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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

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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

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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

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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,

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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.

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  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.

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 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.