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Case Number

Case Refd. No. 35 of 1947.

Attorney(S)

Mr. M. Subbaraya Aiyar for Applicant.
Mr. S. Krishnamachari for Mr. C.S Rama Rao Sahib for Respt.

Judges

Rajamannar, C.J
Yahya Ali, J.

Acts

S. 4(1)(c) and Ss. 42(1) and 42(3). S. 4(1)(c) reads:Subjects to the provisions of this Act,
S. 66(1) of the Indian Income-tax Act
sub-section (3) of S.

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Smart Summary

Structured Summary of the Opinion (Delivered by Yahya Ali, J.)

Factual and Procedural Background

The applicant is a non-resident Hindu undivided family carrying on business in gold and silver in Secunderabad (outside British India). The assessee purchased gold at Secunderabad and sold the major portion at Bombay through commission brokers; a smaller portion was sold in Hyderabad and some locally at Secunderabad. Bombay brokers telegraphed prices; the assessee notified quantities available for sale and goods were sent to Bombay via a representative, assayed, sold by the brokers, and sale proceeds paid to the assessee's agent.

The assessment relates to the year 1941–1942. During that accounting period the total turnover in gold was Rs. 11,20,119; sales at Bombay to British Indian buyers amounted to Rs. 6,68,666 and yielded a profit of Rs. 7,346. The Income-tax Officer assessed the said profits on the basis that they accrued or arose in British India (since the sales occurred in Bombay).

On appeal, the assessee initially argued before the Appellate Assistant Commissioner that (a) the sales took place at Secunderabad (where orders were placed and prices fixed) so profits did not accrue in British India, and alternatively (b) being a non-resident trading with British India, only the portion of profit attributable to operations carried out in British India should be taxable under S.42(3). Both contentions were rejected. Before the Income-tax Appellate Tribunal the assessee abandoned the first contention (that profits did not accrue in British India) and confined himself to the S.42(3) contention; the Tribunal dismissed the appeal.

The assessee applied under S.66 for a reference to the Tribunal. Two questions sought to be referred were (i) whether the sales took place in British India or at Secunderabad and whether income was governed by S.4(1) or (ii) whether the profits were "deemed" under S.42(1) and assessable under S.42(3). The Commissioner replied that the first question did not arise because the assessee had given up that contention before the Tribunal and had accepted that the sales and income accrued in British India; the dispute before the Bench was limited to applicability of S.42(3).

Legal Issues Presented

Whether, in the circumstances of the case, the provisions of S.42(3) are applicable to the profits on the sale of gold effected in British India by the assessee (a non-resident HUF) in such manner as to override the provisions of S.4(1)(c) and render only such portion of such profits assessable as are attributable to operations carried out in British India.
Whether, on the facts, the sales effected to Bombay commission merchants took place in British India or at Secunderabad and whether the income was income earned in British India and governed by S.4(1), or whether the profits derived from the sales made from Secunderabad to commission agents in British India are profits "deemed" by S.42(1) to have accrued or arisen in British India and therefore assessable under S.42(3).

Arguments of the Parties

Appellant's Arguments (as presented in the opinion)

The source of the business and the purchases and principal activities were in Hyderabad/Secunderabad; what occurred in British India amounted only to delivery of the gold and receipt of the price.
Consequently, the profits from the Bombay sales did not accrue or arise in British India (initial contention, later abandoned before the Tribunal).
In the alternative (and ultimately pursued before the Tribunal and in the reference), the appellant argued that S.42(3) applies to cases where not all operations are carried out in British India, and therefore only that portion of profits reasonably attributable to operations carried out in British India should be assessable.
Counsel (Mr. Subbaraya Aiyar) advanced the proposition that the enactment of S.42 effectively merged or subsumed cases of income actually accruing in British India into the "deemed" category, so that S.42 would override the first part of S.4(1)(c) (a contention the Court describes as "startling" and rejects).

