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PETITIONER: THE AGGARWAL CHAMBER OF

       Vs.

RESPONDENT: M/s GANPAT RAI HIRA LAL

DATE OF JUDGMENT: 11/11/1957

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

CITATION:  1958 AIR  269            1958 SCR  938

ACT:        Income-tax--Assessment  of agent in respect of profits  held        for non-resident Principal--Agent’s right to claim deduction        for payment made-Ultimate liability of principal to  income-        tax   on   basis  of  his  world  income,  if   a   relevant        considaration--Indian  it Income-tax Act, (XI Of 1922),  ss.        40(2), 42(1).

HEADNOTE:        The appellant company and the respondent firm were  carrying        on  business in the erstwhile patiala State, and  were  non-        residents  in  British  India.   The  appellant,  acting  as        commission  agent for the respondent, entered  into  several        forward transactions with a Hapur firm of commission agents.        The  profits accruing on these transactions amounted to  Rs.        29,275-2-6 on which the Hapur firm paid a sum Of Rs.  9,314-        13-4  as income. tax.  In 1943 the appellant was ordered  to        be  wound  up and the respondent was placed on the  list  of        contributories.   The  Official Liquidator  applied  to  the        Liquidation  judge  for  a payment order  for  a  sum  which        included the amount of income-tax paid by the Hapur firm for        and on behalf of the respondent.  The main contention raised        on  behalf  of  the respondent was that it  had  no  taxable        income in the year in dispute and was not liable to pay  any        income-tax and that, consequently, it was not liable for the        income-tax paid by the Hapur firm.        Held,  that  the Liquidator was entitled to claim  from  the        respondent  the amount of income-tax paid by the Hapur  firm        irrespective  of the consideration whether its world  income        was  taxable  or not.  Under the law the Hapur firm  was  an        agent of the respondent for the business of the agency which        was entrusted to it, and was as such liable under ss-  40(2)        and  42(1) Income-tax Act, as an assessee for income-tax  on        the  profits made on the respondent’s transactions at  Hapur        and  was entitled to retain the estimated amount of  income-        tax  payable on the amount of the respondent’s profits.   As        the Hapur firm had rightly paid the tax on the profits,  the        respondent  could not be allowed to challenge the  liability        on  the ground that his total world income was  not  taxable        and he was entitled to his profits without deductions.  That        was  a question which must be agitated by  the  non-resident        assessee  at  the time of his assessment.   As  between  the

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      parties  the  tax  paid by the agent had to  be  taken  into        account irrespective of the result of the assessment on  the        non-resident.

