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Petitioner: MESSRS POKARDAS DWARKADAS OF KARACHI VS Respondent: THE COMMISSIONER OF INCOME-TAX, SIND AND BALUCHISTAN
1960 P T D 786
1960 P T D 786
[Karachi (Pakistan)]
Before Constantine and Wahiduddin, JJ
MESSRS POKARDAS DWARKADAS OF KARACHI‑Petitioner
Versus
THE COMMISSIONER OF INCOME‑TAX, SIND AND BALUCHISTAN‑Respondents
References Nos. 2 and 3 of 1948 and Reference No. 69 of 1947, decided on 13th September, 1956.
(a) Income‑tax Act (XI of 1922), Ss. 13 and 66 proviso-- Application‑Question of fact‑Finding, based on sufficient material‑‑Tribunal justified in refusing to state case.
(b) Income‑tax Act (XI of 1922), Ss. 4 (1) (a) and 14 (2) (c) --Income received by book adjustment from foreign company is income "received" within meaning of sections.
The assessees, selling agents of a foreign company, before giving the sale price to their principals used to deduct the amount due to them as commission and as interest due to them on advances by way of loans made to their principals. This deduction was adjusted in their book entries.
Held, that the assessees 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" within the meaning of sections 4 (1) (a) and 14 (2) (c), Income‑tax Act.
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 ref.
(c) Income‑tax Act (XI of 1922), S. 66 (2)‑Question not raised and not required to be referred‑Not allowed to be raised before High Court.
(d) Excess Profits Tax Act (XV of 1940), S. 5‑Profits‑"Accrue or arise"‑‑Place of‑To be determined in circumstances of each case.
The question as to where profits accrue or arise is to be determined in the particular circumstances of every case.
One must look into the material source of income and not to metaphorical source.
In the present case the actual source of commission earned on sales was the obligation carried out by the assessees at Bombay, the income was received at Bombay and therefore in these circumstances, the income must be looked at to have accrued or arisen in British India.
The Commissioner of Income‑tax, Bombay v. Sarupchand Hukamchand A I R 1931 Born. 236 and Commissioner of Income-tax, Bombay Presidency v. Bansilal Motilal A I R 1930 Bom. 381 ref.
Hiralal Kalyanmal v. Commissioner of Income‑tax, Bombay A I R 1943 Bom. 98 distinguished.
(e) Income‑tax Act (XI of 1922), S. 4‑Accrual of income-- Time‑Not necessarily bound up with the time when balances are struck if profits have otherwise been actually received.
Held, that it was not correct to say that the profits by way of commission on sales accrued only on the taking of accounts after six months when the facts were that the assessee knew the amount of his commission on sales transacted by him and he was authorised to deduct his commission from moneys realised on sales by the assessee.
Commissioner of Taxes v. Melbourne Trust Ltd., A I R 1914 P C 230.
(f) Income‑tax Act (XI of 1922), S. 4‑Contract of sale entered into without British India‑Commission on sale not deemed to have arisen in British India.
Parmanand for Petitioner.
Abdul Aziz for Respondents.
ORDER
WAHIDUDDIN, J.‑This judgment will dispose of Reference No. 69 of 1947 and References Nos. 2 and 3 of 1948. The facts out of which these references have arisen are that in the account year ending 28th of July 1942, assessment year 1943‑44, the petitioner Mr. Pokardas Meghraj in Bombay was appointed the selling agent of Cambay State Mills. The State Mills were leased out to Rai Bahadur Rayja Bhushan Seth, Hiralal Kalyanmal and Seth Sohemal Kamal Kumar. The lessees approached the petitioners for financial help, and it was in consideration of this that they were appointed the sole agents of the goods manufactured by the Cambay State Mills. Two agreements dated 6th May 1941 the petitioner agreed to lend and advance such sum of money as loan as may from time to time be required by the lessees for the working of the said mill not exceeding at any time the aggregate sum of 2 lacs. The lessees were to pay interest at the rate of 6 percent. per annum and such interest was payable after six months. Under clause 12 of this agreement the assessees were entitled to demand payment of the amount due at Bombay besides other places. It will thus be noticed that the payment of the amount advanced and the interest due was contemplated primarily to be paid at Bombay.