Respondent's (Revenue/Commissioner) Arguments

The Commissioner pointed out that the assessee had given up the contention that the profits did not accrue in British India and that the Appellate Assistant Commissioner had found that the sales were effected in British India and that the income of Rs. 7,346 accrued or arose in British India.
The Commissioner noted that the argument as to the applicability of S.42(3) proceeded on the accepted basis that the sales actually took place in British India and that the income accrued in British India; thus the issue was limited to whether S.42(3) required allocation of profits attributable to operations carried out in British India.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income-tax, Bombay v. Hongkong Trust Corporation Ltd.	Illustrates the meaning of statutory "deeming" — where a person or thing is "deemed" to be something, Parliament requires that it be treated as if it were that thing even though it is not in reality so.	The Court invoked the principle to explain that profits "deemed" by statute to accrue in British India are not in reality accrued profits but are treated as such for the statute's purposes; this supports the distinction between actual accruals and deemed accruals under the Act.
Hira Mills Ltd., Cawnpore v. Income-Tax Officer, Cawnpore (observations of Sir Iqbal Ahmad, C.J.)	Holding/observation that relief under S.42(3) applies only where the profits and gains are deemed under S.42 to accrue or arise in British India, and not where they actually accrue or arise in British India.	The Court relied on this observation to support its conclusion that S.42(3) does not apply to profits which in fact accrue or arise in British India but only to those profits which are deemed by S.42(1) to accrue there.

Court's Reasoning and Analysis

The Court proceeded in a stepwise manner:

Preclusion: The Court first held that the assessee was precluded from reasserting at the S.66 reference the contention that the profits did not accrue or arise in British India because the assessee had abandoned that plea at earlier stages and had proceeded on the footing that the profits did in fact accrue or arise in British India. The history of the proceedings showed that the only real issue remaining was the applicability of S.42(3) once accrual in British India was accepted.
Statutory structure: The Court analyzed the relevant statutory provisions. It set out S.4(1)(c), S.2(1) and S.42(3) and observed that S.4(1)(c) addresses two categories: (a) profits actually accruing or arising in British India to non-residents and (b) profits which are "deemed" to accrue or arise in British India. The legislature needed to define the "deemed" category (via S.2, S.42 and related explanations), but not the first category.
Nature of "deemed" profits: The Court emphasized the legal distinction between actual accruals and statutory "deeming" — when the statute deems certain profits to accrue in British India, those profits are treated as if they so accrued for fiscal purposes although in reality they may not have. The Court relied on the precedent about the meaning of "deemed" to underline this point.
Rejection of the merging argument: The Court rejected the appellant's contention (described as "startling") that S.42 had the effect of merging or subsuming the category of actual accruals within the deemed category so as to abrogate the first part of S.4(1)(c). The Court found this view "utterly unsustainable" and contrary to the scheme of the Act.
Distinction between residents and non-residents: The Court noted the Act's overall distinction: for residents, all income accruing or arising, whether within or without British India, is taxable; for non-residents, only income which accrues or arises or is deemed to accrue or arise in British India is taxable. The provisions like S.42 are meant only to specify the cases that are to be regarded as "deemed" accruals.
Reliance on authority: The Court referred to the observation in Hira Mills to support the interpretation that relief in S.42(3) applies only to profits deemed under S.42 and not to profits that actually accrue or arise in British India.
Conclusion on applicability: On the combined statutory construction and procedural posture (assessee having accepted actual accrual), the Court concluded that S.42(3) does not operate to reduce or reallocate profits which in fact accrued in British India; S.42(3) applies only where the profits are deemed by S.42(1) to accrue or arise in British India.

The opinion explicitly states the Court's view that the reference question was "rightly framed" and answers it in that light. The Court also ordered costs of the reference to be paid by the applicant (Rs. 250).

Holding and Implications

Holding: The Court answered the reference by holding that S.42(3) applies only to profits and gains which are "deemed" under S.42(1) to accrue or arise in British India, and does not apply to profits which in fact accrue or arise in British India.

Implications:

The assessee is precluded from re-asserting the contention that the profits of Rs. 7,346 did not accrue or arise in British India, because that contention was abandoned at earlier stages and the proceedings thereafter proceeded on the basis of actual accrual in British India.
The Court rejected the argument that S.42 effectively overrides or abrogates the first limb of S.4(1)(c) so as to treat actual accruals as if they were statutory "deemed" accruals; the statutory scheme treats actual accruals and deemed accruals as distinct for taxing purposes.
Direct effect on the parties: the assessment treating the profits as accruing in British India stands to the extent consistent with this interpretation; the applicant was ordered to pay costs of the reference (Rs. 250) to the Commissioner.
No broader change in the law was announced by the Court beyond its interpretative conclusion; the decision rests on statutory construction and the factual/procedural posture of the case.

N.R.R — Costs ordered: applicant to pay Rs. 250 to the Commissioner.

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Burugu Nagayya And Another v. The Commissioner Of Income-Tax, Madras.

(Delivered by Yahya Ali, J.)

