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Petitioner: MESSRS SIR WILLIAM ROBERTS TIMBER Co. LTD, BARAMULA KASHMIR STATE VS Respondent: COMMISSIONER OF INCOME-TAX, PUNJAB AND N.W.F.P ROVINCES, LAHORE
1960 P T D 1235
1960 P T D 1235
[Lahore (Pakistan)]
Before Muhammad Munir, C. J. and M. R. Kayani, J
MESSRS SIR WILLIAM ROBERTS TIMBER Co. LTD, BARAMULA KASHMIR STATE‑Petitioner
Versus
COMMISSIONER OF INCOME‑TAX, PUNJAB AND N.W.F.P ROVINCES, LAHORE‑Respondent
Civil Reference No. 8 of 1948, decided on 19th June, 1951.
(a) Income‑tax Act (XI of 1922)------
----Ss. 4 (1) (c), 42 (3)‑Goods manufactured by assessee outside British India‑Sold in British India through another firm‑Profits, held, did not arise or accrue exclusively in British India‑Profits to be apportioned in terms of subsection (3) of S. 42.
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.
Held, if the assessee's case fell under clause (c) to sub section (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.
The profits on the sale of shooks did not exclusively accrue or arise An British India and such profits should have been apportioned in terms of subsection (3) of section 42.
(1950) 18 I T R 472 rel.
(b) Income‑tax Act (XI of 1922)----
----Ss. 4 (1) (a), 66 (1)‑Profits whether received in British India‑Finding, whether based on any material‑Question of law, not of fact‑Determining circumstances.
The real point that arose in the case was 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 the High Court, but they referred to do so on the ground that the question was purely one of fact.
Where the point is whether the finding about the receipt of thy profits was based on any material, the question at once becomes one of law.
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 connection between the two companies qua the transactions in question.
(1946), 14 I T R 417 and A I R 1932 P C 165 ref.
(c) Income‑tax Act (XI of 1922)----
-----S. 66 (1)‑Rejection of accounts by Tribunal and application of flat rate of profits‑Not question of law.
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 not a question of law which the Tribunal should be directed to state.
(d) Excess Profits Tax Act (XV of 1940)------
---S. 5‑Act does not touch profits received in British India‑Income‑tax Act, 1922, S. 4 (1) (b).(c).
The Excess Profits Tax Act does not touch profits that are merely received into British India. Subject to certain qualifica tions, 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 the clauses (b) and (c) of subsection (1) of section 4 of the Income‑tax Act:
P. C. David for Petitioner.
Muhammad Hussain for Respondent.
JUDGMENT
MUHAMMAD MUNIR, C. J.‑This is a reference by the Allahabad Bench of the Income‑tax Appellate Tribunal under subsection (1) of section 66 of the Indian Income‑tax Act. In order to bring out the real issues in the case a detailed statement of the facts is necessary.
The name of Sir William Roberts is associated with two joint stock companies. One of these, Sir William Roberts Timber Co. Ltd. (hereinafter called the Kashmir Company) is g private limited Company incorporated in the State of Kashmir. The other, Sir William Roberts (Shahdara) Timber Co. Ltd. (herein after referred to as the Lahore Company) has its head office in Lahore and was, before the Partition, incorporated in India. The former, which had its registered office at Baramula, took forest coupes on lease in the Kashmir State and extracted timber from there. Some timber was sold in the State and the rest was used in the manufacture of shooks in the company's factory at Baramula. These shooks were partly sold in Kashmir and partly in India through the Lahore company. During the previous year for the year of assessment 19‑13‑44 the Kashmir company sold shooks in India to the amount of Rs. 1,45,332. As the profit and loss account of the company was not accepted by the Income‑tax Officer, Lahore, these sales were subjected by him to a flat rate of 30% profits. The application of this rate resulted in the excess of that company's income in British India over its income in Kashmir. According ly the Income‑tax Officer taxed it as a company resident in British India and also subjected it to Excess Profits Tax. On appeal, the Appellate Assistant Commissioner differed from the findings of the Income‑tax Officer. He held that since the control and management of the affairs of the company was not situated wholly in British India, the company could not be held to be a resident company and that since on the calculations made by him its income in British India did not exceed its income in Kashmir, he treated it for the purposes of, assessment as a non- resident company. In regard to the estimation of profits on the sale of shooks, he thought that the flat rate applied by the Income‑tax Officer was inadequate and that these sales should have been subjected to a flat rate of 50%. It was not clear from the Income‑tax Officer's order whether the profits oh the sale of shooks were taxed by him because they had been received in British India or because they had accrued or arisen in British India. The Appellate Assistant Commissioner went into this matter and felt that the case was governed by section 42 of the Income‑tax Act and that the entire profits on the sale of shooks could not be said to have accrued or arisen exclusively in British India. Acting under subsection (3) of that section he attributed half of the profits to the company's activity in British India and the re maining half to the operation outside British India. Since the result of these calculations was teat the company's income in British India fell short of its income outside British India the company was taxed as a non‑resident company. Both parties appealed to the Appellate Tribunal. The Tribunal found themselves unable to maintain the flat rate of 50 percent. which had been applied by the Appellate Assistant Commissioner and substituted it by the flat rate of 30% which bad been applied by the Income‑tax Officer. They, however, accepted the department's contention that the profits on the sale of shooks must be considered to have accrued or arisen and also received in British India and that for that reason the case was outside the provisions of subsection (3) of section 42. Dissatisfied with this order, the assessee applied to the Tribunal to state a case for the opinion of this Court. It was alleged in the application that in the Income‑tax case the following five questions arose :‑
