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Petitioner: RAMKOLA SUGAR MILLS & Co., LTD. VS Respondent: COMMISSIONER OF INCOME-TAX, PUNJAB AND N.-W. F. PROVINCESHonorable Justice AKRAMBashir Ahmad,Malik Muhammad Hussain
1960 P T D 994
1960 P T D 994
[Federal Court (Pakistan)]
Present : Akram, Cornelius and Sharif, JJ
RAMKOLA SUGAR MILLS & Co., LTD.
Versus
COMMISSIONER OF INCOME‑TAX, PUNJAB AND N.‑W. F. PROVINCES
Civil Appeal No. 2 of 1954, decided on 20th April, 1955.
(a) Income‑tax Act (XI of 1922)------S. 4 (1) read with S. 14 (2) (c)‑Amount of dividend accruing outside "British India" to Com pany in "British India" and set of with agreement of both Companies against a debt owed by the British India Company to the foreign Company‑Amount, held, "received" in "British India" (Akram and Sharif, JJ. Cornelius, J, Contra).
Rs. 75,000 accrued as dividend declared by a company hav ing its registered office at K, in India to a company which had its registered office at N in Pakistan. This amount was set off by agreement of both Companies against a debt of Rs. 78,000 owed by the N Company to K company.
Held, (Akram and Sharif, JJ; Cornelius, J. Contra) that Rs. 75,000 was income received‑ by the N. Company within meaning of sections 4 (1) and 14 (2) (c) of Income‑Tax Act, 1922.
By paying with the dividend‑income the debt due to the foreign company at K, the appellant‑company at N made available to itself the amount which it would have otherwise been obliged to send to the foreign company at K. True, it was done by book entry, but the money was the dividend‑income received by the agent of the N appellant‑company which the company was entitled to receive in the course of the business at N.
Trnidad Lake Asphalt Operating Co. Ltd., v. Commissioner of Income‑tax Trinidad 1945 A C 1 ref.
Gresham Life Assurance Society v. Bishop 1902 A C 287 distinguished.
Per Cornelius, J. (Contra) :‑
As regards the debt due from the assessee‑firm, there can be no manner of doubt that it was locally situated in K, and was pay able there. Accordingly, the position resulting from the agree ment between the assessee‑firm and the K company may be stated thus‑a debt due to the assessee‑firm, created and payable in K, was set off against a larger debt due from the assessee‑firm also locally situated in K. In the situation thus created, any sign of a remittance from K to British India must necessarily be far to seek. There would be nothing left to remit.
The authorities from the case of the Gresham Life Assurance Society 1902 A C 287 onwards have been clearly and consistently to the effect that such action is in accordance with the proper duty of a company to maintain accounts of its affairs, wherever they may be situated, and to present in its annual statement of affairs, a true picture of its monetary position, taking into account all income accrued and expenditure incurred at every place where it has business dealings. This principle was adopted and followed in the case of the New India Assurance Company (1938) 40 Bom. L. R. 803, and is not to be regarded as foreign to the Pakistan jurisdiction. Action of this kind by an assessee has never been regarded as furnishing by itself proof of reclept of the relevent monies from abroad.
The transaction in the present case, to the extent that it opera ted on anything tangible, was concluded in K. The book‑entries in British India, therefore, cannot be regarded as evidencing a receipt or bringing in, for as a result of the transaction there was nothing left to be received in, or brought into British India.
Since the assessee‑company and the K firm were separate entities, the mere fact of their having several Directors in common does not affect the principle upon which the question raised in this case should be answered.
Bashir Ahmad, Senior Advocate Federal Court (Abdul Rashid, A. F. C. with him) instructed by M. Siddiq, Attorney for Appellant.
Malik Muhammad Hussain, Senior Advocate Federal Court (Abdul Aziz, A. F. C. with him) instructed by Nazir‑ud‑Din for Respondent.
Date of hearing : 30th March 1955.
