K. Subba Rao, C.J:— The Income-Tax Appellate Tribunal referred the following two questions under Section 66(1) of the Income-Tax Act to the Madras High Court.

1. Whether the loss to the residents arising from the forward contracts entered into by them with the non-resident is a profit accruing or arising to the non-resident in British India within the meaning of Section 4(1);

2. Whether the residents are bound to deduct tax under the provisions of Section 18(3-A) on the amounts paid by them to the non-residents?

2. After the constitution of the Andhra High Court, the said reference has been transferred to this Court.

3. The facts which gave rise to the reference may be stated thus. The assessees who are residents of British India, (hereinafter referred to as residents) entered into certain speculative contracts of forward purchase and sale of ground nut oil, kernel and turmeric with Messrs. Rupchand Chhabildass & Co., a firm at Sangli, a native state (hereinafter referred to as non-residents). The non-residents are pucca adatia merchants of Sangli. There were 20 contracts between the residents and the non-residents between 25th October 1941 and 4th August 1947. The mode of business followed by them was as follows:— The non-residents would send out from time to time market reports in respect of certain commodities to the residents at Kurnool. Whenever the residents considered the quotations so sent to be favourable, they gave telegraphic instructions to the non-residents to buy or sell for a particular vaida. The purchases and sales were effected by the non-residents at the rate prevailing at the time of the contracts. The non-residents bought or sold as the case may be and sent telegraphic intimations to the residents together with the rates and vaida date. Though it is stated that the residents sent regular contracts to the non-residents for acceptance, the latter denied it and there is nothing on record to show that any such contracts were sent. The non-residents, in their turn entered into similar contracts with other merchants at Sangli to purchase or sell an equal quantity at the same rate to cover the contract with the residents. The non-residents also took an advance from the residents to cover any possible losses that might occur in future and the residents sent advances periodically whenever the initial advances sent by them were exhausted. The residents never took or gave delivery of the goods on the vaida date. Sometimes, they even determined the contracts before the vaida date. After the contract was determined or after the vaida date arrived, the non-residents after settling or determining the contract, intimated the result by means of a letter to the residents. The transactions ended in a profit to the non-residents. Though usually the residents made payments to the non-residents by means of demand drafts and sometimes by hundies, there is no evidence on record to show how they were paid to the non-residents in the instant case. The net profits got by the non-residents during 1947-1948 were Rs. 2460/-. During the assessment year 1948-1949, the Income-tax officer treated the residents as assessees under Section 18(7) of the Income-Tax Act and required them to pay tax amounting to Rs. 795-5-0 on the said amount. The residents unsuccessfully filed an appeal against that order to the Appellate Assistant Commissioner and a further appeal to the Income-Tax Appellate Tribunal, Madras. At the instance of the residents, the Income-Tax Appellate Tribunal referred the aforesaid two questions for this Court's decision.

4. The two questions formulated above turn upon the following provisions of the Indian Income-tax Act.

Section 4(1): Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which—(c) if such person is not resident in the taxable territories during such year, accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year.

Section 18(3-A): Any person responsible for paying to a person not resident in the taxable territories 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 any income-tax and super-tax thereon as an agent, deduct income-tax at the maximum rate and super-tax at the rate applicable to a company or in accordance with the provisions of sub-Clause (b) of sub-section 1 of Section 17 as the case may be.

Section 18(5):— Any deduction made and paid to the account of the Central Government in accordance with the provisions of this section and any sum by which a dividend has been increased under sub-section 2 of section 16 shall be treated as a payment of income-tax or super-tax on behalf of the person from whose income the deduction was made or of the owner of the security or of the shareholder as the case may be and credit shall be given to him therefor on the production of the certificate furnished under sub-section 9 of section 20 as the case may be in the assessment, if any, made for the following year under this Act.

Section 18(7):— If any such person does not deduct, or after deducting fails to pay, the tax as required by or under this section, he and in the cases specified in sub-section 3-D the company of which he is the principal officer shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax.

5. The result of the aforesaid sections may be stated thus. Section 4 defines the income of a person that can be charged to tax under section 3. In the case of a person, who is not a resident in the taxable territories, all his income, which accrues or arises or is deemed to accrue or arise to him in the taxable territories during the previous year is liable to tax. To facilitate collections, a duty is cast on a person who is a resident and is responsible for paying the said income to the non-resident to deduct the income tax on the said amount at the maximum rate payable by the non-resident. Such deduction shall be treated as payment of income-tax or super-tax on behalf of the person from whose income the deduction was made. If such deduction is not made, the default is deemed to be on the resident in respect of the tax. The basis of the aforesaid scheme is that a non-resident is chargeable to the tax on the said income for it is the income of the non-resident, and the liability of the resident is only secondary and he will be proceeded against only in case he makes a default in making the necessary deduction. The short question therefore is whether the profit made by the non-residents as a result of the aforesaid speculative transactions, has accrued or arisen in the taxable territories.

