PETITIONER:
COMMISSIONER OF INCOME-TAX/EXCESSPROFITS TAX, BOMBAY CITY
Vs.
RESPONDENT:
MESSRS. BHOGILAL LAHERCHAND includingBATLIBOI & CO., BOMBAY
DATE OF JUDGMENT:
18/12/1953
BENCH:
MAHAJAN, MEHR CHAND
BENCH:
MAHAJAN, MEHR CHAND
DAS, SUDHI RANJAN
HASAN, GHULAM
JAGANNADHADAS, B.
CITATION:
1954 AIR 155 1953 SCR 444
ACT:
Indian Income-tax Act (Xlof 1922), s. 42(1)-Scope of.
HEADNOTE:
A Hindu undivided family was carrying on business in
Bombay, Madras and the Mysore, being treated as a single
assessee and its relevant accounting period was 10th
October, 1941, to 8th November, 1942. During this period,
the Mysore branch purchased goods from the Bombay head
office and the Madras branch of the value of Rs’ 2 lakhs
odd. The In tax ‘Officer estimated these purchases of
the Mysore in British India at Its. 3 lakhs and its profits
at Rs 75,000 on the sale of these goods in Mysore. In
view of the provisions of s. 42 of the Indian Income-tax
Act, half of this profit, i.e., to the extent of Rs. 37,500,
was deemed to accrue or arise in British India because of
the business connection of the L non-resident branch in
British India:
Held, that, on the facts and circumstances of the case,
the Income-tax Officer was right in applying the provisions
of s. 42 1 of the Income-tax Act and holding that RS.
37,500 were deemed to accrue in British India and in
including in the assessment a portion thereof.
Held also, that s. 42 sub-ss. (1) and (3), cover Cases of
both residents as well as non-residents.
Commissioner of Income-tax v. ‘Western India Life
Insurance Co. [1945] (13 I.T.R. 405) dissented from. Sutlej
Cotton Mills Ltd. V.-Commissioner of Income-tax, West Bengal
(A.I.R. 1950 Cal. 551), Commissioner of Income-tax/Excess
Profits Tax, Madras v. Parasuram Jethanand (A.I.R 1950,Mad.
631), Commissioner of Income-tax. Bombay V. Ahmedbhai
Umarbhai & Co. ([1950] S.C.R. 335), referred to.
445
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 160 of
1950.
Appeal against the judgment and Decree dated the 30th
March, 1951, of the High Court of judicature at Bombay
(Chagla C. J. and Tendolkar J.) in Income Tax Reference No.
34 of 1950.
C. K. Daphtary, Solicitor-General for India, (Porus A.
Mehta, with him) for the appellant.
R. J. Kolah for the respondent.
1953. December 18. The judgment of the Court ,was
delivered by
MAHAJAN J.-This is an appeal from the Judgment of the
High Court of Judicature at Bombay delivered on a reference
under section 66 (1) of the Indian Income-tax Act, 1922,
whereby the High Court answered the first referred question
in the negative.
The assessment in question concerns the year 194344. A
Hindu undivided family was carrying on business in Bombay.,
Madras and the Mysore State. Its business was taken over by
a registered firm on 17th March, 1942. For the purpose of
this appeal however this circumstance is not material. The
case has been dealt with on the assumption that a single
assessee carried on, business from 10th October, 1941 to 8th
November, 1942, the relevant accounting year. According to
the accounts of the assessee, during this period the Mysore
branch purchased goods from the Bombay head office and the
Madras Branch of the value of Rs. 2,45,455. The Income-tax
officer estimated these purchases of the Mysore branch in
British India at Rs. 3,00,000 and its profits at Rs. 75,000
on the sale of these goods in Mysore. In view of the
provisions of section 42 of the Act, half of this profit,
i.e., to the extent of Rs. 37,000, was deemed to accrue or
arise in British India, because of the business connection
of the non-resident, branch in British India.
