Anglo India Jute Mills Co. Ltd. v. S.K Dutt And Another Opposite Party.

1. This case involves a point of law under the Indian Income-tax Act, which though important is curiously enough a matter of first impression. The point arises in the following way: The petitioner, the Anglo India Jute Mills Co., Ltd. is a company incorporated under the Indian Companies Act and carries on business in Calcutta. Messrs Clive Investment Trust Co. Ltd. is a Sterling Company registered in the Unitea Kingdom. It is now in liquidation. In the year 1947, the petitioner company acquired the entire share capital in a company called Landale & Clarke Ltd. The bulk of the shares was purchased from the Clive Investment Trust Co. Ltd. (2450 ordinary shares and 1900 preference shares). At the time of the transaction, the parties thought that the Capital Gains Act would be applicable and a sum of Rs. 1,48,812-8-0 was left with the purchasers in the anticipation that this would be sufficient to meet the capital levy. Needless to say that the sellers had sold the shares at a considerable profit. On or about 10-3-1954 the Income-tax Officer, Companies, District II, Calcutta served on the petitioner a notice under Section 46(5-A) of the Indian Income-tax Act stating that a total sum of Rs. 3,97,230-1-0 was due from the Clive Investment Trust Co. Ltd. on account of income-tax and Corporation tax and required the petitioner to pay any sums held by it on account of the said assessee, or payable to it. The petitioner has paid the sum of Rs. 1,48,812-8-0 and Rs. 1,822-7-0 to the Income-tax authorities. The latter sum appears to be by way of interest. The managing agents of the petitioners were thereupon directed to furnish particulars of the transaction which they did. On 15-3-1955 the Income-tax Officer, Companies, District II, Calcutta wrote to the petitioner that the tax recoverable on the transaction under S. 18(3-A) was Rs. 2,27,540-15-0, whereas the petitioners had deducted and paid over only Rs. 1,48,812-8-0. It was therefore directed under Section 18(7) of the Indian Income-tax Act, to make payment of the balance of Rs. 78,728-7-0 within 27-3-1955. This the petitioner refused to pay. The question that arises in this application is whether the petitioner is liable to pay this sum. Section 18(3-B), Indian Income-tax Act under which the payment of tax has been claimed from the petitioner runs as follows:

“Any person responsible for paying to a person not resident in the territories any interest not being ‘Interest on Securities’ or any other sum chargeable under the provisions of the 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-cl. (b) of sub-s. (1) of S. 17, as the case may be.

2. The obvious question is as to whether the Clive Investment Trust Co. is “a person not resident in the territories”. Section 4-A(c) runs as follows:

“A company is resident in the taxable territories in any year if the control and management of its affairs is situated wholly in the taxable territories in that year or if its income arising out of the taxable territory in that year exceeds its income arising without the taxable territories in that year, account not being taken in either case of income chareagle under the head ‘capital gain.’”

