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Petitioner: S. NARAYANASWAMI VS Respondent: COMMISSIONER OF INCOME TAX, MADRASHonorable Justice RAJAGOPALANR. Venkataraman,C. S. Rama Rao Sahib
1963 P T D 872
1963 P T D 872
[Madras India]
Before Rajagopalan and Srinivasan, JJ
S. NARAYANASWAMI AND ANOTHER
versus
COMMISSIONER OF INCOME TAX, MADRAS
Referred Cases Nos. 26 and 36 of 1953 and 17 and 73 of 1957, decided on 14th February 1961.
Income tax Act (XI of 1922)-----
---- S. 4(1)(b) (iii) Foreign profits Remittance Mysore securities brought to taxable territories solely for sale and reinvestment in other securities Remittance of capital not profits.
N and S were the partners of a firm which had its head office at Madras in British India and a branch at Trivandrum outside British India. Out of the accumulated profits earned and accumulated at Trivandrum N and S purchased Mysore securities and held them at Trivandrum. As they desired to change the investment to Travancore securities, in form, they sold the securities to the firm on August 6, 1947, at Trivandrum under what were styled as broker's contracts. On August 7 the firm entered into a contract at Madras to sell the Mysore securities to a broker in Bombay at the price at which it had bought them from the partners and, on August 8 the firm entered into a contract for the purchase of Travancore securities of the same face value as the Mysore securities. The Mysore securities were brought to Madras later on August 21, and were forwarded to the buyer at Bombay. N and S were credited on August 23 respectively with the sums of Rs. 37,006 and Rs. 32,652 being the sale proceeds of the Mysore bonds. The Income-tax Officer held that these transactions constituted remittances to British India of unassessed foreign profits under section 4 (1) (b) (iii) of the Income tax Act, 1922. On a reference :
Held, that, even if bringing the Mysore securities to Madras constituted a remittance, the securities represented capital, as the accumulated unassessed foreign profits had been capitalised when they were invested in the purchase of those securities. There was no device to bring in money for use in British India : there was only a substitution of securities which were ultimately held outside British India. There was only a remittance of capital. The sums of Rs. 37,006 and Rs. 32,652 could not, therefore, be brought to tax under section 4 (1) (b) (iii) of the Income tax Act, 1922.
Commissioner of Income tax v. Muhammad Ismail Rowther (1910) 8 I T R 150 applied.
Walsh v. Randall (1940) 23 T C 55 distinguished.
STATEMENT OF CASE Case Referred No. 26 of 1953 [The case stated in Case Referred No. 36 of 1953 is similar and is not printed here.]
By this application, the assessee requires the Appellate Tribunal to refer to the High Court two questions of law, which are said to arise out of the Tribunal's order in I. T. A. No. 5082 of 1950 51, dated February 19, 1952. Inasmuch as a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case, agreed to by the parties, and refer it to the High Court of Judicature at Madras, under section 66 (1) of the Indian Income tax Act.
2. The assessee is a partner in Chitra & Co., a firm of share and stock brokers, carrying on business at Madras with a branch at Trivandrum, hereinafter referred to as the Madras firm and Trivandrum firm, respectively.
3. The assessee bought on his own account from the Trivandrum firm certain Mysore Government securities of the face value of Rs. 34,000 for Rs. 36,821 under a contract dated June 20, 1947, through debits to his current account with it; in two amounts on June 23, 1947 and July 2, 1947. Some time later, on August 6, 1947, he sold the identical securities under a broker's contract back to the Trivandrum firm, which in turn sold them on the same day to the Madras firm under another contract for rupees 37,006 (made up of Rs. 36,423 representing the market price at Rs. 107-2-0 together with accrued interest thereon of Rs. 583 till date). The Madras firm, in its turn, sold the said lot on the next day, August 7, 1947, to Champaklal Devidas, hereinafter referred to as the Bombay broker, for Rs.37,006, the same price at which it took over from the Trivandrum firm.