JUDGMENT
AKRAM J.‑This is an appeal by the assessee‑company from a Judgment of the Court of the Judicial Commissioner, North‑West Frontier Province in a reference made under section 66 of the Income‑tax Act. Broadly stated, the facts of the case are as follows :‑
The appellant, Ramkola Sugar Mills Ltd., a joint stock company, situated at present at Hamira, in Kapurthala State, had its registered office at Nawanshahr in the Hazara district of the North West Frontier Province during the assessment year 1943‑44. This company held certain shares in another joint stock company Mahalaxmi Sugar Mills Ltd., which had its registered office at Hamira in the Kapurthala State. The latter company on the 31st October, 1942, declared its dividend on the shares aforesaid and a sum of Rs. 75,000 became payable to the appellant company on that account. On the same date, however, that is, the 31st October, 1942, an adjustment was made in the books of account of the Mahalaxmi Sugar Mills Co., Ltd., by crediting the sum of Rs. 75,000 aforesaid towards a sum of Rs. 78,000 said to have be come due to it, by the appellant‑company and by debiting that sum by a corresponding entry in the books of account of the appellant‑company at Nawanshahr. Admittedly the three directors of the two companies were the same persons, who managed the business of the said companies.
It appears that in connection with the assessment of income tax for the year 1943‑44 a contention was raised on behalf of the appellant‑company to the effect that as the sum of Rs. 75,000 had accrued at Hamira in an Indian State, and was not received by the appellant‑company at Nawanshahr in British India, section 4 (1) (a) of the Income‑tax Act (XI of 1922) was inapplicable while section 4 (1) (b) (ii) was to be read section 14 (2) (c). thereof with the consequence that the said sum of Rs. 75,000 was not liable to income‑tax under either of the clauses (a) or (b) (ii) of section 4 (1). This contention was, however, overruled by the Income‑tax authorities and by the Income‑tax Appellate Tribunal and their view was upheld by the Court of the Judicial Commissioner, North West Frontier Province, on reference under section 66 (1) of the Income‑tax Act of 1922. The reference made was in the following terms :‑
"Whether in the circumstances of the case the dividend in come of Rs. 75,000 can be said to have been received by the assessee‑company in British India within the meaning of section 4 (1) read with section 14 (2) (c) of the Act."
It was answered in the affimative and the appellant‑company was made liable for costs of the respondent Commissioner of Income‑tax.
The present appeal was thereupon preferred by the assessee company on a certificate by the Court of the Judicial Commissioner to the effect that the requisite conditions were fulfilled and the case was a fit one for appeal under section 66‑A (2) of the Income‑tax Act read with section 109 of the C. P. C.
The relevant portions of sections 4 (1) and 14 (2) (c) of the Act are as follows :‑
"4 (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 on 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 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 during such year.
14 (2) : The tax shall not be payable by an assessee in respect of‑
(c) any income, profits or gains accruing or arising to him within an Indian 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 section 12‑B or section 42."
Counsel for the appellant argued before us that as the dividend income or Rs. 75,000 had accrued to the appellant company at Hamira in a foreign State on the 31st of October 1942, and was appropriated there on the same date towards a debt owed by the appellant‑company, the sum could not be considered to have been either actually or constructively received at Nawanshahr in British India and was consequently, not liable to taxation under section 4 (1) read with section 14 (2) (c) of the Income‑tax Act ; that there was merely notional cross‑payment at Nawanshahr and Hamira which could not amount to receiving any money at either place. In support reliance was placed on the cases of Commissioner of Income tax, Bombay v. Ahmadabad Advance Mills Ltd. ((1940) 8 I T R 95) ; Gresham Life Assurance Society Ltd. ((1902) A C 287) Keshar Mills Ltd. v. Commissioner of Income‑tax, Bombay ((1953) 23 I T R 230) and Messrs Sarupchand Hukamchand v. The Commissioner of Income‑tax, Bombay. (I L R (1945) Dom. 228).
