JUDGMENT

(Delivered by Viswanatha Sastri, J.)

The question that has been referred to us is as follows:

“Whether in the circumstances S. 42 of the Income-tax Act as amended in 1939, would apply to ‘residents’ as well?”

The facts out of which this reference arises may be briefly stated. The assessee is a merchant carrying on business in Madras in paper and stationery and has been assessed as an individual resident and ordinarily resident in British India. In February 1942 the assessee opened a branch of his business at Mysore where paper and articles of stationery were sold. It is common ground that there have been no remittances of money or profits from Mysore to British India. The Income-tax Officer, however, found that there was an intimate business connection between the head office at Madras and the branch at Mysore, and held that a portion of the profits earned by the business at Mysore should be deemed to have accrued or arisen in British India by reason of S. 42(1) of the Income-tax Act of 1922 as amended. The business connection found was that the assessee regularly purchased paper and other articles of stationery in British India and sent them over to his branch at Mysore for sale. In the circumstances the Income-tax Officer apportioned the profits of the Mysore branch under S. 42(3) of the Income-tax Act and assessed to Indian Income-tax a sum of Rs. 9139 along with the profits derived from the business carried on in British India. On appeal, the Appellate Assistant Commissioner reduced the Mysore profits deemed to have accrued or arisen in British India by reason of the business connection, to the sum of Rs. 6513. The assessee objected to the inclusion of this sum in his assessable income on the ground that S. 42 of the Indian Income-tax Act had no application to the case of a resident in British India, and that under S. 14(2)(c) of the Income-tax Act, income accruing or arising to a resident in British India, within an Indian State, and which had not been received in or brought into British India was exempt from liability to tax. The Appellant Tribunal upheld the contention of the assessee and modified the assessment accordingly. The revenue authority has applied for this reference.

The question turns upon the proper interpretation of S. 42(1) of the Income-tax Act, as it now stands. The contention of the assessee is that having regard to the terms of S. 42(1), it could possibly have no application to the case of a resident in British India, while the revenue authority maintains the contrary. The language of S. 42(1) as it now stands after several amendments, as well as its previous legislative history, would indicate, in our opinion, that it applies to residents, though having regard to the several categories of income specified in the section, its application to the case of residents must be rare. It may be conceded that the large majority of persons falling within S. 42(1) would be non-residents. Extensive changes were made in Sub-Secs. (1) and (2) of S. 42 by the Amending Act of 1939. Before the amendment of 1939, S. 42(1) ran as follows:

“In the case of any person residing out of British India, all profits or gains accruing or arising to such person, whether directly or indirectly, through or from any business connection or property in British India, shall be deemed to be income accruing or arising within British India, and shall be chargeable to income-tax in the name of the agent of any such person, and such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax.”

It will be observed that the section as originally enacted was statedly confined in its application to the case of persons residing out of British India. After the amendment of 1939, S. 42(1) reads as follows:

“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 accuring 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.”

Proviso (1) to S. 42 runs as follows:

“Provided that where the person entitled to the income, profits or gains is not resident in British India, the income-tax so chargeable may be recovered ……and that any arrears of tax may be recovered also in accordance with the provisions of this Act from any assets of the non-resident person which are, or may at any time come within British India.”

Sub-Sec. 2 of S. 42 runs in these terms:

“Where a person not resident or not ordinarily resident in British India, carries on business with a person resident in British India, and it appears to the income-tax officer, that owing to the close connection between such persons the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to the resident either no profits or loss than the ordinary profits which might be expected to arise in that business, be profits derived therefrom or which may reasonably be deemed to have been derived therefrom, shall be chargeable to income-tax in the name of the resident person who shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax.”

The first part of S. 42(1) deliberately omits all reference to the category of persons to whom the income “accrues or arises”. The language is wide enough to comprise persons who are resident as well as non-resident and persons who are not ordinarily resident in British India. The omission in the first part of S. 42(1) of all reference, to persons to whom the income is deemed to accrue or arise by reason of the business connection is significant. By way of contrast it may be pointed out that in S. 42(2) there is specific reference to persons not resident or not ordinarily resident in British India. Again in S. 4(1)(b) of the Income-tax Act, reference is to the accrual or the arising of income to a person resident in British India, whereas in the first part of S. 42(1) there is no reference to the person to whom income, profits or gains are deemed to accrue or arise. The language being perfectly general, there is no reason for so limiting it as to exclude its application to residents and persons not ordinarily resident and confine it to non-residents. The matter does not stop there. The second part of S. 42(1) which refers to cases where the person entitled to the income, profits or gains is not resident in British India, by necessary implication demonstrates that the first part of S. 42(1) takes in all persons whether resident or non resident; and the latter part of S. 42(1) deals with only one class of persons falling under the first part of S. 42(1), namely, persons entitled to the income, profits, or gains, who are not residents in British India. Further, the first proviso to S. 42(1) specifically refers to the case of a person entitled to the income, profits or gains, who is not resident in British India. If, as contended by the learned Advocate for the assessee, S. 42(1) is confined in its application to persons not resident in British India, the proviso which is a sort of an exception to the genera rule enacted in S. 42(1) would become meaningless in so far as it is confined to income, profits and gains of persons not resident in British India. The proviso itself suggests that the main part of S. 42(1) applies to a larger category of persons namely residents as well as non-residents. The matter again received the attention of the Legislature in the year 1947. In spite of the amendment of S. 42 in the year 1939 the marginal note continued to be as it was before, namely, “non-residents”. In the year 1947, a new marginal note was substituted in these terms “Income deemed to accrue or arise within British India” evidently with a view to counteract one of the reasons relied on by the Bombay High Court in the Commissioner of Income-tax, Bombay v. Western India Life Insurance Co. Ltd.(1) for its conclusion that Sub-S. (1) of S. 42 applied only to non-residents.