4. The scrip relating to these transactions were sent by the Trivandrum firm to the Madras firm through the Bharat Bank Ltd., Trivandrum, the exact date of despatch from Trivandrum not being available, but may be taken to be well after August 7, 1947, the date of contract of sale with the Bombay broker. Delivery of these documents was taken by the Madras firm on August 21, 1947, and the financial entries were passed through its books crediting the Trivandrum firm's account and debiting its own stock account for the said sum of Rs. 37,006. On the same day, a bill was drawn on the Bombay broker, with the documents attached and negotiated with the Imperial Bank of India, Madras, and the proceeds were duly credited to its bank account. The Madras firm thereupon credited its stock account for the sale by it to the Bombay broker in the above manner and on its advice the Trivandrum firm credited the assessee's current account with Rs. 37,006 on August 23, 1947.
5. In the above circumstances, the Income tax Officer treated the sum of Rs. 37,006 received by the Madras firm in the manner aforesaid as a remittance to the assessee of his Travancore profits into the former British India.
6. The availability of Travancore profits to cover the sum in question was not in dispute, but what was objected to was the assessability. The Appellate Assistant Commissioner, on appear by the assessee, accepting his contention, held that a firm was al separate entity in law apart from its partners, that as the sale by the assessee to the Trivandrum firm was an outright sale in Trivandrum itself, the consideration having been received there by credit to his ledger account and, therefore, it could not be said that there was any remittance to British India, the receipt by the firm not amounting in law to a receipt by or on behalf of the partner, and as such directed the deletion of the remittance amount of Rs. 37,006 from the assessment of the assessee.
7. Against the decision of the Appellate Assistant Commissioner, the Department carried the matter on appeal to the Appellate Tribunal. The Tribunal found that the transaction when shorn of its unnecessary ramifications was a simple one ; that, starting from the contract, dated August 6, 1947, between the assessee and the Trivandrum firm right up to the receipt of cash from the said Bombay broker by the Madras firm, was nothing but the sale of the assessee's holdings of the scrips in question, formerly purchased and held by him in Trivandrum, the proceeds whereof were ultimately received in British India. The resulting cash also actually found its way into the bank acc,)unt of the Madras firm though ultimately to the credit of the assessee through the books of the Trivandrum firm. On these facts the Tribunal held that the substance and reality of the matter was a simple transaction of a sale of securities acquired by the assessee out of his Trivandrum profits eventually in British India and that as the quantum of the Trivandrum profits available for remittance was adequate, the amount in question clearly constituted a remittance of Trivandrum profits and consequently assessable. The Appellate Assistant Commissioner's decision was thus reversed and the assessment made by the Income tax Officer restored.
8. Out of the aforesaid facts, the question of law that arises is :
"Whether there was material for the Tribunal's finding that the real effect of the transactions put through was to bring about a remittance to the assessee of his foreign profits to the extent of Rs. 37,006 assessable. under section 4 (1) (b) (iii) ?"
Referred Case No. 73 of 1957* [The case stated in Referred Case No. 17 of 1957 is similar and is not printed here.]
In compliance with the directions of the High Court in C. M. P. No. 7015 of 1956, dated 18th September 1956, we state the case and refer it to the High Court at Madras. The question of law on which the Tribunal has been directed to state the case is as follows :
"Whether, in the circumstances of the case, even if the amount of Rs. 37,006 was a remittance to the assessee, such a remittance' did dot amount to remittance of capital ?"
2. A case has been stated at great length in R. C. No. 26 of 1953, on the following question
"Whether there was material for the Tribunal's finding that the real effect of the transactions put through was to bring about a remittance of the assessee of his foreign profits to the extent of Rs. 37,006 assessable under section 4 (I) (b) (iii) ?"
The following are the further facts relating to the question set out in the first paragraph directed by their Lordships.
3. The assessee was a partner of a firm styled Swastik & Company which carried on business as shares and stock brokers in Madras and at Trivandrum from which he retired in May, 1946, & commenced another partnership under the name and style of Chitra & Company to carry on the same line of business at the same places as aforesaid.
4. The assessee purchased certain Mysore Government Securities of the face value of Rs. 34,000 for Rs. 36,821 on June 23, 1947, and July 2, 1947, at Trivandrum from out of his past accumulated foreign profits at that place as partner of Swastik & Company aforesaid. It is common ground that such foreign profits were adequate to cover the aforesaid purchases.