JUDGMENT:        CIVIL APPELLATE JURISDICTION: Civil Appeal No. 79 of 1954.        938        Appeal from the judgment and order dated March 10, 1953,  of        the former Pepsu High Court in Letters Patent Appeal No. 493        of  Samvat 2005 arising out of the judgment and order  dated        January 18, 1949, of the said High Court in E. As.  Nos. 78-        96 of Samvat 2001.        Naunit Lal, for the appellants.        Mohan Behari Lal, for the respondents.        1957.  November 11.  The following Judgment of the Court was        delivered by        KAPUR J.-This is an appeal brought pursuant to a certificate        under  Art. 133(1)(c) of the Constitution from the  judgment        and order of the Division Bench of the erstwhile Pepsu  High        Court pronounced on March 10, 1953, modifying in appeal  the        order of the Liquidation Judge.        The  facts are fully recited in the judgments of the  courts        below  and comparatively a brief recital will be  sufficient        for the purpose of this judgment.  The appellant company was        incorporated  in  1934  under  the  Companies  Act  of   the        erstwhile  Patiala  State.  It carried on  the  business  of        commission  agency  for dealing in forward  transactions  in        various   kinds  of  grain  and  other   commodities.    The        respondent-  firm  Ganpat Rai Hira  Lal  of  Narnaul-besides        being  a shareholder of the appellant company  had  dealings        with  it  and entered into several forward  transactions  of        sale  and  purchase  of grain and  other  commodities.   The        appellant,  acting as a commission agent of  the  respondent        and its other constituents entered into several transactions        of forward delivery at Hapur with Firm Pyarelal Musaddi Lai,        who  were  carrying on commission agency business  at  Hapur        (and will hereinafter be termed the Hapur firm).  The  total        profits  of the transactions entered into by  the  appellant        with  the Hapur firm was Rs. 48,250 on which the Hapur  firm        paid  Rs. 14,730-8 as income-tax.  The profits  accruing  on        the  transactions entered into on behalf of  the  respondent        amounted  to  Rs.  29,275-2-6  on  which  the  proportionate        income-tax claimed to have been paid was        939        Rs. 9,314-13-4.  On May 20, 1943, the appellant was  ordered        to  be wound up and Udmi Ram Aggarwal, a pleader of the  old        Patiala  High Court was appointed its liquidator.  The  list        of  contributories was settled on October 21, 1943, and  the        respondent was placed on that list.  Though this matter  was        challenged  in  the appeal before the High Court  it  is  no        longer in controversy between the parties.        The Official Liquidator on March 18, 1944, applied under  s.        186  of the Patiala Companies Act, for a payment  order  for        Rs. 12,204-12-3 against the respondent and in support of his        claim  he  filed,  with  this  application,  copies  of  the        respondent’s  account in the books of the appellant  showing        how  the amount claimed was due from the  respondent.   This        amount  included  the sum of Rs. 9,476-13-0, on  account  of        income-tax  paid by the Hapur firm for and on behalf of  the        respondent  on  the profits of the forward  transactions  at        Hapur and the commission of the Hapur firm.  The  respondent        raised  several objections and pleaded inter alia  that  the        Hapur firm with whom the appellant had entered into  forward

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      transactions had no right to demand any income-tax from  the        appellant  as no profit had accrued to the  appellant  which        was acting as a commission agent and " was only entitled  to        the  commission ". It was also pleaded that as on the  total        number  of transactions entered into between the  respondent        and  the appellant there was a loss, the respondent was  not        liable to pay any income-tax and that the respondent had  no        taxable  income  in the year under dispute or in  any  other        year.  On May 23, 1944, the respondent filed an  application        in  which  it was submitted that the Hapur  firm,  who  were        agents of the appellant at Hapur, had retained Rs. 14,730-8-        0, " which was in trust with them under s. 42 of the  Income        Tax  Act  "  and  prayed that  the  Official  Liquidator  be        directed to apply to the Income Tax authorities for a refund        of the amount retained and paid by the Hapur firm, as no tax        was  really  due  on the transactions entered  into  by  the        appellant  with the Hapur firm and none was payable  by  the        respondent.        940        After evidence was led by both parties the payment order was        made  by the learned Liquidation Judge on January 18,  1949,        for  a  sum  of Rs. 8,191-0-9 which included a  sum  of  Rs.        6,867-9-6 the proportionate amount of income-tax due on  the        profits accruing on the respondent’s transactions.   Against        this  order  the respondent took an appeal to  the  Division        Bench  and  canvassed two points: (1)  that  the  respondent        could  not be settled on the list of contributories and  (2)        that  it was not liable for the amount retained for  payment        of  income-tax  from  out of  profits  on  the  transactions        entered  into on its behalf by the appellant with the  Hapur        firm  and  subsequently  paid  by  the  latter.   The  court        negatived the former contention and held that the respondent        had  rightly been settled on the list of contributories  and        upheld the latter contention and held, following a  judgment        of  the Judicial Committee of the Ijlas-khas of  Patiala  in        Panna  Lal  Mohar Singh v. Aggarwal Chamber  (1),  that  the        Official  Liquidator of the appellant was riot  entitled  to        claim the amount of income-tax paid by the Hapur firm.   The        Judicial Committee ljlas-khas had held :        "  Before the liability of the contributory can be fixed  it        must  be shown that his income was such on which income  was        assessable.........  It is not denied that the  contributory        was  carrying on other transactions in India a,-,  it  stood        before partition through other person.  It was therefore his        entire  income  that was to be taken into  consideration  to        assess his liability to income-tax."        The appellant then applied for a certificate to appeal under        Art. 133(1)(c) which was granted in the following terms:        "  The  first question is whether a decision  given  by  one        Judge of the Judicial Committee can be regarded in law as  a        decision  of  the  Committee.  The  second  is  whether  the        principle  laid  down by the learned Judge of  the  Judicial        Committee  that  the Aggarwal Chamber of  Commerce  was  not        entitled to recover from its clients the proportionate share        of  the income-tax paid by it unless it was shown  that  the        total amount        (1)  C. A. 60 Of 2005 S.        941        of  income of the clients was assessable to income-tax,  was        sound.        Accordingly   we   allow   the  petition   and   grant   the        certificate."        The first point has not been canvassed before us and in  the        view  that we have taken it would be unnecessary to go  into        that  matter.   The sole point for decision is  whether  the

