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PETITIONER: SUTLEJ COTTON MILLS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, WEST BENGAL III,CALCUTTA

DATE OF JUDGMENT23/10/1990

BENCH: AGRAWAL, S.C. (J) BENCH: AGRAWAL, S.C. (J) THOMMEN, T.K. (J)

CITATION:  1992 SCC  Supl.  (1)  85 JT 1990 (4)   387  1990 SCALE  (2)931

ACT:     Income Tax Act, 1922: Sections 14(2)(c) and 42(3) Asses- see--Resident  in  British  India-Remittances  from   native States--Whether  liable to be assessed--In addition  to  as- sessment of profits from native States as deemed income from British India-Principle of attribution-Applicability of.

HEADNOTE:     The appellant, a company resident in British India,  had a  cotton mill. The cloth manufactured in the mill was  sold in  British India as well as native States. For the  assess- ment  years  194546,  194647 and 1947 48,  the  company  was assessed under Section 14(2)(c) of the Income Tax Act, 1922, in  respect of certain sums remitted to British  India  from native  States, in addition to the assessment under  Section 42(3),  deeming 1/3rd of the profit from the sales  effected in  native States, as having accrued from the  manufacturing part of business in British India.     The  assessee’s contention that 1/3rd of  income  having been assessed under Section 42(3), as income deemed to  have accrued  in British India, no further assessment  should  be made  under Section 14(2)(c) was rejected by the Income  Tax Officer, the Appellate Assistant Commissioner and the Income Tax  Appellate  Tribunal.  The Tribunal  also  rejected  the assessee’s  additional  contention that if  the  remittances made to British India in any year exceeded the amount  taxed under Section 42(3), then it was only so much of the  excess which  could  be taxed under Section 14(2)(c).  However,  it reduced  the  additions made by the Income Tax  Officer  and affirmed by the appellate authority, by 1/3rd of such remit- tances.  On a reference made under Section 66(1),  the  High Court confirmed the Tribunal’s decision.     In the appeal before this Court, on behalf of the appel- lantassessee  R was contended that where there was  a  mixed fund, as in the instant case, consisting partly of taxed and partly  of  untaxed monies, any remittance  made  should  he deemed to have been paid out of that 294 part of the money which had suffered tax and that it was the right of the tax payer to attribute the payment to the taxed money so as to obtain the benefit allowed by the law. Dismissing the appeals, this Court,

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   HELD: 1.1 If there were two funds at the disposal of the assessee---one  upon which tax had been already  levied  and another  which was liable to be brought to tax---a  presump- tion, in the absence of evidence to the contrary might arise that  the remittance made by the assessee in the  course  of its business was made out of the fund that was already taxed and not out of the fund that remained to be taxed. [297F]     Meyyappa  Chettiar  v. The Commissioner  of  Income-Tax, [1933] 1 ITR 37, 45, referred to.     1.2  The tax payer is given the right of attribution  in the  way most favourable to himself. In the absence of  evi- dence to the contrary, it is presumed that payments are made out  of  income. This abstract principle of  attribution  is applicable in certain circumstances. Whether it is  applica- ble in a particular case depends upon the facts of that case and the provisions of the statute. It can be adopted only to the  extent  that it is consistent with the law  and  facts. [298E-F]     Paton  (As Penton’s  Trustee) v. Commissioners of Inland Revenue,  21 Tax Cases 626 and The Cape Brandy Syndicate  v. The Commissioners of Inland Revenue, 12 Tax Cases 359,  366, referred to.     In the instant case, on the facts found the assessee did not have two funds, but only one fund composed of taxed  and non-taxed  amounts. As one third of this amount had  already been  taxed  under section 42(3) of the Act,  1/3rd  of  the remittances  to British India in a particular year was  held to be exempted from levy. The Tribunal having excluded 1/3rd of  the remittances to British India from taxation during  a particular year, the High Court was justified in refusing to grant any further relief to the assessee. [297G; 299B]