Another agreement between the parties was entered into on the same day. The important terms of this agreement are reproduced below :‑
"(1) The firm shall advance to the Borrowers and the Borrowers shall borrow from the firm a sum of rupees one lac.
(2) The Borrowers shall pay to the firm interest on the said sum of rupees one lac at six per cent per annum and such interest shall be paid every six months ; in default of payment of any six‑monthly instalment of interest the Borrowers shall pay to the firm compound interest with rests taken every six months.
(3) The period of the said loan of rupees one lac shall be three years subject to the provisions of clause 8 hereof.
(4) In consideration of the firm making the said loan of rupees one lac to the borrowers the borrowers shall appoint the firm the sole selling agents of the borrowers for a period of three years from the date hereof if the borrowers shall so long continue to be lessees of and work the said Mills under the said lease or otherwise for such period as the borrowers shall run the said mills as such lessees for the purpose of effecting sales of the cloth and yarn manufactured by the borrowers in the said Mills on the terms and conditions hereinafter contained :‑
(e) The selling price of various kinds of cloth and yarn manufactured by the borrowers in the said Mills shall be fixed by the borrowers and communicated to the firm and the firm shall sell the same Ex‑Mill delivery in consultation with the borrowers as to the price, deliveries, quantities and other terms. Upon every such sale by the firm the firm shall make out a contract between the firm as selling agents of the Borrowers and the purchaser in the form prescribed by the borrowers from time to time and the firm shall immediately thereafter send a copy of such contract to the Borrowers.
(f) The firm shall be responsible to the borrowers for the due fulfilment by the Purchasers of all contracts made by the firm with them either for ready or forward sales and also for the consequence breach of contract by the pur chasers and for the loss or damage arising therefrom to the borrowers provided that there shall be no default on the part of the borrowers in manufacturing or giving deliveries of any class of goods required or sold under the contract or in compliance with the stipulations therein contained for which default the borrowers alone shall be responsible and in case of any breach on the part of borrowers of any contract with a purchaser the borrowers shall keep the firm indemnified against all claims for damages and pro ceedings thereof against the firm by such purchaser and all costs, charges and expenses relating thereto or otherwise suffered by the firm.
(g) The firm shall guarantee to the borrowers the solvency of the purchasers with whom the firm shall enter into any contract for sale of the said goods either for ready or forward delivery and shall be responsible to the borrowers for any loss arising to the borrowers by reason of the insolvency or bankruptcy of any purchaser to whom the goods are sold or for any other cause whatsoever.
(h) The borrowers shall allow to the purchasers under any contract entered into by the firm with them credit for payment of the price of goods taken delivery of by them under such contract for such number of days as is customary or usual at the various centres for which the said goods are sold without in any way affecting the liabilities of the firm for due discharge and fulfilment of the said contract by the purchasers as hereinabove provided. Provided however that if the firm shall make any such payment to the borrowers earlier than the expiry of the period of credit the borrowers shall allow to the firm interest on all such payment at the rate of six per cent per annum from the respective times of their having been made till the expiry of the period credit the borrowers shall allow to the firm interest on all such payments at the rate of six percent. per annum from the respective times of their having been made till the expiry of the period credit for the payment thereof.
(i) If the goods sold under any contract are not taken delivery of by the purchaser on the due date of delivery under the contract the firm shall pay to the borrowers (whether the purchaser has made any payment or not to the firm) the purchase price of the said goods immediately on the expiration of the usual or customary period of credit allowed to the purchaser and if not so made the same shall carry interest against the firm at the rate of six per cent per annum.