It was contended that the assessee being a person
resident in India, section 42 could not be invoked in the
case, because that section had-application only to
446
cases of non-residents. The Income-tax Tribunal following
the decision of the Bombay High Court, in Commissioner of
Income-tax ‘V. Western ,India Life, Insurance Co. Ltd.(1),
upheld this contention, ‘and ruled that no part of the
Mysore profit could be taxed in British India. At the
instance of the Commissioner of Income-tax/Excess Profits
Tax, Bombay City, three questions were referred to the High
Court under section 66 (1), the first of these being
“Whether in the circumstances of the case can the profits
on the sale of goods in the Mysore State be deemed to accrue
or arise in British -India under’ section 42 (1) of the
Indian Income-tax Act”-
The High Court returned an answer to the question’ in the
negative after resettling it in these terms :-
“Whether on the facts and in the circumstances of the case
the Income-tax Officer was right in applying the provisions
of section 42 (1) of the Income-tax Act, and holding that -
Rs. 37,500 were profits deemed to accrue in British India
and in including in the assesment a portion thereof.”
This appeal is before us on a certificate granted by the
High Court, and the only question canvassed here is whether
section 42 (1) of the Indian Income-tax Act has application
to the case of a resident assesses or whether its scope is
limited to a non-resident assessee alone.
It is common ground that if section 42 of the Act has
no application to the case of a resident assessee, the whole
of the Mysore profit, namely Rs. 75,000, cannot -be included
in the assessment of the year 1943-44. On the other hand, if
such an assessee is within the ambit of the section, in
that event the sum of Rs. 37,000 or any part of it would
be liable to assessment during the assessment year in
question.
Section 42 of the Act is in these terms:
“(1) All income, profits or gains accruing or arising,
whether directly or indirectly, through or from any business
connection in the taxable territories’
(1) [1945]13I.T.R.465.
447
or through or – -from any money lent at interest and brought
into the taxable territories in cash or in kind or through
or from the sale, exchange or transfer of a capital asset in
the taxable territories, 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 :
Provided that where the person entitled to the income,
profits or gains is not resident- in the taxable
territories, the income-tax so chargeable may be recovered
by deduction under any of the provisions of section 18 and
that any arrears of tax may be recovered also in accordance
with the provisions of this Act from any assets of the non-
resident person which are, or may at any time come within
the – taxable territories
Provided further that any such agent, or any person who
apprehends that he may be assessed as such an agent, may
retain out of any money payable by him to such non-resident
person a sum equal to his estimated liability under this
sub-section, and in the event of any disagreement between
the non-resident person and, such agent or person as to the
amount to be so retained, such agent or person may secure
from the Income-tax Officer a certificate stating the amount
to be so retained pending final settlement of the liability,
and the certificate so obtained shall be his warrant for
retaining that amount
Provided further that the amount recoverable from such
agent or person at the time of final settlement shall not
exceed the amount specified in such certificate except to
the extent to which such agent or person may at such time
have in his hands additional assets of such non-resident
person.
(2) Where a person not resident or not ordinarily
resident in the taxable territories carries on business
,with a person resident in the taxable territories, and it
appears to the Income-tax Officer, that owing to the close
connection between such persons the course
448
of business is so arranged that the business done by the
resident person with the person not resident or not
ordinarily resident produces to the resident either no
profits or less than the ordinary profits which might be
expected to arise in that business, the profits derived
therefrom or which may reasonably be deemed to have been
derived therefrom, shall I* chargeable to income-tax in the
name of the resident person who 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 arc not carried out in the taxable territories
the profits and gain’s of the business deemed under this
section to accrue or arise in the taxable territories shall
be only such; profits and gains as are reasonably
attributable to that part of the, operations carried out in
the taxable territories.”
Before its amendment in the year 1939 the first part of the
section tin thus:
“42(1). In the of any person residing out of British
India, all profits or gains accruing or arising to such
person, whether directly or indirectly, through or from any
business connection or property in British India, shall be
deemed to be income accruing or arising within British
India, and shall be chargeable to income-tax in the name of
the agent of any such person, and such agent shall, be
deemed to be, for all the purposes of this Act, the assessee
in respect of such income-tax:”
The rest of the section was substantially in the same
terms. Inspite of its amendment in 1939 the marginal note
to the section continued to refer to “non-resident” as
before, though the words ‘residing out of British India”
were deleted from the body of subsection (1). The retention
of this marginal note gave rise to conflicting decisions on
the question whether the section, in spite of the change
made in its language in 1939 still continued to have
application to cases of ” non-residents” alone. In order to
clarify this matter, by Act XXII, of 1947, the marginal note
was amended and it now is in these terms:-
449
“Income deemed to accrue or arise within British India.”
