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PETITIONER: MCGREGOR & BALFOUR LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX,WEST BENGAL

DATE OF JUDGMENT: 16/03/1959

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. SINHA, BHUVNESHWAR P. KAPUR, J.L.

CITATION:  1959 AIR  771            1959 SCR  Supl. (2) 355  CITATOR INFO :  D          1960 SC1016  (16,18)  R          1961 SC1233  (7,10)  F          1975 SC2016  (13,21)

ACT:        Income-tax-Company  carrying  on  business  in  England  and        India-Refund of excess Profits tax paid in England-If can be        taxed in India-Indian Finance Act, 1946, s. 11(4).

HEADNOTE: The  appellant carried on business in England and in  India. For  the previous years it paid excess profits tax  in  both countries  and it obtained deduction of the amounts so  paid from  its profits and gains for the purposes of  the  Indian Income-tax Act.  In the assessment year 1947-48 it  obtained a  repayment of RS. 2,31,009 out of the excess  profits  tax paid in England.  The Income-tax authorities acting under S. 11(14),  Indian  Finance  Act  1946,  included  this  amount received in England in the taxable profits of the appellant. The appellant contended that the repayment not being  within the taxable territory it could not be taxed. Held,  that the amount received as repayment of  the  excess profits  tax was rightly taxed.  Under S. 11(14) the  amount of  repayment was deemed to be ’income’ for purposes of  the Indian Income-tax Act and that ’ income ’ was to be  treated as  the  income  for  the previous  year  during  which  the repayment  was  made.  Section 11(14)  created  a  liability irrespective of the considerations arising from the  general provisions  of the income-tax law.  The distinction  between incomes  within  and without taxable  territories  was  made unnecessary by S. 11(14). Eglinton Silica Brick Co. Ltd. v. Maryian, (1924) 9 Tax Cas. 92; A. & W. Nesbitt Ltd. v. Mitchell, (1926) " Tax Cas.  217 and Kirke’s Trustees v. The Commissioners of lnland Revenue, (1926) 11 Tax Cas. 323, applied.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 265 of 1956. Appeal from the judgment and order dated August 26, 1954, of

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the  Calcutta High Court in Income-tax Reference No. 107  of 1952. S.Mitra,  Dipak  Choudhry  and  B.  N.  Ghosh,  for   the appellants. C.K.   Daphtary,  Solicitor-General  of  India,   K.   N. Rajagopala  Sastri,  R.  H. Dhebar and  D.  Gupta,  for  the respondent. 356 1959.  March 16.  The Judgment of the Court was delivered by HIDAYATULLAH, J.-Messrs. Mcgregor & Balfour, Ltd.,  Calcutta (hereinafter  called the Company) is a Company  incorporated in the United Kingdom.  Its head office is also there.   It, however,  does  business  in India also.   In  some  of  the previous  years,  the  Company was required  to  pay  excess profits  tax both in England and in India.  When it did  so, it  obtained deduction of the amounts from its  profits  and gains  for  purposes  of the Indian  lncome-tax  Act,  under s.12(2) of the Indian Excess Profits Tax Act. In  the assessment year 1947-1948 which corresponded to  the accounting  year of the Company ending on October 31,  1946, ’it  obtained a repayment of Rs. 2,31,009 out of the  excess profits tax paid in England.  This was under s. 28(1) of 4 & 5, Geo.  VI, Ch. 30.  For purposes of the levy of the Indian Income-tax, this sum was included in the taxable profits  of the Company by the Income-tax Officer.  He purported to  act under s. 11(14) of the Indian Finance Act, 1946 (hereinafter called  the  Act).  The income of the Company in  India  was held to be Rs. 6,34,937 (including the sum of Rs.  2,31,009) while  the in-’ come outside the taxable territory was  held to  be  Rs. 4,29,620.  Applying s. 4A(c)(b)  of  the  Indian Income-tax Act, the Income-tax Officer assessed the  Company on its total world income. The  appeals  of  the Company -  made  successively  to  the Appellate Assistant Commissioner and the Incometax Appellate Tribunal  were dismissed.  The Tribunal,  however,  referred the following questions of law to the High Court at Calcutta under s. 66 of the Indian Income-tax Act: "(1)  Whether on the above facts and circumstances  of  this case  the Tribunal was right in holding that the sum of  Rs. 2,31,009  was income of the assessee during  the  assessment year under consideration and was liable to be assessed under the Indian Income-tax Act ? and (2)If  so,  whether this amount could not  be  taken  into consideration for determining the residence of the 357 assessee under s. 4A(c)(b) of the Indian Income-tax Act ? " This reference was heard by Chakravarti, C. J., and  Lahiri, J.,  who by their judgment dated August 26,  1954,  answered the first question in the affirmative and the second in  the negative.  They, however, granted a certificate under s. 66A of  the  Indian Income-tax Act, read with Art.  135  of  the Constitution  to appeal to this Court.  No appeal  has  been filed on behalf of the Department, and the second of the two questions must be taken to be finally settled in this case. The contentions of the Company in this appeal, thus, concern only  the  first  question, and they are two:  It  was  said firstly that s. 11(14) of the Finance Act could not be  made applicable  to  the assessment year 1947-1948,  because  the provision was not incorporated in the Indian Income-tax  Act or  repeated in the subsequent Finance Acts.  This  argument was  not seriously pressed before us, and beyond  mentioning it,  Mr. Mitra for the Company did not choose  to  elaborate it.   We think that Mr. Mitra has been quite correct in  not pursuing  the  matter.  The section framed as  it  is,  does apply  to subsequent assessment years just as it did to  the

