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PETITIONER: KESHAV MILLS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT: 30/01/1953

BENCH: BHAGWATI, NATWARLAL H. BENCH: BHAGWATI, NATWARLAL H. MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN BOSE, VIVIAN

CITATION:  1953 AIR  187            1953 SCR  950  CITATOR INFO :  E&D        1959 SC  82  (8)  F          1959 SC1165  (11)  D          1961 SC 921  (9,11,20,21)  R          1964 SC1766  (10)  R          1965 SC1636  (7)  R          1965 SC1862  (28)  RF         1966 SC 870  (5)  RF         1977 SC1802  (14)

ACT: Indian  Income-tax Act (XI of 1922), ss. 4 (1) (a) and  (c), 13 Non-resident-Accounts in mercantile system-Sale of  goods in  British  India through agents-Assessability  of  profits derived  from such sale-Provision of law applicable to  such cases-Income-tax  authorities,  whether  bound  to   compute income  according to mercantile system-Applicablity of  s.13 to non-residents.

HEADNOTE: A non-resident company manufactured textile goods at P  out- side British India and sold the goods ex-mills.  A firm, R & Co., guaranteed the sale-price of goods sold ex-mills by the company to purchasers at Ahmedabad within British India.  As the  company  maintained  its  accounts  according  to   the mercantile  system,  the company debited R & Co.,  with  the price of goods sold and credited the sales account with  the amount of the bills.  R & Co., collected the amounts of  the bills  from  the  purchasers on behalf of  the  company  and credited  the  sums realised in the company’s  account  with banks  at Ahmedabad and also disbursed them to creditors  of the company in British India.  These payments were  credited by  the  company to R & Co. During the  relevant  accounting year  the company thus received Rs. 12,68,480.  The  company also  received  Rs.  4,40,878 from sales  to  purchasers  in British  India.   The amount of the sales  bills  for  which hundis were drawn on the purchasers in favour of banks  were debited  by  the company to the accounts of  the  respective merchants  and  credited to the sales account and  the  sums received  by the banks from the purchasers against  delivery of the railway receipts were credited by the company to  the

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accounts of the respective purchasers.  In either case there was  no change in the relationship of vendor  and  purchaser between  the  company and the purchasers by  reason  of  the entries  made in the company’s books.  The question  as  re- framed  by  the High Court was whether these two  sums  were sale proceeds of the goods sold by the assesses to merchants in  British India and whether they were received in  British India and could be included in the assessable income of  the company in British India: Held,  per Mehr Chand Mahajan, S. B. Das and Bhagwati  J.J., (Vivian Bose J. dissenting) that the two amounts in question were  sale proceeds of the goods sold and delivered  by  the company  to  merchants  in British India ;  that  they  were neither received by the company nor could be deemed to  have been received by it when the entries were made in the  books of account at P but had 951 merely  accrued or arisen to it there; that they were  first received  by  R  & Co. and by the  banks  through  whom  the railway receipts were negotiated on behalf of the company in British  India; and that they were therefore liable  to  tax under  s.  4(l) (a) of the Indian Income-tax Act  as  having been received in British India on its behalf. Though  it  is true that in the case of  residents,  if  the assessee  employs  the  mercantile system  regularly  it  is obligatory  on  the income-tax authorities  to  compute  the income according to that system, it is doubtful whether that position would be available to a non-resident who  maintains his books of account outside British India according to  the mercantile system. Section 13 would only be relevant where the total profits of the  assessee  have  to be computed and in  that  event  the assessee  would  be entitled to claim that  they  should  be computed  according to the system of accounts maintained  by him; it would not be relevant when stray items of income are sought to be assessed in the taxable territories as received in the taxable territories by a non resident. Bose  J.-In  the  case of accounts kept  in  the  mercantile system, the profit or loss at the end of the accounting year is  based  not  on a difference between  what  was  actually received  and  what  was  actually  paid  out,  but  on  the difference between the right to receive and the liability to pay.   The taxation in such cases is not on income,  profits or  gains which were received but on profits which  "accrued or arose" to the assessee in the accounting year.  This view excludes s. 4(l) (a) and this means that a resident is taxed in  such cases under s. 4(l)(b) and a non-resident under  s. 4(l) (c).  Applying s. 4(l) (c) to the present case, in  the case of the Rs. 4 lakhs odd the profits accrued or arose  in British India where the right to take delivery of the  goods accrued  and where the price was actually paid, but what  is really  taxable  under s. 4 (1) (c) is not the Rs.  4  lakhs odd, but the figures entered in the accounting year -as  the price  of  the various transactions which the  Rs.  4  lakhs represented.  Similarly, in the case of Rs. 12 lakhs odd, it is  the figure entered in the books in the  accounting  year relating to the transactions which is taxable. By the Full Court.-The expression "deemed to be received" in s. 4 (1) (a) means deemed by the provisions of the Act to be received. Subramaniyan  (Chettiar v. Commissioner of Income-tax (2  I. T.  C. 365), Ahmed Din Alladitta v. Commissioner of  Income- tax,  Punjab  (2 I.T.R. 369), Kanwal Yayan  Hanir  Singh  v. Commissioner  of Income-tax, Ajmer-Merwara (6  I.T.R.  675), Commissioner-  of Incometax v. Singari Bai (13  l.T.R.  224)