It is significant that the changes made in section 42 in
the year 1939 were consequential to the entire recasting of
section 4 of ‘the Act., Section 4 as it stood prior to 1939
charged income-tax on all income, profits or gains, from
whatever source derived, accruing or arising or received in
British India or deemed under the provisions of the Act to’
accrue, or arise, or’ to be received in British India. It
further’ provided that the”income,profits and gains accruing
or arising , without British India to a person resident in
British,’ India, shall, ‘if they are received in or brought
into British India, be’ deemed to have accrued or arisen in
British India and to be income, profits and gains, of the
year in which they are so received or brought, notwith-
standing the fact that they did not so, accrue or arise in
that year. By the amendment in the year 1939, the total
income of any previous’ year of any person was defined as
including ‘all income, Profits and gains from whatever
source derived which
a) are received or are deemed to be received in
British(a) India in such year by or on behalf of such
person, or
(b) if such person is resident in British India during
such year,-
(1) 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…………
(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;……”
This legislative change in the Act made all income
accruing or arising or deemed to accrue or arise in British
India during the previous year to a resident the subject of
a charge, apart from income accruing or arising- without
British India during the previous year.
450
The term “deemed” brings within the net of chargeability
income not actually accruing but which is supposed
notionally to have accrued. It involves a number of
concepts. By, statutory fiction income which can in no
sense be said to accrue at all may be considered as so
accruing. Similarly, the fiction may relate to the place,
the person or be in respect of the year of taxability.
Section 42(1) defines what income is deemed to accrue within
the taxable territories. It is only by application of this
definition that one class of income “deemed to accrue to a
resident within taxable territories” within the meaning of
section 4(1) (b) () can be estimated. The words “In the
case of any person residing out of British India” were
deleted from section 42(1) during the pendency of the
amendment. Bill of 1939 in the Council of State presumably
with the object of making the section applicable to any
person who had any income which in a primary sense arose in
British India, even though technically it had arisen abroad,
irrespective of the circumstance whether that person was
resident, ordinarily resident or not ordinarily resident.
By section 8 of Act XXIII of 1941, clause (c) was added
to section 14 of the Act. No effect was to be given to this
amendment before the year ending 31st March, 1943. The
relevant part of section 14, after this amendment is in
these terms:-
“The tax shall not be payable by an assessee in respect
of any income, profits or gains accruing or arising to him
within, a Part B State, unless such income, profits or gains
are received or deemed to be received in or are brought into
the taxable territories in the previous year by or on behalf
of the assessee, or are assessable under section 12-B or
section 42.”
In view of these legislative changes in the provisions of
sections 4, 14 and 42 of the Act, the conclusion is
irresistible that the object of recasting section 41(1) in
general terms was to make the definition of “deemed income”
given in the section generally applicable to all classes of
assessees. This sub-section has been drafted in the widest
terms and there is nothing whatsoever in
451
its language residents only. Wherever the legislature
intended to limit the operation of any part of this section
to non-residents alone, it said so in express terms. Sub-
section (2) and the latter portion of sub-section (1)
expressly concern themselves with the case of nonresidents,
while sub-sections (1) and (3) are so framed that they cover
both residents and non-residents.
A Bench of the Bombay High Court in Commissioner ,,of
Income-tax v. Western India Life Insurance Co.(1), held that
notwithstanding its amendment in 1939 the section applied
only to non-residents. Reliance was placed, inter alia, on
the circumstance that the marginal note appended to the
section indicating that it applied to non-residents alone,
had not been deleted. To avoid this criticism and to remove
doubts the legislature by Act XXII of 1947 changed the
marginal note also.
It seems to us that any other construction of the section
would create an anomaly, inasmuch as the Part B State income
failing under section 42 would not be assessable in the
hands of a resident, but it would be assessable in the,
hands of a non-resident, because the Income-tax Act while it
ropes in world income of a resident, exempts income accruing
within the Part B States from its ambit except when such
income is received or is brought into taxable territory or
comes within the ambit of section 42. Such a construction
would be contrary to the policy of the Act.
It is unnecessary to dwell on, this point at any great
length in view of the circumstance that the decision in
‘Commissioner of Income-tax v. Western India Life Insurance
Co.(1), has been dissented from and for good reasons, in
subsequent cases.
