Full Judgment Text
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PETITIONER:
P. V. RAGHAVA REDDI AND ANOTHER
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX
DATE OF JUDGMENT:
16/01/1962
BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
SINHA, BHUVNESHWAR P.(CJ)
KAPUR, J.L.
SHAH, J.C.
MUDHOLKAR, J.R.
CITATION:
1962 AIR 977 1962 SCR Supl. (2) 596
CITATOR INFO :
D 1981 SC 148 (5,8,11)
ACT:
Non-resident company-Commission due to-
Received by Indian firm and paid directly or
through others to the non-resident company-If
statutory agent-Income, if received in taxable
territory-Indian Income-tax Act, 1922 (11 of
1922), ss. 4(1)(a), 4(1)(c), 43.
HEADNOTE:
The appellant is a firm which was doing
business in mica. To negotiate for orders and to
handle its other affairs the appellant engaged a
company in Japan which is admitly a "non-resident"
company. By agreement between the
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two firms, during the years of account the amount
of commission payable to the Japanese company was
received by the appellant. But this amount could
not be sent, due to the exchange control
restrictions, to the Japanese company. The amount
was kept under the instructions of the Japanese
company in a separate account to be held on its
behalf to be applied as instructed. Some of the
amount was later paid to the Japanese company
either directly or through others. Treating the
appellant as ’statutory agent’ of the Japanese
company the Income-tax authorities assessed the
appellant on the amount received for the two
account years. The appeal to the Commissioner
failed. But on further appeal the Tribunal ordered
the cancellation of the assessment. The
Commissioner of Income-tax obtained a reference to
the High Court and the High Court answered the
question "whether the aforesaid sum of Rs. 26,255-
0-0 and Rs. 11,272-0-0 being selling commission
credited to the aforesaid non-resident company’s
account in the books of the assessee are
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chargeable in the hands of the assessee under s.
4(1) (a) for the assessment years 1949-50 and
1950-51 ?" in favour of the Department. The
assessee thereupon filed an appeal before the
Supreme Court on a certificate granted by the High
Court.
The two main questions before the Supreme
Court were whether the appellant was a ’statutory
agent’ for purposes of s. 43 and whether the
income was received by Japanese company in ’the
taxable territory’.
^
Held, that there was a business connection
between the assessee and the Japanese company
sufficient in law for treating the assessee as an
agent for purposes of s. 43, and the appellant was
rightly treated as a ’statutory agent’. Before the
money was entered into the account in the name of
the Japanese company and held on its behalf there
might be a relation of debtor and creditor between
the assessee and the Japanese Company; but after
the money was credited in the books of account in
the name of the Japanese company it belonged to it
because it was held for and on behalf of that
company and was at its disposal. Therefore the
income was received in the taxable territory
within the meaning of s. 4(1) (a) of the Indian
Income Tax Act, 1922.
Held, further, that cls. (a) and (c) of s.
4(1) can be read disjunctively and that it is not
necessary that the income must not only be
received in the taxable territories but also must
accrue or arise in the taxable territories.
Turner Morrison & Co. Ltd. v. Commissioner of
Income-tax [1953] 23 I.T.R. 152, followed.
598
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 325 and 326 of 1960.
Appeals from the judgment and order dated
February 21, 1956, of the former Andhra High Court
in case Referred No. 50 of 1954.
R. Ganapathy Iyer, R. Thiagarajan and
G.Gopalakrishnan, for the appellants.
H. N. Sanyal, Additional Solicitor General of
India, K. N. Rajagopala Sastri and P. D. Menon,
for the respondent.
1962. January 16.-The Judgment of the Court
was delivered by
HIDAYATULLAH J.-The appellant is a firm at
Gudur (Andhra Pradesh), which was doing busines
Mica under the name and style of the Continental
Export and Import Company. During the years of
account, 1948-49 and 1949-50 (corresponding to the
assessment years, 1949-50 and 1950-51), the
assessee firm exported Mica to Japan. Mica was not
directly exportable to Japanese buyers during
these years, as Japan was under military
occupation, but to a State Organisation called
Boeki-Cho (Board of Trade). To negotiate for order
and to handle its other affairs in Japan in
connection therewith, the assessee firm engaged
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San-Ei Trading Co. Ltd., Tokyo, as its agents. The
Japanese Company was admittedly a ’non-resident’
Company. Two agreements were entered into by the
assessee firm and the Japanese Company, the first
for the quarter, July to September 1948, during
which period a commission of 4 per cent on the
gross sale proceeds was payable to the Japanese
Company, and the second, for an indefinite period,
with the commission reduced to 2 per cent.