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      respondent is liable for income-tax, which has been paid  by        the Hapur firm on the transactions, which were entered  into        by  the appellant with the Hapur firm for and on  behalf  of        the respondent?  There is no finding by the High Court  that        the respondent had entered into any forward transactions  in        British India or at Hapur with any firm other than the Hapur        firm  and  this matter was not agitated before  us,  nor  is        there  any  finding  as to the total  world  income  of  the        respondent and there is no material on the record from which        it could be determined.        The  appellant is a non-resident company and the  respondent        is  a  non-resident,  residing at Narnaul in  what  was  the        Indian State of Patiala.  The appellant entered into forward        transactions  on behalf of the respondent at Hapur in  which        there  was a considerable amount of profit.  The High  Court        has found that the Hapur firm paid Rs. 6,867-9-0 on  account        of  income-tax which was payable on the profits made on  the        transactions  entered  into with the Hapur firm for  and  on        behalf  of  the respondent.  The respondent  challenged  its        liability  to  pay  income-tax on the  ground  that  it  was        liable:        "  only  on  his  total  earnings  during  the  year   under        assessment and since, as is clear even from the books of the        respondent, he had suffered heavy losses in his business  at        Narnaul, his total income was not assessable to any  income-        tax."        The learned Liquidation Judge held the respondent liable for        the  amount  of  the income-tax by applying  s.  69  of  the        Contract Act.  The Division Bench on appeal disallowed  this        item  on  the ground that it had not been shown that  the  "        total  earnings"  of the respondent were taxable  under  the        Act.  Neither of the        942        courts  below have discussed the relevant provisions of  the        Act, not even s. 42 which was mentioned by the respondent in        his  application  of  May 23, 1944, nor have  they  given  a        finding as to the jural relationship of the Hapur firm  with        the  respondent.   The  agency of the  Hapur  firm  was  not        seriously disputed before us nor repudiated.  The case seems        to have proceeded on the basis of this agency in the  courts        below.   The  Hapur firm was employed by the  appellant  for        forward  transaction  business  of the  respondent  who  has        accepted the transactions entered into as also the amount of        the  profit  accruing  on those  transactions  and  is  only        disputing  the amount of income-tax deducted,  retained  and        paid  on those profits.  Under the law the Hapur firm  would        be an agent of the respondent for that part of the  business        of  the  agency  as was entrusted to it  and  "  privity  of        contract arises between the principal and the substitute  ".        Section 194 of the Contract Act; De Bussche v. Alt (1).        It  is now necessary to refer to the relevant provisions  of        the  Income-tax Act in force in the assessment year  1942-43        (hereinafter  termed the Act).  It is not clear as  to  what        was  the signification of the words " total earnings "  used        by  the High Court because it is not used in the Income  Tax        Act  which  uses two expressions ; " total income  "  and  "        total  world income " in sub-s. 15 of s. 2 of the Act.   The        definition of " total income " comprises two things (i)  the        total amount of income, profits and gains referred to in  s.        4(1)  and  (ii) computation in the manner laid down  in  the        Income Tax Act.  " Total world income " includes all income,        profits and gains wherever accruing or arising except income        to  which under the provisions of s. 4(3) the Act  does  not        apply.        Thus  in the case of the respondent who is a "  nonresident"

