to make all moneys payable in respect of that commission payable to them in Bombay. Of course, if they had done that the income would have been received in British India and no question would have arisen. It is admitted by the Advocate‑General that in fact they did not do that. The money was all sent to Indore and the commission was paid there. The question that we have determined is whether the commission payable to the assessee is in respect of the sale of cloth by the Bombay, shop is income which accrues or arises in British India within the meaning of section 4, Income‑tax Act. The fact that the commission might have been segregated and paid in British India seems to me to have an important bearing upon the question. Mr. Coltman, on behalf of the assessees, says that the right to commission accrues or arises under the agreement and nothing else. He says that the whole of the proceeds of sale from the Bombay shop and any other shop owned by the company are paid in the normal course of business to the company in Indore and his clients get a commission out of the whole amount and, therefore, the commission accrues or arises in Indore which is outside British India. On the other hand, the Advocate‑General says that the nature of the business carried on by the assessees, so far as it is material for the present purpose, is that they are carrying on the business of selling agents for the shop in Bombay, that they sell goods in Bombay, and they get a commission in respect of the proceeds of the sale, and that, therefore, their commission accrues and arises in Bombay. There is not, I think, any authority which is of much assistance Mr. Coltman, presses with the decision of this Court, in Commissioner of Income‑tax v. Bansilal Moldal (A I R 1930 Bom. 381), in which it was held, the question there being whether the interest received by the assessee at Hyderabad on Government of India promissory notes enfaced for payment at Hyderabad treasury can be deemed to accrue in British India, that the words, `accruing or arising' were more extensive than `received' and that you have to look to the source from which the income arises. That case is quite different upon the facts from the present case, and does not help us to determine the source of the income with which we have to deal. I think this case is near the line, that there is a good deal to be said for the arguments on both sides, but upon the whole, I prefer the arguments of the learned Advocate‑General. I think that this income being commission upon sales made in Bombay does accrue or arise in British India, and none the less so because as a matter of practice between the parties it is paid in Indore, and the ultimate right to it arises under an agreement made in Indore." Barlee, J. while considering this question made the following observation :‑ "We have to see whether the commission of one and a quarter percent. earned by the assessees on the sale of goods through the Bombay shop `accrued, arose or was received' in British India. The words 'accruing or arising' have been the subject of interpretation recently in this Court in Commissioner of Income‑tax v. Bansilal Motilal, where it was decided that they indicate `some origin or source of growth for the income in question' and that the words are used with reference to the place from which the income is derived and that the use of the word `source' in the expression `from whatever source derived' confirmed that view. It is conceded, therefore, that we have to find the source of the income earned by the assessees through the Bombay shop, and two theories have been put before us. Mr. Coltman has argued that we must look for the source of this income in the agreement, since without the agree ment between the assessees and the company they could not have recovered anything at all. On the other hand the learned Advocate‑General asks us to look to the shop in British India and the sales there as a true source. It seems to me that the latter view is the one which we must accept. Of course, the term, `source' can be interpreted in several ways, in the same way as the word `cause' can be defined as the material cause, the final cause, or the immediate cause and so on. But here I am of opinion that we must look to the material source of the income and not to what perhaps may be called a metaphorical source. In fact the shop was the actual source of the gross profits of the sales, and, as the whole must contain the part, it seems to me that the source of the profits earned by the assessees under the agreement was the Bombay shop and must be looked upon as arising in British India." We are in complete agreement with these observations. In such cases one must look into the material source of income and not to metaphorical source. In the present case also the actual source of commission was the obligation carried out by the petitioners at Bombay, the income received at Bombay and, therefore, in these circumstances, the income must be looked at to have accrued or arisen in British India. The authority cited by the learned counsel for the assessee, A I R 1943 Bom. 98, stands on a different footing. The assessees in that case were the managing agents and also selling agents of the textile Mill of Indore. They