In Sutlej Cotton Mills Ltd. v. Commissioner of Income-
tax, West Bengal(2 ) a Bench of the Calcutta, High Court
considered this matter at some length and reached the
,decision that sub-sections (1) and (3) of section 42
,covered cases of both residents as well as non-residents.
The same view was taken by a Bench of the Madras High Court
in Commissioner of Income-tax/Excess
(1) [1945]13 I.T.R.405.
(2) A.I.R. 1950 Cal. 551.
452
Profits Tax, Madras,v,. Parasuram Jethanand (1). Again
the matter was -discussed in this court in Commissioner of
Income-tax, Bombay v. Ahmedbhai Umarbhai & Co.(2) by,
Patanjali Sastri J., as he then was, and also by Mukherjea
J. in the same case. This is what Patanjali Sastri J. said
on this point:-
“It is noteworthy that the first part of sub-section (1)
of section 42 providing that certain classes of’ income,,
are to be deemed accrue or arise in British India is not
confined in its application to nonresidents, but is in
general terms so as to be applicable to both residents and
non-residents. Before its amendment in 1939 the subsection
began with the words ‘in the case of any person residing out
of British India’ which obviously restricted the application
of the provision to non-resident person but in its amended
form the sub-section has been recast into two
distinctparts, the first of which is not so restricted, and
the second part alone, which begins with the words ‘and,
where the person entitled to the income profits and gains is
not resident in British India, is made applicable ‘to non-
resident persons, thereby showing that the former part
applies to both residents and non-residents. The opening
words of the first proviso also point to the same
conclusion, for these words would be surplusage if the sub-
section as a whole applied only to non-residents. A
contrary view has, no doubt, been expressed by a Division
Bench of the Bombay High Court, in Commissioner of Income-
tax v. Western India Life Insurance Co. Ltd.(3). Though
reference was made in that case to the alteration in the
structure of subsection (1) its significance, as it seems to
me, was not properly appreciated. The facts that the
marginal note to the whole section refers to ’non-reside’
and that the section itself finds a place in Chapter IV
headed ’Liability in special cases’ were relied upon as
supporting the view that sub-sections (1) as a whole applies
only to non-residents. As pointed out ‘by the Privy Council
in Balraj Kunwar v. Jagatpal Singh(4), marginal notes in an
Indian statute, as in an
(1) A.I.R. 1950 Mad. 631.
(2) [1950] S.C.R. 335.
(3) [1945] 13 I.T.R. 405.
(4) 26 All. 393, 406.
453
Act of Parliament, cannot be- referred to for the pur-
pose, of construing the statute, and it may be mentioned in
this connection that the, marginal note relied on has since
been replaced by the words ‘Income deemed to accrue ;or
arise within’, British India which makes it clear that the
‘main object, of sub-section (1) was to define that
expression (see section 12 (a) of Act XXII Of 1947). Nor
can the title of a chapter be legitimately used to restrict
the plain terms of an enactment.”
The same view was expressed by Mukherjea J. ,Nothing that
has been said by Mr. Kolah before us justifies
reconsideration of these opinions.
Mr. Kolah argued that when the world income of a resident
was, brought within the net of chargeability by section 4 in
1939 it was then wholly unnecessary to include such an
assessee in the ambit of section 42. In our judgment, this
contention is fallacious. Whatever income arises in a
primary sense to a resident in taxable territories is
chargeable under section 4 (1) (b) (1). Hence it was
necessary to make section 42 applicable to such a case.
Whatever other consideration may arise in estimating the
foreign income -of a resident will not be applicable to
income deemed to accrue within taxable territory. Moreover,
as above pointed out, in view of the provisions of section
14 (c) resident assessees but for section 42(1) would not be
liable to assessment regarding income accruing to them in
Part B States, even if there is a business connection in
taxable territory. Mr. Kolah was unable to suggest any
reasonable explanation for the deletion of the words ”any
person residing out of British India” from section 42(1) as
it stood before 1930. The Only purpose in deleting these
words could be to bring residents within the a ambit of the
section. There is no reason whatsoever for not giving to
the plain words of the section the meaning that on the face
of it they bear.
For the reasons given above we are of the that the answer
by the High of Bombay to the first question referred to it
was wrong. We therefore allow this appeal with costs and
answer
7-93 S.C.India/59
454
this question referred to the High Court in the affirmative.
Appeal allowed.
Agent for the appellant: G. H. Rajadhyaksha.
Agent for the respondent: Rajinder Narain.