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distinguished. B.M.   Kamdar, In re (1946 I.T.R. 14),  Pondicherry  Railway Co.  v.  Commissioner  of  Income-tax  (58  I.A.  239)   and Commissioner of 952 Income-tax v. Mathias (66 I.A. 23), Commissioner of  Income- tax  v.  Kameswar Singh (1933 I.T.R.  94),  Commissioner  of Income-tax v. Chunilal Mehta (1938 I.T.R. 521) referred to.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION: Civil Appeal  ,#No.  151  of 1951. Appeal  from a Judgment and Order dated  14/15th  September, 1949, of the High Court of Judicature at Bombay (Chagla C.J. and Tendolkar J.) in Income-tax Reference No. 2 of 1949. R.   J. Kolah and N. A. Palkiwalla for the appellant. C.   K.  Daphtary, Solicitor-General for India  (P.A  Mehta, with him) for the respondent. 1953.   January 30.  The judgment of Mehr Chand Mahajan  J., Das J. and Bhagwati J. was delivered by Bhagwati J. Bose  J. delivered a separate judgment. BHAGWATI J.-This is an appeal from the judgment and order of the  High Court of Judicature at Bombay upon a reference  by the  Income-tax Appellate Tribunal under Section 66  (1)  of the  Indian  Income-tax Act, 1922, whereby  the  High  Court upheld  the  decision  of the Appellate  Tribunal  that  two amounts  of  Rs. 12,68,480 and Rs. 4,40,878  were  the  sale proceeds  of  goods sold by the appellant  to  merchants  in British  India,  were  received in British  India  and  were liable to income-tax in British India. The  appellant is a company registered in the Baroda  State, as  it  then  was,  prior to  its  merger  with  India.   It manufactures textile goods in Petlad in the Baroda State and after  the  goods  are manufactured they  are  sold  by  the company ex-mills.  The company employs Messrs.   Jagmohandas Ramanlal & Co. as guaranteed brokers.  That firm  guarantees the sale price of goods sold by the company ex-mills to  the purchasers   from  Ahmedabad  and  receives  commission   as consideration  for the guarantee and the work which it  does for  the  company.  The company is a  non-resident  and  its accounts are maintained according to the mercantile system. 953 In the assessment year 1942-43 (the previous year being  the calendar  year  1941) the total sales of the  goods  by  the company amounted to Rs. 29,68,808.  In making the assessment on the company for that assessment year the following  three amounts  were considered for the purpose of determining  the company’s liability to British Indian tax.     (a)  Sale    proceeds      recovered          through Messrs. Jagmohandas          Ramanlal & Co.......................Rs. 12,68,480     (b)  Sale proceeds through British          Indian  banks  and shroffs rec          eived  by means of drafts or hu          ndies drawn by the company...........Rs. 4,40,878          (Railway receipts handed over          to British Indian merchants by          the banks on payment). (c)  Sale  proceeds  received by cheques on  British  Indian banks  and hundies on British Indian shroffs and  merchants, and collected by the banks and shroffs .................................. Rs. 6,719735                           Total            Rs. 23,81,093

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As  regards item (a) the company debited the account of  the firm  of  Messrs.   Jagmohandas  Ramalal  &  Co.  with   Rs. 13,41,744  which  represented sales made by the  company  to merchants  of  Ahmedabad whose payments were  guaranteed  by that firm, and credited the sales account with the amount of the  bills.  Messrs.  Jagmohandas Ramanlal &  Co.  collected the amounts of the bills from the merchants at Ahmedabad and credited  the sums recovered in the company’s accounts  with banks  and/or  shroffs  at  Ahmedabad  and  also  made  dis- bursements   under  instructions  of  the  company  to   the creditors  of  the  company in  British  India.   All  these payments  were  credited by the company to  the  account  of Messrs.  Jagmohandas Ramanlal & Co. and during the  relevant accounting year the company thus 954 received  Rs.  12,68,480  against the total  debits  of  Rs. 13,41,744. As  regards  item (b) the company received Rs.  4,40.878  by drawing hundies or drafts for the amounts of its sales bills (including  the forwarding charges and the cost  of  transit from the mills premises to the station) on the merchants  in favour of recoginised banks and shroffs in British India, by sending the same to those banks or shroffs with the  railway receipts  duly  endorsed in favour of the merchants  and  by instructing  the  banks or shroffs to  recover  the  amounts including  the costs of transmitting the same to them.   The amounts of these sales bills were debited by the company  to the accounts of the respective merchants and credited to the sales account and the sums recovered by the banks or shroffs from the merchants in British India against the delivery  of the relative railway receipts were on receipt of the same by the  company  credited  to the accounts  of  the  respective merchants in their books of account. As regards item (c), the company received Rs. 6,71,735  from the  merchants  by cheques and hundies drawn  on  banks  and shroffs  in British India in favour of the  company.   These cheques and hundies were negotiated by the company in Petlad and  sent back for credit to its accounts with  those  banks and  shroffs.  The said cheques and hundies were  cashed  in British  India and the sale proceeds remitted by  the  banks and shroffs to the company.  The amounts of the sales  bills were  debited to the accounts of the merchants in the  books of the company when the goods were invoiced to the merchants and  these  accounts  were credited  with  the  moneys  thus received by the company from the merchants. The Income-tax Officer brought to tax the profits derived by the  company  represented  by the said three  items  in  the assessment  year on the basis that the sale proceeds  having been received in British India the profits were received  in British  India.   The Appellate  Assistant  Commissioner  on appeal held that profits 955 from  items (a) and (c) were exempt from British Indian  tax while those represented by item (b) were rightly taxed.  The Department filed an appeal to the Appellate Tribunal against the  decision  of the Appellate  Assistant  Commissioner  in regard to items (a) and (c) and the company filed an  appeal in  respect  of item (b).  The Appellate  Tribunal  held  in regard to item (a) that the merchants in British India  were not   absolved  either  in  law  or  in  fact   from   their responsibility  to pay to the company its dues by virtue  of the  debit  entries in the account of  Messrs.   Jagmohandas Rainanlal  & Co. and in regard to item (b) that the  payment of  the  amounts  due  was a  condition  precedent  to’  the delivery of goods by the banks in British India on behalf of