5. The aforesaid securities were sold to Champaklal Devidas in Bombay on August 7, 1947, for Rs. 37,006 (net) through the Trivandrum and Madras Offices of Chitra & Co. aforesaid in the manner described in detail in paragraphs 3 and 4 of the statement of the Case, in R. C. No. 26 of 1953 which has also been directed by their Lordships to be posted for hearing along with the present reference.
6. By another contract, dated August 8, 1947, the assessee purchased 3 per cent. 1952 54 Travancore Securities for the same face value of Rs. 34,000 at a cost of Rs. 35,714.
7. The assessee received credit for the above net sale eventually in his own current account with the Trivandrum branch of Chitra & Co. aforesaid on August 23, 1947. On the same day, his account was also debited for the aforesaid purchase. A copy of his ledger account is annexed hereunto as Annexure "A" and forms part of the case,
8. The Income tax Officer treated the aforesaid amount of Rs. 37,006 as a remittance into India of the assessee's foreign profits during the year ended August 16, 1948, the "previous year" for the assessment year 1949 50 and assessed it as follows :
Rs. Out of year's profits at Trivandrum??????????????????? ?????????????????????? 2,427 Out of prior year's unremitted profits???????????????? ?????????????????????? 34,579 ??????????????????????????????????????????????????????????????????????????????????? Total ?? 37,006
9. The contention before the Income tax Officer was that the aforesaid amount did not represent any remittance at all and alternatively even if it did, it was only capital in the light of the decision in Muhammad Ismail Rowther, In re ((1940) 8 I T R 150). The Income tax Officer dismissed the alternative contention in the following words:
"The assessee's representative also claimed that bringing in of securities cannot constitute remittance as decided by the Madras High. Court in the case of Muhammad Ismail Rowther In re. The facts in that case, however, were entirely different. There, certain Mysore securities belonging to the assessee were brought into British India and were deposited with the Imperial Bank as security for a loan. In the present instance the securities have been sold out and converted into cash. I hold therefore that the receipt of Rs. 37,006 by the Madras Office for the sale of shares amounted to receipt by the assessee . . ."
10. In his appeal to the Appellate Assistant Commissioner, the assessee contended, inter alia, as follows :
"No. (7). The Income tax Officer should have held that the appellant substituted his investment in Mysore Securities by an investment in Travancore State Securities, for the reason that, although interest on Mysore Securities was tax free in Mysore, it was not so exempt in Travancore and the appellant wanted to take advantage of the fact that interest from Travancore State Securities was tax free in Travancore and that the operation in fact amounted to a replacement of one foreign investment with another form of foreign investment and there was no remittance of profit into British India.
(b) The Income tax Officer should have held that the principle of the decision in the case of Muhammad Ismail Rowther applied to the appellant's case in that foreign profits, once capitalized assumed the form of capital and the subsequent receipt into British India, even if the transaction in the appellant's case amounted to a receipt, was a receipt of capital and not of profits and the second receipt was therefore outside the scope of the Income tax Act.
(11) The Income tax Officer erred in computing the profits available for remittance at Rs. 56,204. The appellant will file at the time of the hearing of the appeal a correct statement for the profits available for remittance, if it should be held that there was a remittance at all liable to taxation."
As the Appellate Assistant Commissioner cancelled the assessment holding that it was not a remittance at all, there was consequently no occasion for the assessee to agitate the aforesaid contention before him any further.
11. In the course of the hearing by the Tribunal of the appeal filed by the Department against the aforesaid decision of the Appellate Assistant Commissioner, the assessee did not challenge the availability of profits at Trivandrum to cover the aforesaid amount if it was to be treated as a remittance. In the Tribunal's order in paragraph 2 therein, it is stated as follows: "It is common ground that there were enough Travancore profits to cover the amount in question." The contention that the remittance was to be deemed capital, based on the ruling in Muhammad Ismail Rowther, In re aforesaid, was not argued before the Tribunal so that the Tribunal did not deal with it in its order.