Counsel for the respondent, the Commissioner of Income‑tax, Punjab and N. W. F. P., on the other hand, contended that as the reciprocal entries were made in the books of account of the two companies at Nawanshahr and Hamira on the same date, i.e., 31st October, 1942, by the common directors of both the companies, who were managing the affairs of the Companies, the dividend in come of Rs. 75,000 received by the directors was tantamount to its being received by the appellant‑company itself at Nawanshahr. Reliance in this connection was placed on the cases of Trinidad Lake Asphalt Operating Company Ltd., v. Commissioner of Income. tax for Trinidal and Tobago (1945 A C 1) ; and The Secretary to the Board of Revenue, Income‑tax, Madras v. Al. Ar. Rm. Arunchalam Chettiat & Brothers (I L R 44 Mad. 65 at p. 91).
The above cases cited for the parties do not, however, seers to me to be in point. In none of these the directors were common to the debtor and the creditor company, and looked after the business of both the companies as their general agent, at least in the eye of law, nor was the amount in respect of which income‑tax was sought to be assessed received by the directors in the course of the busi ness of the companies and entered in their respective books of account on the same day. It is obvious that 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 A 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. Certain general observations in the case of Trinidad Lake Asphalt Opera ting Company, Ltd., cited by the respondent, appear to me to be of assistance in the present case, although the decision in the case mentioned above was with regard to the true meaning of the words "transmission" of "revenue" in section 30 of the Income tax Ordinance, 1940, applicable in Trinidad. Lord Wright in the course of his judgment observed as follows :‑
"No actual money passed. If the dividend had been trans mitted by a banker's draft sent by the appellant to Barber it could not have been questioned that the dividend had been transmitted, but the two companies might do their own banking transactions between themselves and dispense with the interven tion of banking facilities The transaction involved the sending to Barber by the appellant, and receipt by Barber from the appellant, of the dividend. This was effected by the agreement that payment should be made by cancellation of the debt for goods supplied. This method had been mutually agreed before the dividend was declared. The agreement was carried out by each party making corresponding entries in its books. These were not merely book‑keeping entries. They represented the actual receipt of the dividend by Barber, and the actual payment of it by the appellant to Barber and concurrently, the actual receipt by the appellant from Barber of payment of his debt for goods supplied. The composite and joint transaction in principle satisfies the description of payment by Mellish L. J. in In re Haremoney & Montague Tin and Copper Mining Co., Spargo's Case (1873 L R 8 Ch. 407, 414) ; Nothing is clearer, he said, then that if parties account with each other, and sums are stated to be due on the one side, and sums to an equal amount due on the other side of that account, and those accounts are settled by both parties, it is exa ctly the same thing as if the sums due on both sides had been paid. Indeed, it is a general rule of law, that in every case where a transaction resolves itself into paying money by A to B and then handing it back again by B to A, if the parties must meet together and agree to set one demand against the other they need not go through the form and ceremony of handing, the money backwards and forwards. This statement gives a description of what is often called a settlement in account or a set off, the word not being there used in the technical sense of the statutes of set off. There is actual, not merely notional or constructive pay ment of the indebtedness on either side. There is thus a "transmission " of funds whether the transmission is only across the table or is across the ocean. Transmission involves, indeed, an intermediate space but does not depend on the extent of the space. Each party receives payment from the other. Each party having received payment in this way makes in his turn the corresponding payment to the other. The transaction is necessarily bilateral."
It is to be noticed that in the case of Gresham Life Assurance Society v. Bishop, it was remarked by Lord Lindley : " A mere entry in an account which does not represent such a trans action does not prove any receipt, whatever else it may be worth." Evidently there the genuineness of the transaction seems to have been doubted. In the case in hand it cannot be said that the entries in the books of account of the two companies do not represent genuine transaction, and a receipt of money in the form in which money is received as between businessmen.
I am of opinion that the Court of the Judicial Commissioner has taken a correct view in holding that the dividend income of Rs. 75,000 is liable to assessment of income‑tax under section 4 (1) of the Income‑tax Act. I accordingly dismiss the appeal with costs.