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assessment  for  1946-1947,  and  prima facie,  it  was  not necessary  to follow one of the two courses detailed  above. Since the point was not pressed before us, we need not  give our reasons here. It  was  said  nextly that the High Court was  in  error  in construing s. 11(14) of the Finance Act as a provision which created a liability proprio vigore, as if it was a  charging section.  It was contended that the repayment was not within the  taxable  territory, and in view of the  answer  to  the second  question  as to the applicability  of  s.  4A(c)(b), there  could be no tax upon it. On behalf of the  Department it  was  argued  that the sub-section created  a  charge  by itself and the fiction therein created being sufficient  and clear,  it  was not necessary to consider where  the  income arose. Section 11(14) of the Finance Act reads as follows: " Where under the provisions of sub-section (2) of 358 section 12 of the Excess Profits Tax Act, 1940 (XV of 1940), excess  profits  tax payable under the law in force  in  the United  Kingdom  has  been deducted  in  computing  for  the purposes of income-tax and supertax the profits and gains of any business, the amount of any repayment under  sub-section (1) of Section 28 of the Finance Act, 1941, (4 & 5, Geo.  6, c. 30), as amended by Section 37 of the Finance Act, 1942 (5 &  6, Geo 6, c. 21), in respect of those profits,  shall  be deemed  to be income for the purposes of the Indian  Income- tax  Act, 1922, and shall, for the purpose of assessment  to income-tax  and  super-tax,  be treated  as  income  of  the previous  year  during which the repayment  is  made."  This section may be compared with R. 4(1) of the Rules which  are applicable  to cases 1 and 11 of sch.  D of  the  Income-tax Act, 1918 (8 & 9, Geo.  V, c. 40): " Where any person has paid excess profits duty, the  amount so  paid  shall be allowed as a deduction in  computing  the profits  or gains of the year which included the end of  the accounting  period  in respect of which the  excess  profits duty  has  been  paid; but where  any  person  has  received repayment  of  any amount previously paid by him by  way  of excess  profits duty, the amount repaid shall be treated  as profit for the _year in which the repayment is received." The English rule above quoted deals first with the deduction of  the amount paid as excess profits duty from the  profits or  gains  of  the  year  which  includes  the  end  of  the accounting  period  in respect of which the  excess  profits duty  has been paid a matter dealt with in s. 12(2) of,  the Indian   Excess   Profits  Tax  Act,  and  next   with   the assessability  to tax of the amount repaid from  the  excess profits duty previously charged -a matter dealt with in sub- ss. (11) and (14) of s. 11 of the Finance Act. The  object and purpose of the legislation in each  case  is the  same, and though the two provisions are  not  ipsissima verbal they are substantially in the same words and also  in pari  materia.  The concluding words of the English  rule  " the amount repaid shall be treated as profits of the year in which  the  repayment  is received ", and  which  have  been interpreted by 359 English Courts may specially be compared with the concluding words of sub-s. (14) of s. 11 of the Finance Act, which run: " any repayment...... shall, for the purposes of assessment- to income-tax and super-tax, be treated as the income of the previous year during which the repayment is made." There can be no doubt that the intention underlying the  two provisions  is the same, and the language  is  substantially