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the  company.   The  Tribunal therefore  held  that  profits arising  from  items (a) and (b) were rightly  subjected  to tax.   As  regards  item  (c) the  Tribunal  held  that  Rs. 6,71,735  "were  received by the assessee  company  directly from  the merchants in British India by cheques and  hundies drawn on banks and shroffs in British India in favour of the company but were negotiated in Petlad and sent for credit to the company’s account.  The amounts were received at  Petlad and once they were received there, they could not be held to have been received again in British India ". The Department asked the Tribunal to refer to the High Court the  question  of law arising on item (c)  and  the  company asked  the Tribunal to refer to the High Court the  question of  law  arising  on  items (a) and  (b)  and  the  Tribunal therefore referred the following question of law to the High Court:- " Whether on the facts and in the circumstances of the case, the sums of Rs. 12,68,480, Rs. 4,40,878 and Rs. 6,71,735, or any  of  them, which, represents receipts  by  the  assessee company  of its sale proceeds in British India, include  any portion of its income in British India?" The  High  Court held that Rs. 12,68,480  were  received  in British  India  and included the profits and  gains  of  the business of the assessee company.  It held that Rs. 4,40,878 also were received in British India 956 and  the company was liable in respect of that  amount.   In regard  to  the item of Rs. 6,71,735, the High  Court  found that the facts stated by the Tribunal were not sufficient to enable  it to reach a decision and therefore  directed  that the Tribunal should submit a supplementary statement of case setting  out  the several aspects set out in  the  judgment. The  High Court reframed the question in regard to  the  two items  of  Rs.  12,68,480 and Rs.  4,40,878  in  the  manner following:- (1)Whether  the sums of Rs. 12,68,480 and Rs. 4,40,878  were sale proceeds of the goods sold by the assessee to merchants in British India or were debts due by the said merchants ? (2)Whether if they were sale proceeds, they were received in British India ? and  answered them by stating that they were sale  proceeds and  they were received in British India.  There was also  a third question which was comprised in the reference and that question was framed as under:- Whether the profits of the assessee’s business are  included in the sums of Rs. 12,68,480 and Rs. 4,40,878 ? This  question was also answered by stating that  they  were included in these two sums.  The company obtained leave from the  High Court to appeal against the decision in regard  to the  two  sums of Rs. 12,68,480 and Rs. 4,40,878  and  hence this appeal. It  is common ground that the company is a  nonresident  and its  accounts  have been regularly kept  according  to  the, mercantile system.  Its balance sheets were also prepared on that  basis.   The company was assessed to  tax  in  British India  on  the  basis  that these two  sums  of  money  were received  in British India by or on behalf of  the  company. In  regard  to the item of Rs. 12,68,480,  even  though  the amounts  of  the  sales bills were  in  the  first  instance debited  by  the  company in its books  to  the  account  of Messrs.   Jagmohandas  Ramanlal & Co. the sale  proceeds  in accordance with 957 the  terms  of the sales bills were paid by  the  respective merchants to Messrs.  Jagmohandas Ramanlal & Co. in  British

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India  and  were  either credited  by  Messrs.   Jagmohandas Ramanlal  &  Co.  in the company’s accounts  with  banks  or shroffs  in  British  India or were  disbursed  by  them  in accordance  with the instructions of the company in  British India.   In regard to the item of Rs. 4,40,878  even  though the  amounts  of the sales bills were debited in  the  first instance  by the company to the accounts of  the  respective merchants  in  the books of account at Petlad  the  relative railway  receipts  were  sent by the  company  to  banks  or shroffs in British India together with drafts or hundies  in connection with the same with instructions that delivery  of the  railway  receipts  should be given  to  the  respective merchants against payment and the amounts of the sales bills were  thus paid by the respective merchants to the banks  or shroffs  in  British India and were  transmitted  under  the instructions  of  the company by the banks  and  shroffs  in British  India  to  the  company  at  Petlad.   Prima  facie therefore  the amounts of the sales bills in both the  cases whether  they were paid to Messrs.  Jagmohandas  Ramanlal  & Co.  or  to the banks or shroffs, through whom  the  railway receipts  were  negotiated  were paid by  the  merchants  in British  India  and were received  by  Messrs.   Jagmohandas Ramanlal  &  Co. and the banks or shroffs on behalf  of  the company,in British India.  The receipt of these amounts thus fell within section 4 (1) (a) of the Act and the profits  or gains  of this business thus were received in British  India by or on behalf of the company. The  company however sought exemption from liability to  tax on  the  grounds (a) that the accounts of the  company  were kept on the mercantile or book profit basis under which  the accrual of profit as shown in the account was the  criterion of  taxability  and section 4(l) (a) had no  application  at all;  (b)  that it was obligatory on the  authorities  under section  13 of the Act to accept that system of  maintaining accounts  except under the proviso to that section and  that the method of computation there was made the very basis of 124 958 chargeability  and section 10 read with section 13  operated to  save these amounts from chargeability and (c)  that  the amounts having been treated as received when credit  entries were made in the books of account,  and chargeability having crystallised  on  the date when the income  accrued  or  was treated as received, there was no further scope for a charge when the amounts were subsequently actually received and the subsequent  handling of the amounts by the company  and  the receipt thereof in British India were of no consequence. The  mercantile  system of accounting or what  is  otherwise known  as  the double entry system is opposed. to  the  cash system  of  book  keeping under which a record  is  kept  of actual cash receipts and actual cash payments, entries being made  only  when money is actually collected  or  disbursed. That  system brings into credit what is due, immediately  it becomes  legally due and before it is actually received  and it  brings  into debit expenditure the amount  for  which  a legal  liability  has been incurred before  it  is  actually disbursed.   The profits or gains of the business which  are thus  credited are not realised but having been  earned  are treated  as  received though in fact there is  nothing  more than  an  accrual or arising of the profits at  that  stage. They  are book profits.  Receipt being not the sole test  of chargeability  and  profits and gains that have  accrued  or arisen  or are deemed to have accrued or arisen  being  also liable  to be charged for income-tax, the  assessability  of these  profits  which  are thus credited  in  the  books  of