The assessee's learned Advocate relied upon the decision in Commissioner of Income-tax, Bombay v. Western India Life Assurance Co. Ltd. in support of his contention that S. 42(1) applies only to non-residents. It may be stated that this decision which has been reversed by the Judicial Committee on another point, goes the full length of his contention. The leading judgment in the case was delivered by Kania J. (as he then was) and the reasons adduced in support of his conclusion may be considered seriatim. One of the reasons relied upon by the learned Judge was the existence of the marginal note “Non-residents”, which was retained in the Act even after the amendment of S. 42(1) in 1939. Marginal notes are not part of legislative enactments and are not legitimate aids for the purpose of construing a statute—Balraj Kunwar v. Jagat Pal Singh(2). Further this point is no longer tenable in view of the deletion of this marginal note and the substitution of a fresh one in the terms already stated, in the year 1947. Another reason given by the learned Judge was that if the first part of the section applied both to residents and non-residents, its proper place would be in the definition clauses, apparently, of S. 2. It is not easy to see the force of this observation. S. 42(1) is to some extent a charging section and has to be read as part and parcel of S. 4(1), clauses (b)(1) and (c) of the Act. The learned Judge does not give any indication of the subject matter that could or should have been appropriately included in the definition clauses of the Act. It was further observed in that case that by connecting the first part of S. 42(1) with the latter part of the Sub-Section by the word “and” the legislature intended the first of S. 42(1) to apply only to non-residents. With the utmost respect to the learned Judge, the contrary inference appears to us to follow from the context. The words “and where the person entitled to the income, profits or gains is not resident in British India” in the later part of S. 42(1) show that the previous portion of S. 42(1) applies to residents as well as non-residents, but the latter portion specially deals only with the case of non-residents. The learned Judge proceeded to observe that it was not a fair method of construing S. 4(1)(b), first to separate income into two parts, as income accrued within British India and income accruing outside, and then to take a portion of the latter back into the former category by referring to S. 42(1) of the Act. Ss. 4(1)(b)(i) and 4(1)(c) of the Act refer to income, profits and gains which are deemed to accrue or arise in British India to residents and non-residents respectively. S. 42(1) deals with a particular case where profits and gains accruing or arising outside British India shall be deemed to be income accruing or arising within British India. In the case of residents there is no doubt an apparent redundancy, because Ss. 4(1)(b)(i) and (ii) charge to tax the entire income of a resident, whether it accrues or arises in British India or without British India. At the same time with reference to persons not ordinarily resident in British India the second proviso to S. 4(1)(c) brings into charge the profits and gains which accrue or arise to that person without British India, if they are derived from a business controlled in or a profession or vocation set up in India, or are brought into or received in British India. S. 42(1) widens the net of taxation in the case of persons not ordinarily resident by subjecting to tax profits and gains accruing or arising to them through or from any business connection in British India, or through or from any property or asset of source of income in British India. At least so far as persons not ordinarily resident in British India are concerned, it cannot, be said that S. 42(1) of the Act is otiose. Lastly, the learned Judge of the Bombay High Court observed that the categories of income referred to in S. 42(1) pointed to income, profits or gains which could accrue only to non-residents and would be inappropriate with reference to residents. Here again, in the large majority of cases the categories of income referred to in S. 42(1) would appropriately be referable to non-residents. But it cannot be said that on this ground alone there is no scope for the application of S. 42(1) to residents or persons not ordinarily resident.

As pointed out by my learned brother in the course of the arguments, curiously enough, this very case furnishes an illustration of a situation where S. 42(1) could come into play in the case of residents. The assessee is, as already stated, a resident of British India who carries on business in Mysore, and there has been no remittance of profits from Mysore to British India. Under S. 4(1)(b)(ii) profits accruing to him without British India would be chargeable to Indian income-tax. Under S. 14(2)(c) of the Act the profits and gains of the Mysore business of the assessee are not so chargeable unless such profits and gains are received or deemed to be received in or brought into British India, or “are assessable under S. 42” of the Act. It has been assumed in this reference that there has been a business connection between the head office of the assessee in Madras and his branch at Mysore, and the question relating to the applicability of S. 42(1) arises on that basis. The existence of this business connection would attract the operation of S. 42(1) of the Act, if that provision applied to residents. If S. 42 were attracted, the profits of the Mysore business would be deemed to have arisen or accrued in British India and would be taxable to the extent of the amount apportioned under S. 42(3) as the profits attributable to the British Indian connection, S. 42 applied to residents, would have the effect of abrogating the exemption from Indian Income-tax conferred by S. 14(2)(c) on residents who earn profits by means of a business connection with British India in a Native State and keep their profits in that State. The exemption conferred by S. 14(2)(c) is taken away by S. 42, because of the business connection between the British Indian business and the business done in the Native State and is taken away because S. 14(2)(c) which confers the exemption itself excludes from its ambit incomes chargeable by reason of S. 42. As already stated, this case itself furnishes an instance where S. 42 of the Act may be applied to residents in British India with reference to profits earned by them in Native States, if there is a business connection. The effect of the application of S. 42 to such cases is to take away the exemption from liability granted by S. 14(2)(c) of the Act in respect of profits earned by residents of British India in Native States, if such profits are earned in consequence of a business connection with British India.

For these reasons we are unable to follow the decision in Commissioner of Income-tax, Bombay v. Western India Life Insurance Co., Ltd. and we hold that S. 42(1) of the Income-tax Act as amended in 1939 applies to residents as well as non-residents. The question referred to us is therefore answered in the affirmative and against the assessee. The assessee will pay the Commissioner of Income-tax his costs of the reference, which we fix at Rs. 250.

N.R.R