12. The assessee filed an application for reference to the High Court on the aforesaid Tribunal's order raising two questions, the second of which is as follows
"Whether, in the circumstances of the case, even if the amount of Rs. 37,006 was a remittance to the applicant, such a remittance did not amount to a remittance of capital being the amount of the realisation of the applicant's investments in Trivandrum ?" 13. On the above application, a statement of the case was drawn up and referred to the High Court under section 66 (1) raising only the following question for the consideration of their Lordships :
"Whether there was material for the Tribunal's finding that the real effect of the transactions put through was to bring about a remittance to the assessee of his foreign profits to the extent of Rs. 37,006 assessable under section 4 (1) (b) (iii) ?"
14. The Tribunal did not, in stating the above case", refuse to refer either one or the other of the two questions raised in the applications as aforesaid, but referred only the above question as in its opinion, it was the only question that could be said to arise out of the Tribunal's order. The assessee's counsel agreed to the aforesaid statement in full, including the question referred and did not ask for inclusion of any other additional questions.
15. It is humbly submitted and with respect that in the above situation, there was no basis for the assessee for an application to the High Court under section 66 (2). No doubt, he should have prayed before the High Court for admission of the present question as an additional question in R. C. No. 26 of 1953.
16. However, in obedience to their Lordships' directions, both the parties were heard on the question set out in paragraph 1 supra and directed by their Lordships to be referred. While the assessee agrees that there are adequate profits available in Trivandrum to cover the aforesaid amount of Rs. 37,006, it is contended that the remittances, if any, being in the shape of Mysore Government Securities, as aforesaid, purchased in Trivandrum out of his past unassessed foreign profits is only capital as held in Muhammad Ismail Rowther, In re (the remittance was not in cash or in any other accepted mode of transmission of funds).
17. In our humble opinion, the facts of the above case relied on by the assessee are not on all fours with his own. The following observations of the learned Chief Justice in the course of his judgment in that case go to emphasize the difference
At page 157 : "In the present case the bonds were not bought in Mysore for the purpose of being brought into British India and sold here."
At page 158 : "The Court is not here concerned with the case where a person in order to avoid the payment of income-tax converts his foreign profits into foreign securities and then proceeds to realise them in British India. There is no suggestion of a device . . . ."
18. The Tribunal has found in paragraphs 3 and 4 of its order, copy whereof is annexed hereunto as Annexure "B" and forms part of the case, that the transaction in question constituted actually only a "device" to sell the securities and realise the proceeds in India. These findings are challenged for supporting the materials in R. C. No. 26 of 1953. If, therefore, the assessee relies only on the decision in Muhammad Ismail Rowther In re, it is humbly submitted and with respect that the question directed in this reference may not perhaps be an independent question for their Lordships to consider.
19. Both the parties agree that all the facts have been correctly set out in this statement and that no material fact has been omitted therefrom.
SUPPLEMENTARY STATEMENT OF CASE
Their Lordships of the Madras High Court in C. R. Nos. 26. of 1953, 73 of 1957, 36 of 1953 and 17 of 1957 and T. C. M. P, Nos. 41 and 42 of 1959 dated October 21, 1959, Asvina 29, 1881 have been pleased to direct a further statement of the case to embrace the following aspect of the matter
"Learned counsel for the Department specifically wanted an enquiry into the question, whether the funds were remitted to the head office of the firm at Madras only to enable the head office of the firm to carry on its business. That the moneys belonged to the individual partners would still be a factor, but an equally relevant factor would be whether the sale of the securities held by each of the two partners was only to see that the firm had funds at Madras at that stage to carry on it business. That aspect also will have to be considered in full by the Tribunal in submitting the further statement of the case called for."
2. As their Lordships have desired in the above directions we have investigated into the position as to the extent to which the Madras branch could have derived advantage by way of any physical funds for its business to the detriment of the Travancore branch, ignoring altogether the various book entries involved.
3. The affidavits by the Department and the assessee filed before their Lordships, copies whereof are annexed hereunto as Annexures "X-1" and "X-2" and form part of the case, have been examined and the parties have been heard.
4. The sale proceeds of the Mysore Securities Rs. 37,006 (Narayanaswami's) and Rs. 32,652 (Subramanian's) were received by Chitra & Co., Madras, on August 21, 1947, by discounting the bill drawn on Champaklal Devidas of Bombay. It was also only on that day that the Madras office received the securities.
5. By a contract, dated August 8, 1947, the Madras office purchased on behalf of the assessees 1952-54 Travancore Securities for Rs. 35,714 (Narayanaswami's) and Rs.31,503-12-0 (Subramanian's). The payment was made on August 21, 1947, as claimed in the affidavit.