MUHAMMAD SHARIF, J.‑-----I agree.
CORNELIUS, J.‑-----I am of the opinion that this appeal should be allowed, and that in place of the answer which has been given by the Judicial Commissioner's Court to the question referred by the Income‑tax Appellate Tribunal, there should be substituted an answer in the negative. I base this conclusion upon the require ments of the statute, viz., the Income‑tax Act, 1922, and the existing state of the relevant authorities dealing with the question of the taxability of income received within the territory from abroad. We were not referred to any authority of a Court in Pakistan on the subject, but a large number of authorities from the Courts in India which are of binding effect unless overruled by this Court, having been pronounced prior to the Partition of the sub‑continent, are available by way of guidance. There are also several authorities of the Privy Council and of superior Courts in the United King dom, relating to provision of a similar nature in other Acts.
The leading case on the subject is that of the Gresham Life Assurance Society ; ((1902) A C 287) where the money in question lead been earned abroad in the shape of interest, dividends and permium income, and had been applied for the purposes of the Society at the place where it had been received. The annual accounts of the Society in the United Kingdom showed monies thus received abroad, as well as monies expended abroad, for the purposes of a profit and loss account.
An argument was raised in that case by the Attorney‑General on behalf of the Income‑tax Commissioners which is so closely parallel to that advanced in the present case, that the words in which it is stated in the report cited above may very advantage ously be reproduced here :‑
"In accordance with modern language money is received wherever its benefit or value is obtained. Where debts are paid out of money abroad which would otherwise have to be paid out of money here, there is a receipt here because the debtor is discharged."
The reply to this argument is contained in a number of Indian cases which I shall presently mention. It was not noticed in any of the five speeches delivered in the Gresham Life Assurance Society Case.
The argument setting up a case of constructive receipt was however repelled. Lord Halsbury L. C. being of the view that it was necessary for the money to be received in the country in order to bring it within the terms of the statute proceeded to observe that if the legistature had intended that bringing such money into account was to be equivalent to its being received, it would have been easy to say so, and concluded that no amount of bookkeep ing or treatment of the assets in that case, wherever they might be, would be equivalent to receiving the amount in the United King dom, Lord Macnaghten thought that the entering of the amount by the Society in the statement of its affairs was not material, for "every man and every company having foreign or colonial invest ments, of course knows of the interest arising from them, takes note of it, and enters it in any statement of affairs which may require to be made up", but that was a very different thing from bringing the interest home. Lord Shand said that while it was true that the Society had received the money abroad by the hands of their agents, it was "equally true that as they left that interest where it was gained, it was never received in this country." Lord Brampton thought that there must be actual receipt to satisfy the words of the statute and that entries in account‑books of foreign assets were not sufficient to show receipt of those assets in the United Kingdom. From the judgment of Lord Lindely, it is desirable that I should reproduce a passage at somewhat greater length, touching the question of receipt of money. The passage reads as follows ‑‑
"First, let us consider what is meant by the receipt of a sum of money. My Lords, I agree with the Court of Appeal that a sum of money may be received in more ways than one, i.e. by the transfer of a coin or a negotiable instrument or other docu ment which represents and produces coin, and is treated as such by businessmen. Even a settlement in account may be equiva lent to a receipt of a sum of money, although no money may pass, and I am not myself prepared to say that what amongst businessmen is equivalent to a receipt of a sum of money is not a receipt within the meaning of the statute which your Lordships have to interpret. But to constitute a receipt of anything must be a person to receive and a person from w horn he receives, and something received by the former from the latter and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt whatever else it may be worth."
With reference to the relevant statute, Lord Lindley observed that "the locality of the receipt is made all important, and it is only by ignoring it or by introducing the expression `constructive receipt'‑which may mean anything‑that the claim of the Crown can be supported."