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      "total  income"  would comprise income,  profits  and  gains        received  or  accrued  in  British India  or  deemed  to  be        received  or to accrue in British India.  Section 17 of  the        Act which was relied upon by the respondent’s counsel occurs        in Chapter III dealing with        (1)(1878) 8 Ch, D. 286, 311,        943        Taxable  income ". It provides for the determination of  tax        payable  in  certain special cases of which the, case  of  a        non-resident is one.  It provided:        "  Where a person is not resident in British India and is  a        British  subject  as defined in section 27  of  the  British        Nationality  and Status of Aliens Act, 1914 (4 & 5 Geo.   V.        Ch.  17)  or a subject of a State in India or  Burma,  or  a        native  of  a  Tribal Area, the  tax,  including  super-tax,        payable by him or on his behalf on his total income shall be        an  amount bearing to the total amount of the tax  including        super-tax  which would have been payable on his total  world        income  had it been his total income the same proportion  as        his    total    income   bears   to    his    total    world        income.............. Section 17 does not deal with or affect        the rights and liabilities of persons required under the Act        to  make deductions of income-tax from sums payable to  non-        residents  or  the  consequences of  failure  to  make  such        deductions.        The  very  next chapter (Chapter IV) deals  with  deductions        which  the  Act requires to be made in regard  to  different        heads  of income.  Section 18 provides for deduction at  the        source.  Sub-s. 3 A of this section was as under:-        S.18(3A) " Any person responsible for paying to a person not        resident in British India any interest not being "  interest        on  securities",  or  any other  sum  chargeable  under  the        provisions  of  this  Act, shall, at the  time  of  payment,        unless he is himself liable to pay income-tax thereon as  an        agent, deduct income-tax at the maximum rate."        The  proviso to this sub-section made provision for  payment        of  monies without deduction if there was a  certificate  of        the  Income Tax Officer to that effect.  Under s.  18(7)  of        the  Act a person making the deduction was required  to  pay        the  amounts so deducted to the Income Tax authorities.   In        default of such deduction such person became an assessee  in        respect of the tax.        Chapter  V  of  the Act deals with "  Liability  in  Special        Cases" which includes agents.  Section 40(2)        120        944        dealing with the case of trustees or agents of a person non-        resident in British India; provided        S.40  (2)  "Where  the trustee or agent of  any  person  not        resident in British India and not being a minor, lunatic  or        idiot  (such person being herein after in this such  section        referred  to  as a beneficiary). is entitled to  receive  on        behalf  of such beneficiary, or is in receipt on  behalf  of        such beneficiary of, any income, profits or gains chargeable        under  this Act, the tax, if not levied on  the  beneficiary        direct,  may be levied upon and recovered from such  trustee        or agent, as the case may be, in like manner and to the same        amount as it would be leviable upon and recoverable from the        beneficiary if in direct receipt of such income, profits  or        gains,  and  all  the provisions of  this  Act  shall  apply        accordingly."        Thus under this section which is essentially a machinery and        an  enabling  section  the tax to be realised  from  a  non-        resident  could be levied upon the agent in the same  manner        as  it could have been leviable upon and recoverable from  a