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similar. Now, the English rule was interpreted by the English  Courts to create a liability irrespective of considerations arising from  the  general  provisions of the  income-tax  law.   In Eglinton Silica Brick Co., Ltd. v. Marrian (1), the assessee company  which had gone into voluntary liquidation  in  1904 was carried on by the liquidator till 1921 when the business was sold to another company which took it over on October 5, 1921, and the business of the appellant company then ceased. The   income-tax   assessment  for  the  year   192122   was apportioned  between the two companies and inasmuch  as  the assessee company had suffered a loss, it was reduced to  nil in  its  case.  The assessee company  then  received  pound, 7,224 and pound, 1,150 in 1952 after it had ceased to  carry on  business as repayments of excess profits duty, and  this income  was  assessed under R. 4(1)  above  mentioned.   The question was whether this was right. The case was considered by the Lords of the First  Division, and  they are their opinion against the assessee firm.   The Lord  President (Clyde) with whom Lords Skerrington,  Cullen and  Sands  agreed (Lord Sands dubitans) explained  the  two parts of the rule as follows: "  The principle is obvious.  It is that if a  taxpayer  has made profits assessable (directly, or indirectly through the operation  of the three years’ average) to income  tax,  and -the  Revenue takes a share of those profits in the name  of Excess  Profits  Duty,  it is only  fair  that  the  profits actually   assessed  to  Income  Tax  should   suffer   some corresponding deduction..........." (1)(1924) 9 Tax Cas. 92, 98. 360 The  problem which arose in the case of repayment of  Excess Profits  Duty was different.  Nobody knew or could know  how soon,  or  how late, repayment might fall to  be  made;  nor whether  the business whose profits were assessed to  Excess Profits  Duty would be in the same hands when repayment  (if any) came to be made.  By that time the business might  have ceased  to be in existence.  Repayment might therefore  have to be made to a person who was not carrying on the  original business.  The original trader might have given up business, died,  and  an executor might have come in his  place.   The solution  provided for all these cases is that contained  in the  second  part of the paragraph, according to  which  the amount repaid to any person is to be I treated as profit for the year in which the repayment is received.’ It is  obvious that  the  amount of the former trading  profits  so  repaid could  not actually be trading profits for such year.   None the  less, the amount repaid is to be treated as if it  were that  which-in  fact-it is not, and cannot be.   The  amount repaid consists of trading profits which reach the  taxpayer out  of their proper time.  However belated his fruition  of them, they have not lost their original character as trading profits.  In my opinion, this is what explains the  position of paragraph (1) of Rule 4 as part of the Rules under  Cases I and 11 of Schedule D, which are concerned with the profits of  trades and vocations.  That some artificial rule  should be  formulated was in the circumstances inevitable, and  the highly artificial character of the rule adopted is shown  by the words in which it is expressed-, the amount repaid shall be treated as profit for the year in which the repayment  is received.  In  short,  the amount repaid  is  deemed  to  be something  that  it  is not, and could  not  in  the  actual circumstances   possibly  be.   Nor  is  this  in  any   way unreasonable  or  contrary  to what might  be  expected,  if regard be had to the subject-matter.  For, as has been seen,

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the  Excess  Profits Duty was itself a part of  the  trading profits  computed by methods familiar under the  Income  Tax Act.   It was not merely a part of something  which  entered into the computation of profit; it was actual 361 computed  profit.  And, but for the disparity between the  ’ accounting  period’ and the three years’ average,  it  would have been directly assessable to Income Tax." A  similar  view was taken in the Court of  Appeal  by  Lord Hanworth,  M. R., Scrutton, L. J., and Romer, J.  (Scrutton, L.  J., dubitans) in A. & W. Nesbitt Ltd. v.  Mitchell  (1). There  too, the assessee company after suffering  losses  in the accounting period May 1 to November 25, 1920, went  into liquidation  and  ceased to trade.  On April 22,  1924,  the repayment  of Excess Profits Duty took place, and  this  was assessed  to income-tax.  The Master of the Rolls  described the amount received as repayment in these words: " But in respect of what is that payment made ?  It is not a legacy,  it is not a sum which has fallen from the  skies  ; it,  is a sum which is repaid because there was too large  a sum paid by the Company to the Revenue Authorities over  the whole period during which Excess Profits Duty was paid,  and that sum means and is intended to represent a repayment of a sum  which was paid by them in respect of the  duty  charged upon  the excess profits of their trading.  It  comes  back, therefore, not having lost its character but being still the repayment of a sum-too much, it is true,-but a sum taken out of the profits which were made by the Company in the  course of  its  trading, profits which at the time they  were  made were  subject  to Income Tax and subject to  Excess  Profits Duty,  and that is the character of the repayment  that  has been made." Dealing with the rule, the Master of the Rolls observed : "I  have pointed out, this is a case where the  Company  has received  payment  of an amount previously paid  by  way  of Excess Profits Duty and having that characteristic attaching to  it; and we are told by the Statute that when such a  sum is  repaid it is to be treated as a profit for the  year  in which  the  repayment  is received.  It is said  it  may  be treated as a (1)  (1926) 11 Tax Cas. 211. 217, 218. 46 362 profit;  but  it ought not to be treated  as  an  assessable profit.  The answer, to my mind, is that it is paid back not by  way of a sum which has no origin or ancestry ; it  is  a sum  which represents a repayment of the amount   previously paid by that company in the form of Excess profits duty upon their trading.  If it is to have that character and is to be treated as such a profit, although it be a repayment of sums paid in respect of profits, it is to be treated as a  profit for the year in which the repayment is received.  The word ’ treated’  indicates that it is to be deemed to be  something which in fact it is not, or whether it is so or not it is to be  treated  as a profit, and therefore it is, to  my  mind, impossible  to  discuss  the  question  of  whether  or  not difficulties  may arise or whether it may be  criticised  as financially  not  quite sound that it should be  treated  in this method in that particular year; but we are told by  the Statute that it is to be treated as a profit for-the year in which the repayment is received." In a case similar on facts as the ones cited above  (Kirke’s Trustees  v. The Commissioners of Inland Revenue  (1)),  the House  of  Lords Viscount Cave, L. C., Lord  Atkinson,  Lord Shaw of Dunfermline, Lord Sumner and Lord Carson) placed the