During the years of account the amount
commission due to the Japanese Company was
respectively Rs. 26,254-9-1 and Rs. 11,272-8-8.
These amounts (included in the price of Mica
exported) were received by the assessee firm in
India, but due to
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the restrictions imposed by the Exchange Control
laws, they could not be sent to the Japanese
Company The agreements between the assessee firm
and the Japanese Company, therefore, provided for
this contingency by the inclusion of the following
term:
"In view of the difficulties in this
country it is requested that the first party
credits all these amounts to the account of
the second party with them without remitting
the same until definite instructions are
received by the first party."
During the two account years, a total amount of
Rs. 13, 319-12-4 was paid to the Japanese Company
either directly or through others, to whom the
assessee firm was instructed by the Japanese
Company to pay the amount. The Income-tax
authorities treated the assessee firm as the
’statutory agent’ of the Japanese Company, and
assessed tax on the two amounts in the respective
years of assessment. The order of the Income-tax
officer was confirmed on appeal; but the Tribunal
set aside the order on the ground that the income
to the Japanese Company had accrued or arisen in
Japan and could not be said to have been received
by the Japanese Company in the taxable
territories, since s. 4(1)(a) was subordinate to
s. 4(1)(c). The Tribunal thus concluded:
"The reference in section 4(1)(a) to
income ’received in India’ can, in our
opinion, refer only to the situation more
specifically provided for in section 4(1)(b)
as sub-section(a) provides a general cover
for both the immediately following sub-
sections (b) and (c). Section 4(1)(a) cannot
therefore by itself add a new liability to
non-residents the extent of which is clearly
delimited under section 4(1) (c) of the Act
"to only incomes that accrue to them within
the taxable territories. To read
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any further in section 4(1)(a) will totally
nullify the effects of section 4(1)(c).
Income that has accrued once abroad
cannot by any means accrue again in India. If
such income is later remitted to India and
received by or on behalf of such non-
residents in India such subsequent receipt
cannot be chargeable under the Act."
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The assessment was, therefore, ordered to be
cancelled. The Commissioner of Income-tax,
however, obtained a reference to the High Court of
Madras on the question:
"Whether the aforesaid sum of Rs.
26,255-0-0 and Rs. 11,272-0-0 being selling
commission credited to the aforesaid non-
resident company’s account in the Books of
the assessee are chargeable in the hands of
the assessee under s. 4 (1)(a) for the
assessment. years 1949-50 and 1950-51?"
The High Court answered the question against
the assessee firm. The High Court observed that
the learned advocate for the assessee firm
"confessed his inability to support the decision
of the tribunal on the grounds on which it rests".
The High Court further observed that the answer to
the question did not "admit of any doubt or
difficulty". The High Court, however, granted a
certificate, and these appeals have been filed. In
our opinion, the High court was right in the
answer it gave to the question, for reasons which
we shall persently indicate.
Under s. 42, all income, profits or gains
accruing or arising, whether directly, or
indirectly through or from any business connection
in the taxable territories are deemed to be income
accruing or arising within the taxable
territories, and if the person entitled to the
income, profits or gains is not resident in the
taxable territories, it is chargeable to income-
tax either in his name or in the name of his
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agent, and in the latter case, such agent is
deemed to be, for all the purposes of the Act, the
assessee in respect of such income-tax. The
provisos to the section enable the application of
s. 18, and the tax may be recovered by deduction
under that section and the agent or any person who
apprehends that he may be assessed as such an
agent is also enabled to retain out of the money
payable to the non-resident person a sum equal to
his estimated liability. The section thus creates
a vicarious liability, in so far as the agent is
concerned, for the tax which the non-resident has
to pay; but as a safeguard for him, he is enabled
to retain from the money he has to pay, a sum
equal to his own liability in the event of his
being treated as the assessee. Section 43 lays
down who can be deemed to be an agent, and it is
provided that any person having any business
connection with a nonresident person or through
whom the non-resident is in receipt of any income,
profits or gains is to be deemed to be such an
agent, if the Income-tax Officer has caused a
notice to be served of his intention of treating
him as the agent of the nonresident person. Such
persons are conveniently described as "statutory
agents."
In the present case, there is no doubt that
the assessee firm must be treated as a statutory
agent. In Turner Morrison & Co. Ltd. v.