This is a reference made by the Income-tax Appellate Tribunal under S. 66(1) of the Indian Income-tax Act at the instance of the assessee and the question referred is:

“Whether in the circumstances of the case, the provisions of S. 42(3) are applicable to the profits on the sale of gold effected in British India by the assessee, a non-resident Hindu undivided family in such manner as to override the provisions of S. 4(1)(c) and render only such portion of such profits assessable as are attributable to operations carried out in British India.”

We may say at the outset that the frame of the question struck us at first sight as being not quite happy in view of the reference therein to S. 42(3) overriding the provisions of S. 4(1)(c). But after having heard the arguments we feel convinced that the question, for the reasons we shall state later, has been rightly framed.

The applicant is a non-resident and he has been carrying on business in gold and silver in Secunderabad outside British India. He used to purchase gold at Secunderabad and to sell the major portion of it at Bombay through brokers in that line. The rest of it used to be sold in Hyderabad itself, a small portion of it being sold locally at Secunderabad. The Bombay brokers with whom the assessee was in touch would telegraphically intimate to the assessee the current prices of gold in Bombay and thereupon advices would be sent from Secunderabad notifying to them the quantity of gold that would be available for sale at those rates. Soon thereafter gold would be sent to Bombay through a representative of the assessee who would get it assayed in mint and give the same to the broker who after selling it paid the sale proceeds to the assessee's agent. Upon these facts the contention raised on behalf of the assessee was that the source of the business was in Hyderabad and that the purchases and other activities were also in Hyderabad. What was done in British India consisted only in the delivery of the gold and the receipt of the price. The assessment relates to the year 1941-1942 and during the accounting period the total turnover of gold was Rs. 11,20,119 and out of this the sales at Bombay to British Indian buyers were for Rs. 6,68,666 yielding a profit of Rs. 7,346. The Income-tax Officer assessed the said profits to tax on the basis of the same having accrued or arisen in British India, since the profits accrued from the sale of gold in Bombay. On appeal before the Appellate Assistant Commissioner, it was contended that the sales took place in Secunderabad where orders were placed and the prices were fixed at that place under the contract. Upon those premises it was argued that the profits from these sales did not accrue or arise in British India. An alternative suggestion was also made before the Appellate Assistant Commissioner that the appellant being a non-resident was only trading with British India and not in British India and that consequently profits attributable to transactions in British India fell to be taxed under S. 42(3) on the basis of allocation of operations. These contentions were rejected by the Appellate Assistant Commissioner and an appeal was brought against this order before the Income-tax Appellate Tribunal. There also the same two contentions were raised, but the assessee gave up before the Tribunal the first contention, namely, that the profit from the Bombay sales of Rs. 7,346 did not accrue or arise in British India. He confined himself to the second contention relating to the applicability of S. 42(3). The Tribunal did not accept this contention and dismissed the appeal. An application was made before the Tribunal under S. 66 and in that application the two questions that were sought to be referred were the following:

(i) Whether on the facts of the case, the sales effected to the Bombay Commission merchants took place in British India or at Secunderabad and whether the income was income earned in British India and governed by S. 4(1) of the Act or

(ii) whether the profits derived from the sales made from Secunderabad to commission agents in British India are profits or gains deemed to have accrued or arisen in British India within the meaning of S. 42(1) and assessable under sub-section (3) of S. 42.

In spite of his having given up the first contention before the Tribunal and the Appellate Assistant Commissioner, he repeated it in his application under S. 66. In answer to this application the Commissioner filed a reply and in that reply he pointed out that the first question did not arise from the order of the Bench under S. 33(4) and the assessee did not raise any objection before the Tribunal to the finding of the Appellate Assistant Commissioner that the sales of gold were effected in British India and that the income of Rs. 7346 accrued or arose in British India. In paragraph 2 of the reply the Commissioner further pointed out that the argument relating to the second contention before the Bench, namely, as to the applicability of S. 42(3) proceeded on the accepted basis that the sales of gold actually took place in British India and that consequently the income from those sales accrued or arose in British India. In the statement of the case after setting out all that had happened before the Appellate Assistant Commissioner and before the Tribunal at the earlier stages, it is Specifically mentioned that the contention relating to the income arising in British India was definitely given up before the Tribunal. It is only in consequence thereof that the reference was made only as to the applicability of the provisions of S. 42(3) and the question was framed in the specific manner in which it has been cast to emphatically bring out the position taken up by the assessee that the enactment of S. 42(3) has the effect of overriding the provisions contained in the earlier part of S. 4(1)(c) and renders only such portion of the profits assessable as are attributable to operations carried out in British India.