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same  construction  upon the latter part of  R.  4(1).   The following  passage in the speech of Lord Sumner,  explaining the extent of the fiction in the latter part of the Rule, is extremely instructive : "  The  express  mandatory terms of the  sentence  show,  in carefully chosen language, that he is to submit to something by reason of his having previously enjoyed this advantage in the  shape of repayment of an amount previously paid by  way of  Excess Profits Duty.  Something which is not  a  profit, but  is  only  a money repayment, something  which  may  not result  in a profit, because although trading goes on  there is so great a loss on the year that this repayment does  not make  up the deficit, something which may not be  a  trading profit, because trading has ceased altogether,  nevertheless is to be treated as profit and as profit for the year. Treated’ is a, fresh word free from legal technicality. (1)  (1926) 11 Tax Cas. 323, 332. 363 It is the widest word that could be chosen.  The Legislature avoided saying ’shall be assessed as’ or I shall be  brought into  the computation of profit and loss , and  simply  says that something which is not profit but mere payment shall be treated  as  profit, which it c may or may not  be,  and  as profit  for  the year.  I think, therefore,  that  the  word treated is an apt word to impose a charge ". See  also  in this connection Olive and Partington  Ltd.  v. Rose (1). These  cases  were  relied on by  Chakravarti,  C.  J.,  and Lahiri,  J., in the judgment under appeal, and  the  learned Judges pointed out that the addition of the words " for  the purposes of assessment to income-tax and super-tax "  rather strengthen the reasoning in its application to the words  of the Indian Statute.  We agree with this statement.  It is to be  noticed that the sub-section creates two fictions. -  By the  first  fiction it makes the amount of any  repayment  ’ income’  for the purposes of the Indian Income-tax Act,  and goes on to say that that ’ income ’ shall be ’ treated ’ for purposes  of assessment to income-tax and super-tax, as  the income of the previous year. Mr. Mitra, for the Company contends that no doubt the amount may  be treated as ’income ’ for the purposes of the  Indian Income-tax Act, but the Department is still under a duty  to prove  that the Company is liable to tax at all.   According to  him,  this will have to be treated  as  income  received outside  the  taxable  territory,  because  if  the  fiction contemplated  its  being  treated  as  ’within  the  taxable territory  ’,  it would have said so specifically.   In  our opinion, this submission cannot be accepted. That  this  would  have  been taxable  income  but  for  the provisions  of s. 12(2) of the Excess Profits Tax Act,  goes without  saying.   The income character of  the  receipt  is restored  by  the  fiction, and it is to  be  brought  under assessment  without any further proof than this that it  has been  received  as repayment of the United Kingdom  tax,  in respect of which a deduction was made in the earlier  years. The distinction between (1)  (1929) 14 Tax Cas. 701. 364 incomes  within  and  without taxable  territories  is  made unnecessary  by  demanding  that  this  amount  by  way   of repayment  shall be brought to tax and ’ treated’ as  income within the previous year.  The effect thus is that the  sub- section  charges the said amount with a liability to tax  by its own force or to borrow the words of Lord Sumner, is  apt to ’ impose a charge’.

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In  our opinion, the amount received as repayment of  excess profits  tax must be deemed to be ’income’ for the  purposes of  the Indian Income-tax Act and for assessment it must  be treated  as  income  of the previous year.   The  answer  to question  No.  1 given by the Calcutta High Court  was  thus correct. The appeal fails, and is dismissed with costs.                      Appeal dismissed.