(j) Unless otherwise instructed by the firm the borrowers shall despatch the goods sold under any contract made by the firm to the purchaser thereof direct and the borrowers shall draw on the firm for the price of the goods so des patched.
(k) The borrowers shall not be entitled to sell any goods direct to say dealer without reference to the firm and to receive payment thereof direct from such dealer. In all cases in which the borrowers shall sell the goods direct to any dealer the firm shall be entitled to full commission as hereinafter provided in respect of all direct sales by the borrowers and shall not in any way be responsible for the due performance of the contract by the dealer or for payment by him of the moneys thereunder nor shall the firm be in such cases deemed to have guaranteed the solvency of such dealer.
(l) In consideration of the firm carrying out all the obli gations herein the borrowers shall allow to the firm by way of remuneration for their services as such selling agents a commission in respect of all contract entered into by the borrowers either directly or through the firm or by the firm for the borrowers calculated at the rate of one percent. on the sale of cloth and such commission shall be payable by the borrowers to the firm every six months.
(m) At the end of every six months an account shall be taken of all goods sold by the borrowers either directly or through the firm or by the firm for the borrowers and all moneys becoming payable by the borrowers to the firm by way of commission and interest shall be immediately paid thereafter.
(p) The borrowers shall at their own expense provide suitable premises in Cambay for the residence and office of the firm.
(q) The firm shall keep separate proper books of the accounts as the selling agency business as are usually kept by the selling agents and borrowers shall pay to the firm all costs, charges and expenses of such books and of the keeping the said accounts and the borrowers shall have at all reasonable times access to such books of account and shall be at liberty to take such extracts therefrom as they may think fit.
(5) If the said lease in favour of borrowers is terminated before the expiry of the said period of three years or if the borrowers cease to run the said Mills or if the borrowers are or either of them is adjudicated insolvent or if these presents are terminated for any other reason whatsoever the Borrowers shall immediately thereafter repay to the firm the said sum of Rupees one lac or so much thereof as shall for the time being remain unpaid together with all interests thereon and all moneys for commission or interest remaining due notwithstanding anything to the contrary hereinabove provided. The firm shall be entitled to demand such payment either in Bombay or at Cambay or at Indore or at such other place in India as the firm may think fit.
(6) If any question of difference shall arise between the parties hereto or their respective representative or between one of the parties hereto and the representatives of the other touching these presents or any clause or thing herein contained or the construction thereof or touching any matter in any way connected with or arising out of these presents or the operation thereof or the rights, duties or liabilities of either party in connection with the premises the matter in difference shall be referred to arbitration in Bombay in accordance with provision of the Indian Arbitration Act one thousand nine hundred and forty or any statutory modification or re‑enactment thereof for the time being in force.
As witness the hands of parties the day and year first hereinabove written."
It will thus be seen that under this agreement the assessees not only were to receive interest on the amount advanced as loan but also were to receive by way of remuneration for their services as selling agents a commission in respect of contracts at the rate of 1 percent. on the sale of yarn and at the rate of 2% on cloth. According to the facts stated by the Income-tax Appellate Tribunal the following further facts emerge. The interest and commission amounted to Rs. 72,450 in the year of account. It was admitted before the Appellate Assistant Commissioner by the assessees' representative that loans were advanced by the assessees to the lessees in British India and that interests and commission was also receivable in British India. It was also found that the interest and commission has been deducted by the assessees from sale proceeds of the cloth realised in British India before remitting them. All the contracts for the sale of goods by the assessees appear to have been made the by assessees in British India. ii was also not proved that the assessees had an office at Cambay.
