Talipatigala Estate v. Commissioner Of Income-Tax

Viswanatha Sastri, J.:— In R.C No. 55 of 1946 two questions have been referred to this Court for our opinion:

(1) Whether in the circumstances of the case and on evidence and correspondence produced, the firm of Talipatigala Estate could be held to be controlled and managed in British India and is therefore resident and ordinarily resident in British India under Section 4A of the Indian Income-tax Act?

(2) Whether the proceedings under S. 34 could be initiated against a firm which was not assessed previously when one of the partners of the firm had been individually assessed on his share in the firm?

In R.C No. 59 of 1916 it is first of the two questions above stated that has been referred to us for our opinion.

2. The facts common to both these references are these. Talipatigala, a rubber Estate in Ceylon, was purchased by three persons some years ago and during the relevant period was owned by two of the original purchasers, the third having conveyed his interest to the others on 10th May 1941. At one stage of the proceedings before the Income-tax Officer and the Appllate Assistant Commissioner it was contended that the two individuals who now own the Estate were merely co-owners or co-sharera and not partners and that no business was being carried on beyond the usual agricultural operations incidental to the ownership of a rubber Estate. It has been found as a fact both by the Income-tax Officer and the Appellate Assistant Commissioner that the two owners of the Estate are in fact partners who carry on the business of rubber production and that the estate is an asset of the firm. This finding is not now open to challenge before us as no question has been referred to us as to whether or not the two persons owning the estate are members of a firm. The case must now proceed on the basis that the owners of the estate constitute a firm whose business is the working of the rubber estate for profit and that the estate itself is an asset of the partnership.

3. The contention of the assessee is that though one of the partners is resident in British India the control and management of the firm's affairs is wholly situate without British India and the firm is therefore a non-resident. The estate which is situate in Ceylon is managed by an agent holding a power-of-attorney from the partners. The business of the firm requires the employment of a large number of labourers and the supervision of their work, the collection of the rubber juice and the processing of the raw product into a commodity which is fit for sale in the market. Under Section 4-A(b) of the Income-tax Act, a firm is resident in British India unless the control and management of its affairs is situated wholly without British India. It is true that the residence of the individual partners of the firm in British India does not determine the residence of the firm for purposes of income-tax if the control and management of the firm's business is wholly situate outside. It has been held in our Court, as pointed out by the learned advocate for the assessee, that the mere receipt of copies of accounts from agents abroad, which is a common enough practice among Nattukottai Chettiars, does not amount to the exercise of control by the principal who lives in British India: Commissioner of Income tax v. Palaniappa Chettiar, I.L.R (1946) Mad. 26 : (A.I.R (32) 1945 Mad. 210). If the business is transacted abroad by the agent with plenary powers of management and control and the principal does not take any part in the conduct or supervision of the business beyond keeping himself occasionally informed of business conditions then the residence of the principal does not determine the place of control of the business. A mere fleeting or sporadic visit of a principal to the place where the business is conducted by an agent without any exercise of supervision or control during such visit would not connote the exercise or control over the business: Commissioner of Income-tax, Madras v. Ganga bishan Mohanlal 1945 13 I.T.R 20 : (A.I.R (32) 1945 Mad. 174). The mere fact that a partner in British India keeps himself in touch with his other partners conducting or carrying on business in a foreign country and keeps himself informed of the general condition of the business does not amount to the exercise of control in British India over the affairs of the Firm: Messrs Bhimji R. Naik…Applicants (Assessees); v. Commissioner Of Income-Tax, Bombay….*, Bombay, 1946-14 I.T.R 334 at pp. 341, 342 : (A.I.R (34) 1947 Bom. 24.) The decision in Secretary to Commissioner, Salt, Abkari and Separate Revenue, Madras v. Ramanathan Chetti, 43 Mad. 75 : (A.I.R (7) 1920 Mad. 344 S.B) cited by the learned advocate for the assessee dealt with the question of the basis of taxation under the Income-tax Act, 1918 and held that under the Act, as it then stood, the profits of a foreign money lending business of a Nattukottai Chetty banker residing in British India accrued or arose outside British India and was not taxable in British India unless received here. The Court held that though the proprietor or the principal acquainted himself with the state of his business abroad and issued occasional instructions to the agent regarding the conduct of the business, it could not be said that the business was carried on in British India or that the profits accrued or arose here. The profits were held to have accrued or arisen at the place where the moneys were lent and interest was earned and realised, in other words, at the place where the business was actually carried on. This decision does not help to solve the problem that arises in the present case where we are concerned only with the control and management and not with the carrying on of the trade or business itself.