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      non-resident.  Section 42(1) of the Act provided:        " All income, profits or gains accruing or arising,  whether        directly  or  indirectly,  through  or  from  any   business        connection in British India, or through or from any property        in British India, or through or from any asset or source  of        income  in British India, or through or from any money  lent        at  interest  and brought into British India in cash  or  in        kind,  shall  be  deemed to be income  accruing  or  arising        within  British India, and where the person entitled to  the        income,  profits or gains is not resident in British  India,        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."        In  proviso  2  to  this  sub-section  any  such  agent  who        apprehended  that  he  might be taxed as  such  agent  could        retain out of any money payable to such non. resident a  sum        equal to the estimated liability under the sub-,section  and        in  the event of any disagreement between  the  non-resident        and such agent a certificate        945        could  be  obtained from the Income Tax Officer  as  to  the        amount  to  be  retained  which shows that  the  Act  had  a        provision  for  the determination of the question.   As  was        observed by Viscount Cave in Williams v. Singer (1):        "The  fact is that, if the Income Tax Acts are examined,  it        will  be found that the person charged with tax  is  neither        the  trustee nor the beneficiary as such, but the person  in        actual receipt and control of the income which it is  sought        to reach.  The object of the Acts is to secure for the State        a  proportion  of the profits chargeable, and  this  end  is        attained  (speaking generally) by the simple  and  effective        expedient of taxing the profits where they are found."        See  also Archer Shee v. Baker (2 ), Executors of Estate  of        Dubash v. Commissioner of Income Tax (3).        This has rightly been stated to be the underlying  principle        of the deduction under ss. 40, 41 and 42.  Section 48 of the        Act deals with refunds and if the respondent thought that it        was  not liable to the payment of any tax it could apply  to        the Income Tax Officer for refund.        Thus  the  Hapur firm being an agent could  be  held  liable        under  ss.  40(2) and 42(1) of the Act as  an  assessee  for        income-tax   on  the  profits  made  on   the   respondent’s        transactions  at Hapur and was therefore entitled under  the        proviso  to  s.  42(1) to retain  the  estimated  amount  of        income-tax payable on the amount of the respondent’s profits        which in this case was deducted, retained and actually paid.        This fact has not been challenged before us.  The ground  on        which  this  liability is attacked is that the  total  world        income  of the respondent was not taxable and therefore,  on        the  profits  made on the Hapur  transactions,  the  British        Indian  Tax  authorities  could  not  levy  any  tax.   This        contention  disregards  the  provisions  of  and   liability        arising  under ss. 40(2) and 42(1) and the proviso  thereto.        It also is contrary to the principle of taxing statutes that        the profits are " taxed where they are found." In this  case        they were in the hands of the Hapur firm        (I)  (1920)  7 T. C. 387, 411 (H.L.).  (2) (1927) i  i  T.C.        749, 770 (H.L.).                   (3) [1951] 19 I.T.R. 182, 189 (S.C.).        946        which  was in receipt and control of the income.  The  agent        at  Hapur, having lawfully and properly paid the  tax  under        the  Act  that  amount has been rightly  deducted  from  the        profits accruing on the Hapur transactions.