had to open a shop at Indore and Bombay. At both these shops clothes and yarn produced by the Mill were to be sold. There was no dispute in respect of sales effected at Bombay shop, and the income‑tax on the commission earned there was duly paid. The dispute relates to sales effected at Indore shop. Accord ing to the statement of the case, the sales took place at the Indore shop on F. O. R. terms on the Bombay merchants. To recover sale proceeds the Indore shop drew hundies on the Bombay merchants which were in due course accepted and honoured. The proceeds of these hundies were received by the assesses at Bombay. The omission, however, was never deducted at Bombay but was actually received at Indore. Kania, J., on these facts observed as follows: "On those facts it is argued on behalf of the Commissioner that the commission at one per cent. on those gross sale proceeds either accrued or arose in British India, or was received in British India, 33 Bom. L R 382, was relied upon in this connexion. The facts as reported in that case clearly show that the sales were effected there by the assessees in Bombay to Bombay merchants, and the sale proceeds were all recovered in Bombay. Therefore, not only the contract of sale but the sale took place in Bombay in that case. On these facts, the Court found the income accrued in British India. In the present case those two vital factors are wanting. The sales took place at Indore and the property in the goods also passed to the Bombay merchants as soon as the goods were railed at Indore. Therefore, the sale was completed at Indore. It was on these facts that the learned Judges held: "that the amount of the commission was not assessable to income‑tax as the source of the commission was the sale which took place at Indore, and not the receipt of the sale proceeds. The commission was payable even though the proceeds of the sale were not actually received in case the company voluntarily realised purchasers from their obli gation to pay. The commission could not be said to have accrued or arisen at the place where the purchase monies were received." There is a vast difference between the facts of that case and the case before us. The principles of law laid down in this authority are not applicable on the facts of the present case. The observations made in that case were based on the finding that the sales were effected in all respects at Indore. On the other hand, in the present case the findings are that the sales were effected at Bombay, all obligations were carried out at Bombay, commission was deducted at Bombay and interest was payable and deducted at Bombay. The contention of the learned counsel for the assessees that the commission due to the agent could only be determined after the account is taken, is also not well‑founded. Suppose no account is taken even after six months, although in fact certain amounts have been received by the parties concerned, can such a party avoid payment of income‑tax? In our humble opinion the answer will be in the negative. In Commissioner of Taxes v. Melbourne Trust, Ltd., (A I R 1914 P C 230) Lord Dunedin observed: "As regards the question when a profit is earned, their Lordships' view is that a profit can be said to be earned when it is dealt with as a profit. In ordinary cases this synchronises with the realisation of the sums which swell the assets of the person or company and which entering the account, go to bring out the balance which is deemed profit.'. Why this ordinary test should be departed from in particular case ? The assessee was maintaining account of sales at Bombay. They knew the amount due to them as commission in respect of such transactions and deducted it before remitt ing the sale price to their principal. The amount deducted by them was the amount that accrued or arose to them as commission in respect of those transactions. The assessee has not shown that something was returned back to the principal. The position in such cases is that every receipt of money during the year contributes to the quantum of the profits. In our opinion the contention that the profits could only accrue or arise after six months account is made up, is not correct. In our judgment, in the circumstances of this case it is abundantly clear that the income derived in this manner cannot be said to have accrued or arisen anywhere else, but at Bombay. The material source from which it arose was the obligations carried out wholly at Bombay. There is not the slightest evidence on record that the petitioners played any important part to carry out their obligations at Cambay. We will, therefore, in answering the question referred to us, hold that the said income of the petitioners from interest and commissions accrued or arose in British India. The above answer is on the assumption that all the contracts for the supply of goods were made at Bombay. If, however, the Assessee is able to establish some contracts to have been entered into at Cambay State, then a commission in respect of them will not be considered to have accrued or arisen in British India. For the reasons given above, References No. 2 and 3 of 1948 are dismissed with costs. The petitioners also to pay costs of Reference No. 69 of 1947. A.H. References answered.