The taxing section which is relevant in the present case, i.e., section 14 (2), (c) Income‑tax Act makes it clear that income accru ing within an "Indian State" is not taxable unless such income, pro fits or gains are received or deemed to be received in or are brought into British India". It was made clear in the arguments before us that the alternative expression, viz., "deemed to be received" was not relevant to the consideration of the present question and it was necessary, in order that the income should be liable to tax, that it should have been received in or brought into British India. (The tax relates to the assessment year 1943‑44 when "British India" was still in existence. The assessee‑company was resident in "British India", and the disputed item of income accrued as dividend declared by a Company resident in an "Indian State", viz., Kapurthala.)
Cases in which money has been held to have been received in the territory although in a different shape from that in which it was received abroad may be briefly considered at the outset.
In the case of Subramamaya Chettiar ((1935) 3 I T R 346) ; payment was made by a company resident in British India, to a creditor resident in British India, by means of bundies issued in British India on a firm in Penang, Federated Malay States, where the payment was eventually made. It was held that the money thus received by the creditor firm in Penang was received, for the purposes of Indian Income‑tax, in British India. A hundi, it may be observed, being a negotiable instrument is money's worth. In the case of Chidam baram Chetiar ((1935) 4 I T R 309) ; a house was acquired by the assessee from a person who lived abroad, the price being paid to such person, out of the assessee's monies available abroad. It was held that the price of the house was thereby received in British India. In the case of Manickam Chatiar ((1936) 5 I T R 534) ; a debtor paid to the assessee in British India, a debt which was due outside British India ; pay ment was made in the shape of jewels and transfer of a money decree and these were regarded as tangible assets, equivalent to money received in British India. In the case of Shrimati Intermani Jatia (19 T C 342) ; it was found that at shops in British India, there were entries of monies received from a shop in the Bahawalpur State, by means of hundi and cheques. These sums were held to have been received icy British India.
Three cases from the United Kingdom may be mentioned.
In the case of the Scottish Provident Institution (6 T C 34) ; income from investments in the United States had been converted into American bearer bonds, which were subsequently realised in the United Kingdom. This was accepted in the Court of Session of Scotland as amounting to receipt of the money in the territory. But in the case of the Scottish Widows Fund (5 T C 502) ; where such bearer bonds were not realised, but the coupons for half‑yearly interest attached to the bonds were removed and sent to America, where they were encashed, and the proceeds were re‑invested in America, the same Court held that this interest income was not received in the United Kingdom. The bonds themselves, though they represented a debt, were not presently payable, but on a date in the future and then in New York, where also the interest, was payable. The Lord President followed the case of the Gresham Life Assurance Society, and observed that the House of Lords had held itself to be "bound by the strict word of the Statute, and that word is `receipt', and nothing less than actual receipt will do."
A bearer bond, in the relevant respect, is money's worth in the sense that it may be realised by sale in the open market. But a more complicated set of facts appears in the case of the Scottish Mortgage Company of New Mexico (2 T C 165). The business of this Company was to invest money abroad out of monies borrowed by way of capital in the United Kingdom. The modus operandi in respect of income earned abroad was to re‑invest such money abroad, and in the books kept in the United Kingdom to show (1) an equal sum as having been remitted abroad out of borrowings, for investment, and (2) a similar sum as accruing by way of income, which was applied to payment of interest on debentures and a dividend, extinction of a certain debit balance, and satisfaction of certain expenses. As it would be illegal to pay interest on debentures and a dividend to share-holders out of capital sums it was necessary that there should be, by a book‑keeping transaction, conversion of so such of the capital into an equivalent amount of income. It was therefore held that the book entries operated to create a certain sum into income, and this being equivalent to the interest earned abroad, must be regarded as a receipt of that sum from abroad.
I proceed now to consider certain cases which arose in the pre‑Partition Indian jurisdiction, dealing with the question of taxability of income accrued abroad, if the benefit was received in British India. In four of these cases, the benefit received was in the shape of extinction of debt. The first case is that of Multanchand Johurmal ((1930) 58 Cal. 999) The assessee was a firm in Calcutta (British India) with a branch in Cooch‑Behar (an Indian State). A…
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