4. We have been taken through the correspondence at some length. It is unnecessary to refer to the many letters that passed between the agent in Ceylon and the partner in British India, but their substance can be summarised as follows: The agents were selected and sent out from British India by the partner resident here with a power of attorney to manage the rubber estate in Ceylon and look after the business. Reports have been made by the agent to the partner in British India about the progress of the work in the estate and the expenses incurred in connection therewith. Regular accounts have been sent from time to time of the receipts and disbursements of the business to the partner in British India. Instructions have been asked for and issued with reference to some of the matters connected with the business carried on in Ceylon. Instructions have been sent to the agents to engage an adequate number of workmen, reduce the cost of production, increase the wages of workmen, Bell the rubber produce at favourable market rates, and so on. One of the partners paid a visit to the estate in Ceylon in the accounting period presumably to attend to the affairs of the firm during his Stay at Ceylon. One of the partners also opened an account with the Colombo branch of the Imperial Bank for facilitating the conduct of the business.

5. On these facts we hold that not only the right to exercise control and management over the firm's affairs in Ceylon rested with the partner resident in British India but some amount of control and management of the firm's affairs was actually exercised in British India. If any part of the control and management is in British India, then the firm is a resident within the meaning of S. 4-A(b). The acts and instructions of the partner in British India were done and given in the exercise of his right as a partner and were acts of control and management of the firm's affairs in Ceylon. See Commissioner Of Income-Tax, Madras v. V.V.R.N.M. Subbiah Chettiar, I.L.R (1948) Mad. 607 : (A.I.R (35) 1948 Mad. 307), Commissioner of Income-tax v. Shanmugam Rubber Estate, I.L.R (1946) Mad. 163 : (A.I.R (32) 1945 Mad. 366).

6. We would therefore answer the first question referred to us in R.C No. 55 of 1946 and the only question referred to us in R.C No. 56 of 1946 in the affirmative and against the assessee.

7. The second question referred to us arises in R.C, no. 55 of 1946 out of the following facts. One of the partners had been assessed in 1941-1942 to income-tax in British India on its total income, profits and gains which included his share of the profits of the partnership business carried on in Ceylon. In the assessment year 1912-1943 the firm was sought to be assessed as a resident under S. 84 of the Act on the ground that its income had escaped assessment for the previous assessment year 1941-1942. It is contended by the learned advocate for the assessee that this assessment was not permissible in view of the terms of Section 34 of the Income-tax Act. A firm or partnership is different from the members composing it for income-tax purposes and is recognised as a separate assessable unit under Section 3 of the Income-tax Act. Though according to the Partnership Act a partnership firm is not a single legal person, still for purposes of Income-tax the firm is regarded as having a separate status and existence and as a distinct entity apart from the individual partners who carry on the business of the firm. It is true that this principle is not carried to its logical conclusion in every respect and that there are a few exceptions recognised in the Act itself. But it cannot be said that the assessment of an individual partner in a particular year is a bar to the assessment of the firm for that year. Even granting that when the partner was assessed in 1941-1942 on an income which included his share of the profits of the partnership, the Income-tax Officer must have had definite information that there was a partnership which was resident in British India and that its income was liable to assessment in British India, still the Income-tax Officer having taken action within the period of four years of the end of that year, the assessment on the firm was justified under Section 34 of the Income-tax Act. We do not think there is any room whatever for the argument advanced on behalf of the assessee that there has been no honest exercise of the Income-tax Officer's judgment in the present case, that he must be fixed with knowledge of the existence of the firm as a resident in British India even in 1941-1942 and that therefore the present proceedings are illegal. His action was perfectly justified under the terms of S. 34, and the answer to the second question that has been referred to us must be in the affirmative and against the assessee.

8. The assessee is directed to pay the costs of the Commissioner in R.C No. 55 of 1946 which we fix at Rs. 250.

C.R.K/D.R

9. Reference answered.