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account  arises not because they are received  but  because. they have accrued or arisen. Mr.  Kolah appearing for the company drew our  attention  to the following cases:- Subramaniyan Chettiar v. Commissioner of Incometax(1), Ahmed Din  Alladitta  v. Commissioner  of  Income-tax,  Punjab(2), Kanwal  Nayan  Hamir Singh v.  Commissioner  of  Income-tax, Ajmer-Merwara(3) and (1)(1927) 2 I.T.C. 365. (2)[1934] 2 I.T.R. 369. (3) [1938] 6 I.T.R. 675. 959 Commissioner of Income-tax v. Shrimati Singari Bai(1). The assessees there were all residents in British India  and maintained   their  books  of  account  according   to   the mercantile  system.  Except in the case of  Commissioner  of Income-tax  v.  Singari Bai(1) where the assessment  was  in respect  of  the  total income or profits,  stray  items  of income  treated as received in British India were sought  to be charged for tax and they were all assessed for tax not on the  basis  of actual receipts in British India but  on  the basis  of their having accrued or arisen in  British  India. The cases were decided with reference to the law as it stood before  the  amendment  in 1939  which  under  section  4(l) rendered  liable  to tax 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,  arise  or  to be received in  British  India.   The question that arose for the determination of the courts  was whether  under  the mercantile system,  profits  which  were credited in the books could be taxed even though they had in fact  not  been received and the conclusion reached  by  the courts  was  that  these profits credited in  the  books  of account  were earned and could be charged as having  accrued or arisen within British India even though they were in fact not  received.  In none of these cases were the courts  con- cerned with a non-resident claiming to have received profits or  gains outside British India under the mercantile  system of  accounting and claiming exemption from liability to  tax under  section  4  (1) (a) in respect  of  profits  actually received in British India. It  follows  from the above that the  mercantile  system  of accounting treats profits or gains as arising or accruing at the  date of the transaction notwithstanding the  fact  that they  are  not received or deemed to be received  and  under that  system, book profits are, assessed as liable  to  tax. If  an  assessee therefore regularly adopts  the  mercantile system  of  accounting  he would be liable  to  tax  on  the profits thus credited by (1)..[1945] 13 I.T.R. 224. 960 him  in his books of account subject to all  deductions  for bad debts as provided in section 10 (2) (xi).  Section 4 (1) (a) has nothing to do with this basis of taxation.   Section 13 which is an integral part of the computation of the total income  of the assessee and is compulsory on the  income-tax authorities  as well when computing the total  income  (vide section  2  (15)  ) does not lay  down  any  exemption  from liability.   It  only sets up a mode of computation  of  the income  which is liable to assessment and imposes  upon  the income-tax  authorities an obligation to accept the mode  of accounting  regularly adopted by the assessee except in  the cases   where  the  proviso  to  that  section  comes   into operation.  The profits earned and credited in the books  of account  being thus taken as the basis of  computation,  the