(i) Whether in view of the facts and circumstances of this case the Bench was legally right in holding that the income, profits and gains of the assessee company were received in British India within the meaning of section 4 (1) (a) of the Income‑tax Act ?
(ii) Whether in view of the facts and circumstances of this case the Bench was legally right in holding that the income, profits and gains derived by the assessee from such sales in British India were not income, profits and gains accruing or arising, whether directly or indirectly, through or from any business, connection in British India and shall not be deemed to the income accruing within British India within the meaning of section 42 (1) of the Income‑tax Act ?
(iii) Whether in view of the facts and circumstances of the case section 42 (3) of the Income‑tax Act is not applicable and no allocation of profits as contemplated by the above section should have been made ? If so, what allocation will be justifiable in law in view of the circumstances of this case ?
(iv) Whether in view of the facts and circumstances of the case the Bench was right in holding the assessee company to be a resident ?
(v) Whether in the facts and circumstances of this case the departure made by the, British Indian Income‑tax Officer in respect of the application of margin of profit is based upon any evidence and is justified in law ?
In the application for reference in the Excess Profits Tax ease, 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 ?
(ii) Whether now on 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 fiat rate of 30% 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 Li 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 question 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 sub-section (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 not, however, examined the effect of this finding on the method of assessment to Excess Profits Tax, 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 receive) or are deemed to be received in British India in such year by or on behalf of such persons, 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 Ist day of April 1933, are brought into or received in British India by him during such year, or
(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."
Clause (c) of section 41 declares a company to be resident in British India in any year (a) if the control and management of its affairs 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 reproduc tion. 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 not 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 a 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 part of the operations carried out in British India."
It is clear froth 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 Act has to be calculated either on the receipt or the accrual basis or on both basis. If income, profits and gains, from whatever source derived, are received or are deemed to be received id 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 to 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 arising to them without British India during a particular period as 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 recognised 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 Tribu nal'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 (1) (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) be 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 Legis lature reverts to it again in section 42 which provides that income profits or gains accruing or arising in any of the manners mention ed 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 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 previous 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 becomes liable to pay tax. This result 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 sub section (1) of section 4, which directs to be included in the total income of a non‑resident not only income that accrues or arises to him in also income which is deemed to accrue or arise to him but 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 quali9es the general provision in subsection (1). Under sub section (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 tie was right in that assumption, he was if taxability in the present case was determined only by accrual, bound to apply the pro visions of subsection (3), because the profits had accrued on the sale of shooks 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. Ahmad Bhai Umarbhai & Co., Bombay ((1950) 18 I T R 472). In that case the assessee were a firm resident in British India who carried on the business of 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 the Excess Profits Tax Act, 1940. The department, on the other hand, contended (i) that the manufactur ing 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 assessee 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 manufacturing 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 profit, 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 manufacture 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…
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