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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 597 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 599 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 600      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 601 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.