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system of accounting postulates the existence of debts in so far as moneys re ain due and payable by the parties to  whom they  have been debited and when it is realised  that  these debts are not recoverable the assessee gets a deduction  for the bad debts under section 10 (2) (xi).  This however  does not mean that the transaction as it has been recorded in the books  of account under the mercantile system of  accounting or   the  double  entry  system  is  metamorphosed  or   the relationship   between  the  parties  assumes  a   different character.  What was in its inception a transaction of  sale and  purchase is not converted into another  transaction  as between  creditor and debtor.  The relationship  as  between vendor and purchaser still subsists and there does not  come into  existence a new relationship as between  creditor  and debtor with all its necessary consequences.  The transaction as  it has been recorded in the books of account has got  to be  worked  out to its fullest extent.  Merely  because  the goods have been supplied and the price thereof has been  de- bited  to  the purchaser the rights and obligations  of  the vendor  and  purchaser  inter  se  are  not  in  any  manner affected.  The vendor is bound to fulfil all his obligations under  the contract and continues to be liable for  all  the consequences of his default including rejection of his goods by the purchaser or a claim for damages 961 for  breach  of warranty by him.  The purchaser  is  equally entitled  to reject the goods or to claim the damages as  on breach  of warranty by the vendor and all these  rights  and obligations  have got to be worked out in spite of the  fact that  the entries ’are made in the books of account  by  the vendor   in  accordance  with  the  mercantile   system   of accounting adopted by him.  The vendor could not say that he is under no further obligation to the purchaser and that the purchaser must pay the price of the goods debited to him  as a  debt  arising out of the book entry.  The  count  in  any action filed by the vendor against the purchaser would be  a count  for the price of goods sold and delivered  and  would not be a count on an assumpsit for recovery of a debt due by the debtor to him. It  is  clear  that under these circumstances  there  is  no receipt of the moneys at all, either actual or constructive, in  cash or in kind, by actual payment or by  adjustment  or settlement  of  accounts.  There is also no  scope  for  the argument  that even though these sums may not be said to  be either  actually or constructively received they  should  be "deemed  to  be  received".  The expression  "deemed  to  be received" only means deemed by the provisions of the Act  to be  received.   The phrase statutory receipt might  be  con- veniently  employed to cover income which is ’deemed  to  be received’ and instances of such statutory receipts are to be found  in the provisions of the Act, e.g., section  18  (4), section  58 (E), section 58 (J) (3), section  7(2),  section 16(1)  (c)  and sections 19 (2) (vii) and  16(2).  (See  the observations  of Beaumont C.J. in Commissionei,  of  Income- tax,  Bombay v. New India Assurance Co. Ltd.(1).  An  amount cannot be "deemed to be received" merely by the volition  or sweet will of an individual.  In all the cases which we have mentioned  above the profits earned which were  credited  in the  books of account according to the mercantile system  of accounting  were at best "treated as having  been  received" which is neither "received" nor "deemed to be received"  and therefore not within the purview of section 4 (1) (a). (1) [1938] 6 I.T.R. 603 at p. 614. 962 If then profits which have been thus credited cannot be said

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to  be  received nor deemed to have been received  when  the entries  were made in the books of account,  the  contention urged  before  us by Mr. Kolah that  there could  not  be  a second  receipt  of  the amount in British  India  does  not survive.  It is true that the words used in section 4(l) (a) relate to the first receipt after the accrual of the income. Once it is received by the party entitled to it, in  respect of any subsequent dealing with the said amount it cannot  be said  to  be " received" as income on  that  occasion.  [Per Kania  J.  in B. M. Kamdar (1)].  The  "receipt"  of  income refers  to  the first occasion when the recipient  gets  the money under his own control.  Once an amount is received  as income,  any  remittance or transmission of  the  amount  to another  place  does  not result in  "receipt",  within  the meaning  of  this  clause, at the  other  place.   This  was definitely established by the Privy; Council in  Pondicherry Railway   Co.  v.  Commissioner  of  IncomeTax  2)  and   in Commissionei, of Income-tax v. Mathias (3).  If,  therefore, the income, profits or gains have been once received by  the assessee  even  though  outside British India  they  do  not become  chargeable  by  reason of  the  moneys  having  been brought in British India, because what is chargeable is  the first receipt of the moneys and not a subsequent dealing  by the  assessee with the said amount.  In that event they  are brought,  by  the assessee as his own moneys  which  he  has already  received  and had control over and  they  cease  to enjoy the character of income, profits or gains. This  ratio  however  does not apply to  the  facts  of  the present case before us.  The moneys were neither received by the company nor could be deemed to have been received by  it when  the  entries  were made in the  books  of  account  at Petlad.  They had merely accrued or arisen to it and so  far as the receipt thereof is concerned they were first received in  British  India  when  they  were  received  by   Messrs. Jagmohandas Ramanlal (1)[1946] 14 I.T.R. 14 at P. 39, (2)[1931] 58  I.A. 239. (3) [1939] 66 I.A. 23. 963 &  Co. or by the various banks or shroffs in  British  India through  whom  the railway receipts  were  negotiated.   The first  receipt  of the moneys was therefore when  they  were paid  as  such  by. the merchants  to  Messrs.   Jagmohandas Ramanlal & Co. or to the various banks or shroffs as  above. Whatever paid by the merchants to these several parties were the  sale  proceeds  of the goods which had  been  sold  and delivered  by  the company to them and  they  were  received within the meaning of section 4 (1) (a) of the Act by  these several parties on behalf of the company in British India at the  time when these payments were made by the merchants  to them. Mr. Kolah pressed into service the argument based on section 13  of  the  Act that the mercantile  system  of  accounting regularly  adopted  by the assessee was  obligatory  on  the income-tax authorities for computation of his income.  While agreeing   generally  with  that  submission  in   case   of residents, we doubt whether that position would be available to  a  non-resident,  who maintains  his  books  of  account outside  British India according to the  mercantile  system. The  section would only be relevant where the total  profits of the assessee have to be computed, in which event he would be entitled to claim that they should be computed  according to  the  system  of accounts maintained  by  him.   But  the section would hardly be relevant where stray items of income are  caught  in taxable territories as received  in  taxable