JUDGMENT:     CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.  1467-69 of 1976. 295     Appeals by Certificate from the Judgment and Order dated 7.5. 1965 of the Calcutta High Court in Income Tax Reference No, 28 of 1954.     B.  Sen, N.B. Singh, Sanjay J. Khaitan,  Darshan  Singh, B.N. Dhar and Ms. Suman Khaitan for the Appellant.     S.C. Manchanda, S. Rajappa and Ms..A. Subhashini for the Respondent. The Judgment of the Court was delivered by     THOMMEN, J. These appeals by the assessee arise from the judgment  dated  7.5.1965 of the Calcutta  High  Court.  The question  relates to the assessment for the  years  1945-46, 1946-47  and 1947-48 under the Indian Income Tax  Act,  1922 (hereinafter  referred to as "the Act"). The assessee was  a company resident in British India during the relevant years. It  had a cotton mill in British India. The  cloth  manufac- tured  by the mill was sold in British India as well  as  in the  native  States. In the assessment for 1944-45,  it  had been held that, for the sales effected in the native States, 1/3rd  of the profit was, in terms of section 42(3)  of  the Act,  deemed  to  have accrued to the  assessee  in  British India.  This profit was considered as the profit  attributed to  the  manufacturing part of the business carried  out  in British  India,  although  the sales were  effected  in  the native  States.  On the same basis, assessment in  terms  of section  42(3) was made in respect of the  assessment  years 1945-46,  1946-47  and 1947-48. In addition  to  the  deemed income  in  British India, the assessee was  assessed  under

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section  14(2)(c)  of  the Act in respect  of  certain  sums remitted to British India from the native States.     The  assessee’s  contention  that 1/3rd  of  the  income having  been  assessed  under section 42(3) of  the  Act  as income  deemed to have accrued in British India, no  further assessment should be made under section 14(2)(c) of the  Act with  respect  to profits brought into  British  India,  was rejected by the Income Tax Officer as well as the  Appellate Assistant  Commissioner. On further appeal, the  Income  Tax Appellate Tribunal also held that there was no substance  in that contention. The Tribunal stated-- "   .....   the assessment of profits brought  into  British India  from  a Native State under Section 14(2)(c) is  on  a distinct and separate footing from the assessment of  Native States 296 profits  which are deemed to have accrued in  British  India under Section 42  ......  "     The  assessee  raised an additional contention  for  the first time before the Tribunal. That contention was that the remittances made to British India had to be taken as  having first come out of profits "deemed to have accrued in British India" and brought to tax under section 42(3), and only  the excess  remittances, if any, could be taken as  having  come out of the remainder profits exempted from tax under section 42.  The  assessee  pointed out that I/3rd  of  the  profits having  been already charged under section 42(3), by  reason of  the  legal fiction contained in  that  sub-section,  any amount  brought into British India upto the extent of  1/3rd should be presumed to be that which was attributable to that 1/3rd which had already suffered tax, and the balance remit- tance, if any, alone should be taxed under section  14(2)(c) of  the Act. In other words, according to the  assessee,  if the remittances made to British India in any accounting year exceeded  the amount taxed under section 42(3) of  the  Act, then it was only so much of that excess which could be taxed under section 14(2) of the Act. The Tribunal did not  accept this contention. However, it stated: "   .....  it appears to us that the common sense  point  of view would be that the remittances to British India  include both the assessed as well as the exempt profits in the  same proportion in which those existed in the Native State  ..... It therefore appears to us that the correct view would be to apportion  the remittances over the assessed and the  exempt parts  in the same proportion as these existed in the  total profits made in the Native State. As such proportion was one third  and  two thirds, the remittances would  be  similarly split  up.  Thus 1/3rd of the remittances has  come  out  of profits  assessed  under Section 42. On  this  basis,  these additions  made by the Income-Tax Officer and  confirmed  by the Appellate Assistant Commissioner will have to be reduced by one third of such remittances."     On a reference under section 66(1) of the Act, the  High Court by its judgment dated 22.7.1957, found that the  facts stated were insufficient and that there was an error  appar- ent  on the face of the question as framed. The  High  Court accordingly  called  for a supplementary  statement  of  the case.     In  its supplementary statement, the  Tribunal  referred the following question: 297 "Whether on the facts and in the circumstances of the  case, the sums of Rs.50,195 for 1945-46, Rs.76,155 for 1946-47 and Rs.6,00,909  for 1947-48 assessments have been  rightly  in- cluded  in  the  assessable income of  the  applicant  under