6. The words ‘accrue’ or ‘arise’ have been the subject of judicial scrutiny. At the outset, therefore it may be convenient to notice some of the leading decisions interpreting the said words. The Judicial Committee reviewed the decisions on the subject and attempted to define the said words in The Commissioner of Income-Tax, Bombay v. Chunilal B. Mehta I.L.R 1938 Bombay 752.. The assessee there was a resident in British India and the year of assessment was the year ending with 31st March 1934. The assessee was held liable to pay tax upon the profits derived by him from contracts made for the purchase and sale of commodities in various foreign markets, Liverpool, London New York and elsewhere outside British India. The assessee disputed the liability in respect of Such profits on the ground that they were not profits accruing or arising in British India. It was a converse case to the present one. The assessee was in British India and he was assessed to pay tax on the profits derived by him from contracts made outside India. At page 769 the Judicial Committee gave its conclusion as follows:

“Their Lordships are not laying down any rule of general application to all classes of foreign transactions, or even with respect to the sale of goods. To do so would be nearly impossible and wholly unwise—to use the language of Lord Esher in Erichsen v. Last [(1881)-8 Q.B.D 414]. They are not saying that the place of formation of the contract prevails against everything else. In some circumstances, it may be so, but other matters—acts done under the contract for example cannot be ruled out a priori. In the case before the Board, the contracts were neither framed nor carried out in British India; the High Court's conclusion that the profits accrued or arose outside British India is well-founded.”

7. A division Bench of the Madras High Court in Commissioner Of Income-Tax, Madras…Applicant; v. Anamallais Timber Trust Ltd.…, has also considered the scope of the said words “accrue or arise” in Section 4 and has not been able to arrive at better results. There the asses see was a company incorporated in the Indian State of Cochin. During the accounting year the assessee entered into a contract with the Supply Department of the Government of India for the supply of sized timber. There was an invitation to offer by the Supply Department and the assessee made the tender from Chalakudi, which was accepted by the department by a written acceptance note sent from New Delhi. The timber was loaded in wagons in Chalakudi. Under the contract payment was to be made by the Controller of Military Accounts, Poona but no place of payment was specified in it. The system of payment provided under the contract was by cheque on the Government Treasury in India or a branch of the Reserve Bank of India or Imperial Bank of India transacting Government business. The actual receipt of the money by the assessee was at the Imperial Bank at Trichur in the Indian State. The learned Judges held on those facts that the contract was concluded in British India but the manufacture and sale of the goods were carried out at Chalakudi outside British India. They came to the conclusion that the profits from the sale of timber accrued or arose to the assessee outside British India and therefore, they were not chargeable to Indian Income-tax. Both the learned Judges Satyanarayana Rao and Viswanatha Sastri, JJ. considered the case law on the subject in an attempt to define the words ‘accrue or arise’ precisely but expressed their inability to do so. At page 345 Satyanarayana Rao, J. stated:

“It would be impudence on my part to attempt to evolve a rule of general application relating to foreign transactions or even in respect of the sale of goods, when eminent Judges ruled that it is unwise to do so. It would be sufficient to confine the observations to the facts before me and to decide the question in the light of the principles embodied in the decisions bearing on the point, particularly the decision in Chunilal Mehta's case 18 Income Tax Reports 333..

8. The other learned Judge Viswanatha Sastri, J. observed much to the same effect at page 353 thus:

“We have been taken through a number of decisions by the learned Counsel on both sides, but it is difficult to extract from them a comprehensive principle which would serve as a guide. If we are to follow the lead given by the Judicial Committee, the wisest course is to deal with the particular facts before us and decide as best as we can whether they are sufficient to bring the assessee within the charging section. It is difficult to formulate affirmatively a general principle with full confidence in its accuracy or legitimacy. It is a still more difficult task to reconcile all that has been said on this topic in the authorities cited.”