The petitioners contested the inclusion of Rs. 72,450 shown as interest and commission towards profits in the assessment. Their contention before the Appellate Assistant Commissioner was that neither these amounts were received in British India nor they accrued or arose in British India, and as such this income was not taxable. Both the Appellate Assistant Commissioner and Income‑tax Appellate Tribunal repelled this contention and held that the commission and interest accrued in British India and not in Cambay. They also held that the Commission and interest were received in British India. The assessees were vitally affected by these orders in respect of Income‑tax assessment and E. P. T. assessment and therefore they moved the Income‑tax Appellate Tribunal by two separate applications namely E. T. A. No. 287 of 46‑47 and E. P. T. A. No. 285 of 46‑47 to state the case and refer as many as 10 questions of law under section 66 (1) of the Indian Income‑tax Act to the Chief Court of Sind. The Income‑tax Tribunal by order dated 27th June 1947, refused to refer all other questions and referred only, one question of law in E. P. T. appeal. The relevant portion of the said order is reproduced below :‑
"The Tribunal by its orders disposed of two common contentions raised on behalf of the assessee in these appeals. One of the contentions was that the Income‑tax authorities should not have applied the proviso to section 13 of the Indian Income‑tax Act to the case. It was found by the Tribunal that in respect of his five shops the assessee was not able to prove the accuracy of the opening and closing stocks and that the profit disclosed was too low consider ing the market conditions. The Tribunal therefore agreed with the Appellate Assistant Commissioner that in respect of these shops the assessee's income fell to be computed under the proviso to section 13 of the Indian Income‑tax ‑Act. In practically all the cases where the question is whether or not a proviso to section 13 applies it is always a question of fact and not a question of law. Under section 13 of the Indian Income‑tax Act, if the Income‑tax Officer is of opinion that the method of accounting regularly employed by the assessee is such that the true profits cannot be determined therefrom, the Income‑tax Officer, is required to make the computation of the assessee's income upon such basis and in such manner as he may determine.‑
The question whether profits were received in British India by or on behalf of the assessee is a question of fact, whereas whether the income accrued or arose in British India or outside British India is a question of law. In so far as the Income‑tax appeal is concerned, the finding of the Tribunal that the interest and commission were received in British India is a finding of fact. On that finding the assessee's appeal on the point whether or not the sum of Rs. 72,450 was liable to be included in the assessee's income fell to be dismissed. No question of law therefore arises out of the Tribunal's order in R. A. A. No. 52 (Sind) of 1945‑46. We therefore dismiss the Application No. 237 of 1946‑47. The question whether the interest and com mission accrued outside British India falls to be considered only in the E. P. T. appeal. The question of law that we hereby refer to the High Court is: Whether on the facts stated above, did the income of assessee, in the chargeable accounting period, from interest, and commission accrue or arise in British India or outside British India ? "
It is under these circumstances that Reference No. 69 of 47 has come before us for consideration.
Being dissatisfied by the abovementioned order, the assessee preferred two other applications under section 66 (2), Income‑tax Act, namely Civil Reference No. 2 of 48 and Civil Reference No. 3 of 48 to the Chief Court of Sind, calling upon the Income‑tax Appellate Tribunal to state the case and refer all questions of law set out in para. 12 of their application on the matter of Income‑tax Assessment for the assessment year 43‑44. The said questions are reproduced below :‑
(1) Whether in the circumstances of the case, the proviso to section 13 of the I. T. Act is applicable even though the assessee firm had kept regular, complete, closed and adjusted accounts working out therein income, profits and gains in accordance with the mercantile method of accounting:
If the answer to the above question be in the affirmative‑
(2) Whether there was any evidence to support the finding that the figures of opening and closing stocks at the two shops at Sukkur and the shops at Delhi, Amritsar and the head office shop at Karachi were not correctly entered in the account books.
If the answer to both the above questions (1) and (2) above be in the affirmative‑
(3) Whether there was any evidence to support the findings of fact that the assessee firm earned gross profit at 12% on sales made by the Karachi head office shop and not at 7.17% as disclosed by the closed, completed and adjusted accounts ;
(4) Whether there was any evidence to support the findings of fact that the assessee firm earned gross profit at 9% on sales made by the shop at Delhi in the name of Pokardas Menghraj and not at 3.3% as disclosed by the closed, completed and adjusted accounts ;
(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…
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