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Section  14(2)(c)  of the Indian Income-tax Act  as  profits brought into British India from Indian States?"     The  High Court by its judgment dated 7.5,1965  rejected the assessee’s contention that, where there was a mixed fund composed of taxed and non-taxed items and a neutral  payment was  made  i.e. without specifying the exact source  of  the payment,  the  taxing  authorities, in the  absence  of  any evidence  to the contrary, had to proceed on the basis  that the  payment  was made out of that part of  the  mixed  fund which  had already borne tax. The High Court,  however,  ob- served: "   ....  in this case the assessee did not have  two  funds but  only one fund composed of taxed and  non-taxed  amounts and as one third of the entire amount of profits made by the assessee in the Indian States had been subjected to tax  the income-tax  authorities took a reasonable view in  excluding one third of the remitence to British India from taxation in each year. There were sufficient profits in each year out of which  remittance could be made even after deduction of  the portion which had been taxed  .....  ". In  the  result, the question referred was answered  by  the High Court against the assessee. Hence the present appeals.     If  there  were  two  funds  at  the  disposal  of   the assessee--one  upon  which tax had been already  levied  and another  which was liable to be brought to  tax--a  presump- tion,  in  the absence of evidence to  the  contrary,  might arise that the remittance made by the assessee in the course of  its business was made out of the fund that  was  already taxed and not out of the fund that remained to be taxed. See Meyyappa Chettiar v. The Commissioner of Income-Tax,  [1933] 1 ITR 37, 45. That was apparently not the case here, for, on the  facts found, the assessee did not have two  funds,  but only  one fund composed of taxed and non-taxed  amounts.  As one  third of this amount had already been taxed under  sec- tion  42(3) of the Act, 1/3rd of the remittances to  British India  in  a particular year was held to  be  exempted  from levy.     Relying  on the principle referred to in Paton (As  Pen- ton’s  Trustee) v. CommissiOners of Inland Revenue,  21  Tax Cases 626, Dr. 298 B.  Sen,  on behalf of the assessee, however,  submits  that where  there was a mixed fund, as in the present case,  con- sisting  partly of taxed and partly of untaxed  monies,  any remittance  made should be deemed to have been paid  out  of that part of the money which had suffered tax. It is a right of  the  tax-payer  to attribute the payment  to  the  taxed money, so as to obtain the benefit allowed by the law.     Lord  Wright,  M.R. in Paton (As  Penton’s  Trustee)  v. Commissioners  of Inland Revenue, 21 Fax Cases 626 at  639), referring to the right of the tax-payer to attribute payment to taxed monies, stated: "   .....  in the ordinary course, a person paying  interest does  not generally appropriate the payment to income or  to any particular piece of income or any specific asset: he has the  general  body of available funds, say his  banking  ac- count,  if he has only one, and he pays by drawings on  that account.  which may include income, borrowed money,  capital and  so  forth. This is what is meant by payment  out  of  a mixed  fund,  or payments made out of the general  till,  or payments  made  neutrally. The Revenue authorities  have  no right  in such cases to appropriate those payments  to  non- taxable  rather than taxable moneys. Hence the  taxpayer  is given the right of attribution in the way most favourable to himself  It is presumed, in the absence of evidence  to  the

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contrary, that payments are made out of income".     This principle of attribution is no doubt applicable  in certain circumstances, such as those narrated by Lord Wright in Paton (supra), although in that case, on the facts found, the principle was not applied.     Whether  that  principle is applicable in  a  particular case depends upon the facts of that case and the  provisions of the statute. The abstract principle of attribution, which is applicable in certain circumstances, can be adopted  only to the extent that it is consistent with the law and  facts. It is well to recall: "   .....  there is no room for any intendment; there is  no equity about a tax: there is no presumption as to a tax; you read  nothing in; you imply nothing, but you look fairly  at what  is  said and at what is said clearly and that  is  the tax". [Per Rowlatt, J. The Cape Brandy Syndicate v. The Com- 299 missioners of Inland Revenue, 12 Tax Cases 359,366]. The view taken by the Tribunal, with reference to the  facts found  and the provisions of the statute, was, in our  opin- ion, reasonable. It was so found by the High Court.     In  the circumstances, we hold that the Tribunal  having excluded  1/3rd  of the remittances to  British  India  from taxation during a particular year, the High Court was justi- fied  in refusing to grant any further relief to the  asses- see.     Accordingly,  we see no merit in these appeals and  they are dismissed with costs throughout. N.P.V.                                         Appeals  dis- missed. 300