Having regard to the history set out above, we have no difficulty in holding that the assessee is precluded from putting forward the contention at this stage before us that the profits in question did not accrue or arise in British India. The argument throughout and up to the present stage had been on the footing that the profits did accrue or arise in British India, but nonetheless S. 42(1) was attracted and it was necessary for the Income-tax authorities to determine that portion of the profit which is attributable to the operations carried out in British India.

To meet this singular contention it will be necessary to set out S. 4(1)(c) and Ss. 42(1) and 42(3). S. 4(1)(c) reads:

“Subjects 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………if such person is not resident in British India during such year, accrue or arise or are deemed to accrue or arise to him in British India during such year.”

S. 2(1) runs thus:

“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, or through or from the sale, exchange or transfer of a capital asset in British India 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-tax.”

S. 42(3) is in these terms:

“In the case of a business of which all the operations are not carried out in British India, the profits and gains of the business deemed under this section to accrue or arise in British India shall be only such profits and gains as are reasonably attributable to that pare of the operations carried out in British India.”

It will be seen that S. 4(1)(c) deals with two classes of cases. The first category consists of profits accruing or arising in British India to non-residents. The second category consists of profits which are deemed to accrue or arise to non-residents in British India. It was not necessary for the Legislature to make any provision in the statute to explain the first part of the provision dealing with profits accruing or arising to non-residents, but it was necessary to indicate what kind of profits should be deemed to accrue or arise for the purposes of Sub-S. (c) of S. 4(1) and those provisions are found inter alia in Explanations 2 and 3 to S. 4, S. 2(6)(c) and S. 42. It is hardly necessary to point out in this connection that “when a person is deemed to be something, the only meaning possible is that whereas he is not in reality that something, the Act of Parliament requires him to be treated as if it were”—See Commissioner of Income-tax, Bombay v. Hongkong Trust Corporation Ltd. (1). Likewise when certain profits are deemed to be profits for the purpose of a fiscal provision, they are not in reality profits, but they have to be deemed so for the specific purposes of the statute. S. 42(1) comprises a number of sources or connections through or from which the profits may accrue or arise; they are deemed to be income accruing or arising within British India and will be chargeable to Income-tax, if the person entitled to the income is a non-resident, either in his name or in the name of his agent. With regard to cases to which S. 42(1) applies, Sub-S. (3) of that section provides that if the business consists of a number of operations carried out in British India, the profits and gains of the business deemed under S. 42(1) to accrue or arise shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in British India.

Mr. Subbaraya Aiyar had an insurmountable difficulty to face, having regard to the contentions raised at the earlier stages, in contending that the profits did not accrue or arise in British India. It was not possible for him to exclude the applicability of the first part of S. 4(1)(c) and when that part applied, there was no further need to invoke the applicability of the second part dealing with profits which are deemed to accrue or arise in British India. It is to meet the situation that he put forward the startling proposition that the effect of the enactment of S. 42 was to merge all cases of income directly accruing or arising in British India into the latter category mentioned in S. 4(1)(c). In other words, his contention is that by creating the category of profits mentioned in S. 42, virtually the first part of S. 4(1)(c) was abrogated, since, according to him, even profits which directly accrued or arose in British India fell to be treated under S. 42 as profits deemed to have accrued or arisen in British India. The proposition has only to be put in that form to be rejected brevi manu as utterly unsustainable, and being opposed to the entire scheme of the Act, With regard to profits which have accrued and arisen, a distinction is, made in the Act between residents and non-residents. It is provided in the case of residents that all income which accrues or arises whether within or without British India is taxable. In the case of non-residents, income which accrues or arises or is deemed to accrue or raise in British India alone is taxable [apart from cases covered by S. 4(1)(a) which apply to residents and non-residents alike] and it is only to define in what cases income, profits and gains are deemed to accrue or arise that provision is made in S. 42 and in other sections. We may here refer to the observations of Sir Iqbal Ahmad, C.J, in Hira Mills Ltd., Cawnpore v. Income-Tax Officer, Cawnpore., Cawnpore (2).

“We think on construction alone that it is quite clear that the relief afforded by S. 42, Sub-S. (3) applies only to a case in which the profits and gains are deemed under S. 42 to accrue or arise is British India, and not to a case in which they actually so accrue or arise or are received in British India.”

The question is therefore answered accordingly. The applicant will pay to the Commissioner the costs of this reference Rs. 250.

N.R.R

Burugu Nagayya And Another v. The Commissioner Of Income-Tax, Madras.

Structured Summary of the Opinion (Delivered by Yahya Ali, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments (as presented in the opinion)

Respondent's (Revenue/Commissioner) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Burugu Nagayya And Another v. The Commissioner Of Income-Tax, Madras.

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