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      The  Judgment of the Judicial Committee of the  ljlas-i-khas        on which the High Court has based its decision suffers  from        the  infirmity  that it ignores both the provisions  of  and        principle underlying ss. 40(2) and 42(1) of the Act and  the        proviso thereto relating to the liability of an agent  under        the Act and the law of Agency relating to employing of  sub-        agents by agents.  If the Hapur firm rightly paid the tax on        the  profits, the respondent cannot be allowed to  challenge        the amount on the ground that his total world income was not        taxable   and  he  was  entitled  to  his  profits   without        deductions.   That is a question which ha,,; to be  agitated        by the non-resident assessee at the time of his  assessment.        Those persons who are bound under the Act to make  deduction        at  the time of payment of any income, profits or gains  are        not  concerned with the ultimate result of  the  assessment.        The scheme of the Act is that deductions are required to  be        made  out  of " salaries ", " interest on securities  "  and        other heads of " income profits and gains " and  adjustments        are made finally at the time of assessment.  Whether in  the        ultimate result the amount of tax deducted or any lesser  or        bigger  amount would be payable as income-tax in  accordance        with  the  law  in  force  would  not  affect  the   rights,        liabilities  and  powers of a person under s. 18 or  of  the        agent  under ss. 40(2) and 42(1).  As to what would  be  the        effect  and result of the application of s. 17 if  and  when        any  appropriate prceedings are taken is not a matter  which        arises  in  this  appeal  between  the  appellant  and   the        respondent nor can that matter be adjudicated upon in  these        proceedings.   That  is  a matter which  would  be  entirely        between the respondent and the Income Tax authorities seized        of the assessment.        Our  attention  was drawn to two cases (1)  Commissioner  of        Income-tax v. Currimbhoy Ebrahim & Sons(1)        (1)  (1935) 3 I.T.R. 325 (P.C.)        947        In  that  case the assessee company had been treated  as  an        agent of the Nizam of Hyderabad who had lent to the assessee        company  a  sum of Rs. 50 lakhs.  The assessee  company  had        paid in the assessment year a, sum of Rs. 3 lakhs on account        of interest and it was held that the interest earned by  the        Nizam  did not accrue or arise to the Nizam through or  from        any business connection with the assessee company in British        India  or from any property within British India and  there-        fore  s.  42 was not applicable.  No question  of  "business        connection"  was raised in the court below and the  argument        there  proceeded  on the basis that the respondent  was  not        liable for this amount on account of income-tax because  the        "  entire  income " was not assessable to income  tax.   The        argument of isolated transactions based on the  Anglo-French        Textile Co. Ltd. v. Commissioner of Income-tax, Madras(1) is        not  available to the respondent nor was the foundation  for        any such argument laid in the courts below or raised in  the        statement of the case filed by the respondent in this court.        Another case on which reliance was placed is Greenwood v. F.        L. Smidth and Company(2 ). That was a case of a Danish  firm        resident  in  Copenhagan.  It manufactured  and  dealt  with        cement   making  machinery  which  it  exported   to   other        countries.   It  had  an office in London  in  charge  of  a        qualified engineer who received enquiries for machinery such        as the firm could supply, sent to Denmark particulars of the        work  which  the machinery was required to do and  when  the        machinery  was  supplied  he was avilable  to  give  English        purchaser the benefit of his experience in erecting it.  The        contracts between the firm and their customers were made  in        Copenhagan  and the goods were shipped F. 0. B.  Copenhagan.

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      It  was held in that case that the firm did not  exercise  a        trade  within the United Kingdom within the meaning of  Sch.        D  of s. 2 of the Income Tax Act 1853 and was therefore  not        assessable to income-tax.  This decision is not relevant  to        the  case now before us as the facts were different and  the        dicision was under a different statute.        (1)  [1953] S.C.R. 454.        (2) (1922) 1 A.C. 417.        948        In our opinion the Judicial Committee of Ijlas-i-khas was in        error  in  holding  that before fixing the  liability  of  a        contributory  to tax paid by an agent in British  India  for        and   on  behalf  of  the  non-resident  contributory,   his        liability  to pay tax on his "entire income "  really  total        world  income had to be established.  Therefore the  finding        of the High Court that the Liquidator cannot claim from  the        respondent  the  amount  of tax paid by the  Hapur  firm  on        transactions entered into by the appellant for and on behalf        of  the respondent unless it was shown that his total  world        income was taxable is unsustainable.  As between the parties        the  tax  paid  by the agent had to be  taken  into  account        irrespective of the ultimate result of the assessment on the        non-resident.        In  the result this appeal is allowed and the  judgment  and        order  of  the Division Bench of the Pepsu  High  Court  set        aside  and  the  order  of  the  learned  Liquidation  Judge        restored  but in the circumstances of this case the  parties        will  bear their own costs in this court and in  the  courts        below.                              Appeal allowed.