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territories  by a nonresident.  The entries in  the  present case were put in merely to prove that the sale proceeds were received outside British India where the entries were  made. That contention however could not be sustained, as section 4 (1)  (a) is concerned with cases of actual receipt  and  not with cases of paper receipts. Having regard to the observations made above we have come to the  conclusion  that the High Court ",as right  in  holding that the two sums of Rs. 12,68,480 and Rs. 4,40,878 were the sale  proceeds  of  the  goods sold  and  delivered  by  the appellant  to  merchants in British India,  that  they  were received by Messrs, 964 Jagmohandas  Ramanlal  & Co. and by the  banks  and  shroffs through whom the railway receipts were negotiated, on behalf of  the appellant in.  British India, that they were  liable to  tax under section 4 (1) (a) of the ,*Act as having  been received  in  British  India on its behalf,  that  there  is nothing either in the facts and circumstances of the case or in law why they should be exempted from such liability, that the  answers  given to the questions which  were  ultimately considered by the High Court were correct, and the appellant was  rightly  held liable for the tax on these  two  amounts subject to all just deductions and allowances. - The  appeal therefore fails and must stand dismissed with costs. BOSE, J.-I respectfully disagree. Section  3 of the Indian Income-tax Act provides that the  " total  income  "  is to be charged in  accordance  with  the provisions  of  the Act.  We have therefore to  see  what  " total income " means. " Total income " is defined in section 2(15).  It means (not " includes " but means) the total amount of income,  profits and  gains  "referred  to in sub-section (1)  of  section  4 computed  in the manner, laid down in this Act."  Therefore, the  computation of all income refeffed to in section  4(l.) has to be "in the manner laid down in the Act ". Section  4  (apart  from the provisos  and  explanations  is divided  into three clauses, (a), (b) and  (c).       Clause (b)  deals with residents and (c) with nonresidents.  As (a) is  general,  it is legitimate to infer that  it  refers  to both.   Therefore, the words " received" and " deemed to  be received " must be construed in the same sense in both cases except of course where it is otherwise provided in the  Act, for sub-section (1) is made subject to the provisions of the Act. Now  the words "deemed to be received" can be excluded  from consideration  at  once  because  I  agree  that  they   are confined, and are intended to be confined to what I may call the  deeming sections in the Act, that is to say,  to  cases where the deeming must be done 965 under  the  express provisions of the Act.  That  leaves  us with the word "received" (I am of course only deal ing  with section  4(l) (a) which deals with " receipts’ and not  with section  4(l) (c) which refers to "accruals"  and  "arisals" and to that which is deemed to "accrue" or "arise"). Now this, in my opinion, is to be contrasted with the  words "accrue" and "arise" which are used in clauses (b) and  (c). Though  there  may be overlapping in some cases,  I  do  not think  the three are intended to mean the same  thing.   The Privy  Council  thought  in Commissioner  of  Income-tax  v. Mathias(1)  that there is some variation in meaning  between them  and  in  Commissioner of  Income-tax  v.  Chunilal  B. Mehta(2)  they  drew  attention to  the  antithesis  between "accruing  and  arising in" and "received in",  though  they

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also  said in the earlier case that there is not a  complete disjunction  between  them  and  that  they  are  not  three mutually  exclusive qualifications (page 56); that is,  that there may be some overlapping in certain cases. Next, we turn to section 6 which divides the various sources of   income  under  various  heads  for  the   purposes   of computation  and  chargeability and states  that  each  head shall   be   "  chargeable"  "in  the   manner   hereinafter appearing".  It is to be observed that the word "shall"  has been used and not " may " thereby implying that there is  no option in the matter.  So far as business is concerned,  the head is No. (iv) "Profits and gains of business etc." That carries us on to sections 10 and 13 which prescribe the method   of  computation.   Here  again,  the  language   is imperative  and  in  the case of a business  the  method  of computation  has  to  be in accordance with  the  method  of accounting   regularly   employed  by  the   assessee:   see Commissioner of Income-tax v. Kameshwar Singh(3). Now  in the present case, the method of accounting  was  the mercantile system.  The essential difference (1) [1939] 7 I.T.R. 48 at 56.  (3) [1933] 1 I.T.R. 94 at 100 and 101. (2) [1938] P I.T.R. 521 at 527, 125 966 between this and the cash basis system is that in the latter actual  receipts and disbursements are taken  into  account. In  the  former,  sums which are due  to  the  business  are entered on the credit side immediately they are legally  due and  before they are actually received and expenditures  are entered  the  moment  a legal liability to  pay  arises  and before the actual disbursements.  The profit or loss at  the end  of  the accounting year is therefore based,  not  on  a difference  between what was actually received and what  was actually  paid out, but on the difference between the  right to  receive and the liability to pay.  I find it  impossible in  such a case to say that the taxation -is on  income,  or profits and gains which were "received".  It can only be oil profits which " accrued " or "arose" to the assessee in  the accounting  year:  see the Privy Council in  Feroz  Shah  v. Commissioner   of  Income-tax(’).   That,  in  my   opinion, excludes  section  4(l) (a) and that in turn means  that  in such a case a resident is taxed under section 4(l) (b) and a non-resident under section 4(l) (c). Now,  this to my mind is of vital importance.   The  primary object  of  the Income-tax Act is to tax and not  merely  to ascertain  an  income.   The computation of  the  income  is subsidiary and is only for the purposes of ascertaining  the quantum  of  the  tax: see  Commissioner  of  Income-tax  v. Kameshwar  Singh(2).  Therefore, if the legislature  chooses to  lay down different methods of computation and  say  that the  taxation  shall  be on the amount so  computed,  it  is essential  that these methods be adhered to.  In some  cases this  may be to the advantage of the assessee and in  others it may operate to his disadvantage.  But that is immaterial. The  importance  lies in this.  All that can be taxed  in  a given  year are the profits and gains which are received  or which  arise or accrue in the " previous year", and  if  the Act  directs that the profits are to be computed in a  given case  on "accruals" or "arisals" and not on actual  receipts it is essential that that be (1)  [1933] 1 I.T.R. 219at 224 and 225. (2) [1933] 1  I.T.R. 94 at 100. 967 done;  and it follows from that that the tax in such a  case