9. At page 342 Satyanarayana Rao, J. expressed his view on the scope of the said words as follows:

“Where were the contracts concluded and where did the income or right to receive the payment under the contracts accrue or arise? The dictionary meaning of the word accrue is to arise or spring as a natural growth or result, to come by way of an increase. Arising means coming into existence or notice or presenting itself. The word receive is not used in the same sense as accrue and arise. The words “accrue and arise” do not mean actual receipt of the income, profits or gains; and they may be interpreted as conveying the idea of a present enforceable right to receive the income, profits or gains. It is something inchoate but is capable of being enforced or converted into money by actual receipt. The words denote a point of time anterior to the actual receipt.”

10. Viswanatha Sastry, J. said at page 356:

The contracts for the supply of timber in this case were, as I hava held concluded in British India. But the execution of the contracts took place wholly in Cochin State. The rough wood was sawn and manufactured into the requisite shapes and sizes by the assessee company in its own saw mills in the Cochin State………………there is no evidence of the place where the price had to be paid by the buyer or was in fact paid. In the circumstances, it may, therefore, be presumed that the debtor would seek the creditor and pay at least where the debtor is such a respectable body as the Government. In the absence of a contract fixing the place of payments, the seller, in this case the assessee had a right to demand the payment of the price of the goods at the place where the goods were sold and delivered that is to say, at Chalakudi or other places in Cochin State……………My answer is that both the manufacture and sale of the goods were carried on outside British India and the resulting profits accrued or arose outside British India and were therefore not chargeable to Indian Income-tax, the assessee being a non-resident.”

11. No other decisions throwing further light on the question have been brought to our notice.

12. Though there is a nice distinction in the shades of the meaning of the two words ‘accrue or arise’ throughout the Act they have been used to convey the same idea. They may mean ‘bring in as a natural result’. They cannot in the context obviously be synonymous with the word receipt for section 4 specifically provides for the receipt of the income as distinguished from the income arising or accruing in the territories. Therefore, it is something less than receipt and happens sometime prior to the factum of receipt. In their ordinary meaning they seem to require a place to be assigned at which the result of the trading operations comes whether gradually or suddenly into existence. That place may vary according to the nature of the transactions and the source of the income. The place where the contract is concluded may afford a guide but it will not be the sole guide. The place where the acts are done under the contract or where the contract is carried out may under certain circumstances help a court to come to a conclusion, but they are in themselves not decisive and conclusive on the question. It may also be that the place where the right to demand and recover profits accrues, may be a useful indication under other circumstances. But it is apparent from the decided cases that no unerring test can be laid down as affording a key for solving this difficult question. In the ultimate analysis, the question falls to be considered on the cumulative effect of the facts in each case.

13. On the facts submitted by the Tribunal we must hold that the contract was concluded at Sangli. The learned Counsel appearing for both parties proceeded on the basis that the non-residents are pucca adatia merchants and their relationship to the residents is not that of an agent. Therefore, the transaction was between two principals. The non-residents sent market reports to the residents showing details of the Commodities and the rates. The residents choosing their opportune time gave telegraphic instructions to the non-residents to buy or sell for a particular vaida. The non-residents bought or sold as the case may be and sent telegraphic intimation of the same to the residents. By doing so they clearly accepted the offer made by the residents.

14. It is said that subsequently the non-residents sent letters asking the residents to accept the contracts but no such letters were placed before us. Whatever might be their contents, it is manifest from the aforesaid facts that the contracts were concluded at Sangli when the non-residents bought or purchased and telegraphically intimated that fact to the residents. It is also commoncase that the contracting party never contemplated any purchase of goods or delivery of the same. The transactions were purely speculative in character and the profit and loss were ascertained only on the differences between the contract rate and the prevailing rate at the time the contract was closed or the due date arrived. The notional profits arose on calculating the differences in the contract rate and the market rate obtaining at Sangli and therefore the locus of the valuation was at Sangli. The profits accrued to the non-resident because of the result of the speculative transaction at Sangli.

15. There is no evidence that it was a term of the contract that the profits due to the non-residents should be paid at Kurnool. There is not even any material to show that the amounts in question were received by the non-residents at Kurnool, though it appears that on some occasions the amounts were remitted by demand drafts on the Central Bank of India, Kurnool to Sangli. On the aforesaid facts we have no hesitation to hold that the profits due to the non-residents did not arise or accrue in British India. If the non-residents are not liable to tax in respect of the profits on the transactions in question, it follows that the residents also are not liable under section 18(3-A) of the Act.

16. In the result we answer both the questions in the negative. The respondents will pay the costs of the petitioner which we will fix at Rs. 250.

T.A.B

17. Reference answered.