6. The balances in the drawings account of the two assessees in the Madras books are set out below for the following years
Year ended
Narayanaswami
Subramanian
Rs.
Rs.
31-3-1947
15,090
11,677
31-3-1948
39,636
39,386
31-3-1949
43,557
43,165
No doubt, there are much larger drawings during the year ended March 31, 1948, under reference than in the other years. These are, however, attributable mainly to the following items only :
Narayanaswami
Subramanian
Rs.
Rs.
Cheque to Swastik & Co.
14,618
13,853
Income tax
21,462
10,569
7. It is common knowledge that brokers lodge most of the securities and shares owned by them with banks for accommodation. These securities are also, with the consent of the bank, varied from time to time if the old holdings are sold or new scrips purchased. We wanted to further investigate into how far the securities in question, either the old or new scrips, could have been made use of even temporarily for such bank accommodation, even for the short period they remained in the possession of the Madras office. The assessees have expressed their inability to produce the necessary details of the securities held by the bank from time to time on the basis of a letter from the Punjab National Bank Ltd., dated August 24, 1960, copy whereof is annexed hereunto as Annexure "Y" and forms part of the case. It is not understood how a bank can establish any practice not to issue "such like certificates" to its constituents when the constituents demand them. This line of investigation is thus shut out.
8. On the evidence now available, limited as it is, we are unable to find any materials on the basis of which it can be inferred that any part of the Trivandrum funds had been physically employed by the Madras business at or near about the relevant time ; the drawings of the two assessees during the year have been only out of Madras funds.
9. Both the parties agree that all the facts have been correctly set out in this statement and that no facts material to this further statement have been omitted herein.
R. Venkataraman and S. Ramamurthi for the Assessee.
C. S. Rama Rao Sahib and S. Ranganathan for the Commissioner.
JUDGMENT
RAJAGOPALAN, J. The reference under section 66 (2) of the Act, that was directed in C. M. P. No. 7015 of 1956, was itself necessitated during the course of the arguments into R. C. No. 26 of 1953, when an alternative contention of the assessee had to be dealt with to dispose of the controversy between the parties which constituted the subject matter of R. C. No. 26 of 1953. To comply with the directions given in C. M. P. No. 7015 of 1956 a statement of the case has been submitted which has been separately numbered as R. C. No. 73 of 1957 but the questions that arise both in R. C. Nos. 26 of 1953 and 73 of 1957 relate to the same set of assessment proceedings and, as we said, they are really alternative positions to be considered before the questions at issue between the assessee and the Department are ultimately disposed of.
It is rather unfortunate that the specific findings required have not been recorded in the statement of the case submitted in R. C. No. 73 of 1957. The Department filed T. C. M. P. No. 41 of 1959 to call upon the Appellate Tribunal to submit a further statement of the case with reference to the questions which they were directed to refer to this Court in C. M. P. No. 7015 of 1956. Learned counsel for the assessee took time for consideration and eventually represented that the assessee was not opposing the application to call for a further statement of the case.
The scope of the enquiry which was expected of the Tribunal, on the basis of which findings had to be incorporated in the statement of the case, is indicated in the affidavit filed in T. C. M. P. No. 41 of 1959, a copy of which will be forwarded to the Tribunal. Apparently the Tribunal was of the view that, since the question that was referred in R. C. No. 73 of 1957 had not been argued before the Tribunal at the stage of the appeal, the Tribunal could not, and should not, record any specific findings for the disposal of the question referred to this Court for decision. That view is erroneous. Material for recording specific findings was apparently already before the Tribunal. If that material is not complete the Tribunal will afford an opportunity both to the Department and to the assessee to place all the available material, so that the questions at issue can be satisfactorily disposed of.
Learned counsel for the Department specifically wanted an enquiry into the question, whether the funds were remitted to the head office of the firm at Madras only to enable the head office of the firm to carry on its business. That the moneys belonged to the individual partners would still be a factor, but an equally relevant factor would be whether the sale of the securities held by each of the two partners was only to see that the firm had funds at Madras at that stage to carry on its business. That aspect also will have…
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