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can only be on the accruals or arisals and not on the actual receipts,  for clearly you cannot tax on that which you  are forbidden  to  compute in a case where the tax can  only  be levied on what is computable. under the Act. It  is  important to draw the distinction for  this  reason. The  rate of tax varies from year to year, therefore if  the book profits which are directed to be taxed in a given  year are,  say, Rs. 10,000 and the actual receipts only Rs.  100, it makes a lot of difference which figure is taken; nor does it  even  itself  out in the long run, for if  the  rate  of taxation  increases in the following year and the  state  of the  business  is  just the reverse, namely  that  the  book profits are only Rs. 100 whereas the actual receipts arising from  the  previous year’s transactions are Rs.  10,000,  it will  make a considerable difference to the assessee in  the aggregate of tax payable over the years, whether he pays oil the  basis  of book profits or actual receipts  in  the  two years. I am not able to draw a distinction between a resident and a non-resident  in  these matters.  I can find no  ground  for holding that in the case of a resident the mercantile system must  be  adopted for computing the profits if that  is  the system  of accounting regularly employed but that that  need not be done in the case of a non-resident.  If the  assessee had  been  a  resident company, the taxation  would,  in  my opinion,  have  been under section 4(l) (b) on  profits  and gains  which had accrued or arisen and not under  section  4 (1)  (a)  on  profits which had  been  received.   The  same principle  must, in my opinion, be applied in the case of  a nonresident  and therefore section 4 (1) (c)  is  attracted, provided  the  profits and gains have  actually  accrued  or arisen  in the taxable territories or they can,  because  of section  42, be deemed to have accrued or arisen there.   If section  4 (1) (c) is not attracted, then the tax cannot  be levied. Now,  applying section 4 (1) (c), the question is  where  do the profits and gains arise or accrue, in a case 968 like  the  present ? This is not free  from  difficulty  and various  views have been, and can be, taken.  But  as  these expressions have not been defined and as they are not  words of art, I think they should be construed  in their  ordinary meaning  which  businessmen  would  ordinarily  and   easily understand  in a business transaction.  When goods are  sold it is to my  mind evident that the profit or the loss on any particular  transaction  arises out of the sale,  for  until there is a sale there can be no profit. - The profit may not be  wholly  attributable  to the sale but  that  is  another matter.  It is to my mind unquestionable that they arise, in part, at any rate, out of the sale.  Therefore, if the goods are  sold in the taxable territories, then, to my mind,  the profits,  or a portion of them, arise there.  As  the  Privy Council  pointed  out  in  Commissioner  of  Income-tax   v. Chunilal B. Mehta(1), in determining where the profits arise the  place of the formation of the contract is not the  sole criterion, other matters, as for example acts done under the contract are also material. I  am not here attempting to go behind the decision  of  the Supreme  Court to the effect that the place of sale  is  not necessarily  the place of the receipt of the profits.  I  am construing the word "arise " and not "receive". That brings me to the next question, where were the goods in the  present ease sold ? That is a, mixed question  of  fact and law and must vary in each case and must, in my  opinion, be answered in a commonsense way and not necessarily in  the

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artificial  manner  laid down by the Sale of  Goods  Act  to determine where and when the property passes.  What are  the facts here ? In the case of the Rs. 4 lakhs odd, the control over  the corpus of the goods was retained by  the  assessee right up to the moment the price was paid; and the price was paid  not outside British India but to his nominees in  this country,  namely, to the assessee’s banks in British  India. These  banks  retained the documents of title  and  had  the right to refuse (1)  [1938]61.T.R.521 at533. 969 delivery   until  the  money  was  actually   handed   over. Therefore,  the right to get possession of the goods and  to take  delivery accrued or arose in British India  where  the money  was actually paid, and that to my mind must be  taken to  be  the place where the profits accrued  and  arose  for income-tax  purposes,  not because the  money  was  received there,  for we are not concerned with actual  receipts,  but because  the  right  which  accrued  at  the  date  of   the transaction  was to receive the money in British  India  and hand over the goods there on the receipt of the money.  As I have  said, the substance of the transaction must be  viewed and  that cannot be made to depend upon the method of  book- keeping.   Even if there are no books the profits on such  a transaction would accrue in the place where the money is  to be  paid and the goods are to be handed over.  I cannot  see how  that  can alter by reason of the method  of  accounting employed.    Accordingly,  I  agree  that  the   method   of accounting  adopted  by  the  assessee  cannot  affect   the substance of the transactions between the parties or  affect their  nature.   The rights and liabilities of  the  parties inter se cannot be made to depend on the way in which one of them  chooses to keep its books.  But that is not  the  case when  we  come to the question of  taxation  for  income-tax purposes.   There  the method of accounting is  vital.   But even there the substance of the transaction must be  viewed, for  the  substance  cannot  alter  by  a  mere  method   of accounting.   It  is evident that if the assessee  had  been resident  in British India and these transactions  had  been omitted  from tile books, the sums which ought to have  been entered  would  be  taxable  as  items  which  had   escaped assessment even if there had been no actual receipts in that or in any following year.  Therefore, it is not the entry in the books which attracts the taxation but the profits on the transaction  itself, and when the mercantile system is  used the profits arise when the right to receive them accrues and not  when  the  entry is made.  If the  system  is  properly employed  the entry is made as soon as the right to  receive the price arises and so for all practical 970 purposes that is the date ordinarily referred to, but a  man cannot manipulate the amount of his tax by choosing to enter or  not  to  enter  items which ought to  be  entered  on  a particular date, as and when he  pleases. Now, the Rs. 4 lakhs odd represent actual receipts but  that is not what is taxable -when the computation is based on the mercantile  system.  What should be taxed, or  rather  taken into  account for the purposes of taxation, are the  figures entered  in  the accounting year as the sale  price  of  the various  transactions which the Rs. 4 lakhs represent.   The profits which arise out of these transactions do not, on  my view, escape tax because the profits accrue or arise in  the taxable territories.  But the figure on which the tax is  to be  computed  is  not the 4 lakhs odd  which  represent  the actual  receipts but another figure which  unfortunately  we