Commissioner of Income-tax (1), this Court held
that a person who is not an agent of the non-
resident person can be appointed an agent for the
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purposes of s. 43, provided there subsists a
’business connection’ between him and the non-
resident person. It was also held that such agent
was vicariously liable for the tax on income
described in ss.40 and 42. There can be no
question in this case that a ’business connection’
subsisted during the years in question, and the
appellant firm could be treated as an assessee for
purposes of s. 42. What was contended was that
602
the view of the Tribunal of s. 4(1) is the right
view of the law. Section 4(1), prior to its
amendment in 1950 by the Adaptation of Laws Order,
1950, read:
"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 of such
person, or
(b) if such person, is resident in
British India during such year,-
(i) accrue or arise or are deemed
to accrue 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 1st 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 :"
The contention is that this come cannot be
deemed to be received in the taxable territories
(then British India) in the years of account. It
is urged that the Japanese Company did not
actually receive it in British India, and that
there was only a relation of debtor and creditor
between the assessee firm and the Japanese
Company. Till the money was actually paid over to
the Japanese
603
Company, a mere entry in the account books of the
firm was not a receipt by the Japanese Company,
and a mere entry of an item in the account books
has not been deemed to be a receipt by any
provision of the Act, which, it is said, always
states clearly when a fiction is to be applied. It
is also argued that cl. (a) of s. 4(1) is
delimited by cl.(c).
Clauses (a) and (c) of s.4(1) are not
interdependent. In Turner Morrison’s case (1), it
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was observed by this Court that,
"the whole object of that section (s.42)
is to make certain income, profits and gains
to be deemed to arise in India so as to bring
them to charge. The receipt of income,
profits and gains being one of the tests of
liability, where the income, profits and
gains are actually received in India it is no
longer necessary for the revenue authorities
to have recourse to the fiction."
After referring to certain authorities in
which this was so held, this Court pointed out:
"Section 4(1)(a) in terms is, unlike
Section 4(1)(b) or 4 (1)(c), not confined in
its application, to any particular category
of assessees. Section 4 (1)(a) is general and
applies to a resident or a non-resident
person."
It was rightly pointed out by the High Court in
judgment under appeal that;
"Actual or deemed receipt, of income in
the taxable territories by or on behalf of
nonresidents attracts tax under section
4(1)(a) even though the income may not be
chargeable under section 4(1)(c) by reason of
its having accrued or arisen outside. Receipt
of income within the taxable territories by
itself attracts tax whether the recipient is
a resident or non-resident and whether the
income
604
accrued or arose within the taxable
territories or outside. So much is plain on
the language of section 4(1) (a) and (c)."
In our opinion, clauses (a) and (c) of s.4(1)
can be read disjunctively, and cl.(a), which
provides for receipt of income, profits and gains
in the taxable territories cannot be subjected to
the limitation that the income must also accrue or
arise in the taxable territories. To make cl.(a)
depend on cl. c is to make the "accrual" the test,
while cl. (a) only considers receipt in the
taxable territories sufficient. The clauses are
capable of being read independently, though,
sometimes, they may operate together.
This leaves over the question which was
earnestly argued, namely, whether the amounts in
the two account years can be said to be received
by the Japanese Company in the taxable
territories. The argument is that the money was
not actually received, but the assessee firm was a
debtor in respect of the amount and unless the
entry can be deemed to be a payment or receipt cl.
(a) cannot apply. We need not consider the
fiction, for it is not necessary to go to the
fiction at all. The agreement, from which we have
quoted the relevant term, provided that the
Japanese Company desired that the assessee firm
should open an account in the name of the Japanese
Company in their books of account, credit the
amounts in that account, and deal with those
amounts according to the instructions of the
Japanese Company. Till the money was so credited,
there might be a relation of debtor and creditor;
but after the amounts were credited, the money was
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held by the assessee firm as a deposited. The
money then belonged to the Japanese Company and
was held for and on behalf of the Company and was
at its disposal. The character of the money
changed from a debt to a deposit in such the same
way as if it was credited
605
in a Bank to the account of the Company. Thus, the
amount must be held, on the terms of the
agreement, to have been received by the Japanese
Company, and this attracts the application of
s.(4)(1)(a). Indeed, the Japanese Company did
disposes of a part of those amounts by instructing
the assessee firm that they be applied in a
particular way. In our opinion, the High Court was
right in answering the question against the
assessee.
The appeals fail, and are dismissed with
costs, one hearing fee.
Appeal dismissed.