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have  not  been  given.  I am of course  assuming  that  the figures were duly entered in the books at the proper time in accordance  with  the mercantile system of  accounting.   If they were not, then the Income-tax authorities have power to tax  income  which, for one reason or another,  has  escaped assessment Turning  to  the  Rs. 12 lakhs.  We  know  that  the  figure entered in the books relating to these transactions was  Rs. 13,41,744.  i am not clear whether that was entered  in  the accounting  year  with  which we  are  concerned,  though  I gathered that that was the case.  The actual receipts, which followed  later,  amounted  to only Rs.  12,68,480.   In  my opinion, if anything is computable for the purposes of  tax, it is the former figure (assuming all the entries are in the accounting  year)  and  not the latter.   But  in  order  to determine  whether  the profits on  these  transactions  are taxable at all, we must examine the transactions. In  these  cases  the sales were to  merchants  resident  in Ahmedabad.  But according to the assessee’s affidavit, "  In respect of buyers from Ahmedabad, the apllicant  Mills have no account of such buyers.  The 971 price  is  debited to the account of  the  said  Jagmohandas Ramlal and company and credited to the sales account in  the books of the applicant:" and later, Jagmohandas " discharges its debts by making payments to the  applicants from time to time towards the balance in their said  account in  the books of the applicant Mills.  The said amounts  are paid  by the said firm by paying the same to the  credit  of the applicant Mills with British Indian banks or shroffs." Now,  it is evident from this that Jagmohandas & Company  do not  merely  guarantee payment by the Ahmedabad  buyers  but actually  make the payments, or the equivalent of  payments, to  the assessee company.  So little do the  ’buyers  matter that  their  transactions  are not  even  reflected  in  the accounts.   All we have is Jagmohandas.  It does not, in  my opinion, matter whether the actual buyers remained primarily and  legally responsible to the assessee or not.   The  fact remains that in practice Jagmohandas & Company actually  met the   obligations  of  the  buyers  and   discharged   their liabilities  to  the  assessee. it is,  equally  clear  that Jagmohandas & Company must have recouped themselves in  some way from the buyers.  The question is how.  If the whole  of the  transactions  occurred outside British  India  and  the buyers or their agents went to Petlad and received the goods there and paid Jagmohandas & ’Company outside British India, then I am clear that the profits and gains did not accrue or arise  in  British India, simply be-cause  the  (foods  were ultimately  brought there.  But if Jagmohandas & Company  or their  agents  were paid in British India, the  profits  and gains, in my opinion, arose there in the same way as in  the 4  lakhs  case.  If Jagmohandas & Company  were  the  actual agents of the assessee as were the banks in the other  case, and the payments were made in the taxable territories,  then the accrual and arising was direct.  If, however, they  were not the agents in the strict sense of the term, then I am of opinion  that section 42 would be attracted because  at  the very least there would be a "business connection", 972 provided  of  course the payments were made in  the  taxable territories. Now, here again., I am looking to what was actually done  in order  to determine what the rights were, for it is  evident that what was done was done in pursuance of some  agreement,

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express  or  implied, between the  parties  which  agreement regulated  their rights, and those rights in turn  determine the  place  where  the profits accrued or  arose,  or  must, because of section 42, be deemed to have accrued or arisen. In my view, the question referred by the Incometax Appellate Tribunal  in its statement of the case does not reflect  the true   position  because  it  concentrates  on  the   actual receipts.   If  the  cash basis  system  of  accounting  was germane  here, then I would agree that the Rs. 4,40,878  was part of the assessee’s income in British India, and so  also in  the  other  case, provided the  payments  were  made  in British  India.  But it is misleading to enquire what  would have  happened  in circumstances which are not  material  in this  case  because of the mercantile system  of  accounting which was employed. As regards the High Court.  The learned Judges refrained the question  and answered it without sending the case  back  to the Income-tax Appellate Tribunal for a further statement of the  case.   That  was  not strictly  proper.   But,  in  my opinion,  the  refrained  questions  suffer  from  the  same defect. In  my opinion, the case should be sent back to the  Income- tax  Appellate  Tribunal for a refraining of  the  questions along the lines I have indicated and for a further statement of the case. Appeal dismissed. Agent for the appellants: Rajinder Narain. Agent for the respondents: G. H. Rajadhyaksha, 973