3. It is thus clear that with regard to a company the test as to whether it is resident or not within the taxable territories, depends on two factors. The first is as to the control and management of its affairs. In other words, the residence of the company is where control and management of its affairs lies. Secondly, if its income arising in the taxable territory in that year exceeds its income arising without the taxable territories, then also it is resident within the taxable territories. In order to find out whether the Clive Investment Trust Co. is a resident or non-resident within the taxable territories, it would have been necessary to go into these questions of fact. In the present case however it is unnecessary, for the following reason. It appears that Messrs Clive Investment Trust Co. (in liquidation) has already been assessed by the Income-tax Department Companies, District II, Calcutta for the year 1948-1949, which is the relevant year in respect of the - transaction in dispute. The records of the assessment were called for and I have looked into them. A copy of the assessment order has been furnished to me and parties do not object to its being put on the record. It appears from the assessment order which is dated 9-3-1953 that Messrs Clive Investment Trust Co. (in liquidation) has been assessed for the year 1948-1949 on the footing that it was “resident and ordinarily resident within the taxable territories”. As a matter of fact, it is the balance of tax payable on this assessment order that is being realised from the petitioner. There is one other matter with reference to this assessment order which is important in this case. The dealings in shares which resulted in a profit, including the dealings with the petitioner, have been treated as part of the business of the company and as business income and not as capital gain. It has been stated that the company systematically dealt in shares, therefore, the income could not be treated as capital gain. The company was an investment company and change of investment was a normal step. From this assessment order two points emerge. Firstly, that the company is a resident company although it is a Sterling Company registered in the United Kingdom. Secondly, that the profits from the transaction in shares including the transaction with the petitioner have not been treated as capital gain but as business income. It will be recalled that at the time of the transaction the parties thought that the taxation will be on the basis of capital gain, and they provided accordingly by keeping in the hands of the petitioner a sum which was considered sufficient to pay the capital gains tax. Now that the Income-tax Department has treated it as a business income, there has been a short-fall. Mr. Meyer, appearing on behalf of the respondents frankly stated that the Clive Investment Trust Co. was in liquidation and it was being wound up in the United Kingdom. It had no assets in Inida, and consequently there is no hope of realising any dues from them. This is why, the authorities have taken the risk of attempting to realise it from the petitioners if they could do it lawfully. The question is within a small compass, namely, was the said company resident or non-resident? The respondents are faced with the fact that they have themselves assessed the company during the relevant year on the footing that it was resident, and in fact the money that has been sought to be realised from the petitioner is a part of the money due on the assessment order which has been made on the basis that the company was resident. Mr. Meyer has tried to get out of the difficulty by arguing that the words “not resident in the territories” in S. 18(3-B) has a meaning different to the definition in S. 4-A(c). He argues that those words in S. 18(3-B) refer to physical residence and not notional residence as defined under S. 4-A(c). He argues that unless this was so, it would be impossible for any person to pay any money, because unless the whole year expired it would be impossible to find out whether a person is a resident or non-resident within the taxable territory. His analogy is applicable only to an individual. He pointed out that under S. 4-B, an individual was not ordinarily resident in the taxable territories in any year if he has not been resident in the taxable territories in nine out of the ten years preceding that year, or if he has not during the seven years preceding that year been in the taxable territories for a period of, or for periods amounting in all to, more than two years. He argued that let us suppose the transaction had taken place early in the year. It might be that during the rest of the year the assessee would acquire the status of a resident although at the time of the transaction he was non-resident. How is the matter to be determined in that case? From this he argues that under S. 18(3-B), residence should mean physical residence. He says that thus construed, the matter could be easily determined, and anybody paying moneys would at once be knowing as to whether it was being paid to a resident or a non-resident. In my opinion, there are two difficulties in accepting this construction. Firstly, I am not aware that it is permissible to interpret a statute in this fashion. Where there is virtually a definition clause, one must assume that words so defined are used in the same sense throughout the statute, unless there are indications specifically to the contrary. Where a word in the statute is defined, it is not permissible to ascribe to it a different meaning, even if it be the dictionary meaning. The only exception would be where the meaning, if interpreted according to the definition clause, gives rise to any absurdity or impossibility. It may be that by ascribing to it the meaning as defined, the result would be a great hardship to the assessee. That however is no ground for abandoning the statutory definition, I do not see that by giving the words the statutory meaning there is any absurdity or impossibility which results. It is true that in some cases a person paying over sums of money will be put into great difficulty in discovering whether he is doing so to a resident or non-resident. But then, he can have recourse to S. 18(3-C). He can, when in doubt, make an application to the appropriate authorities to determine what tax shall be deducted. But the second point is still more formidable. Assuming that one were to ascribe the dictionary meaning. It must not be forgotten that this is a case of a company and not an individual. In the case of an individual, a sentient being, we all know what residence means. A person is resident where he habitually lives. But what is the residence of a company? According to Mr. Meyer, it is a place where it has its registered office. This is a vexed question, but I think that the preponderance of authority does not bear out the point of view advanced by Mr. Meyer. This very point was decided by the House of Lords in the case of ‘Egyptian Delta Land and Investment Co. Ltd. v. Todd’, (1929) AC 1 (A). It was held there that incorporation under the Companies Act with the attendant statutory obligations, does not by itself as a matter of law constitute residence within the meaning of the Income-tax Act. It was settled by authority that the residence of the company for income-tax purposes was preponderantly, if not exclusively, determined by the place where its real business is carried on. If this is so, then it approximates to the definition given in the Indian Income-tax Act, S. 4-A(c). I have already referred to the fact that the Investment Trust Co. has already been assessed as a resident, although it is a Sterling Company registered in the United Kingdom. Mr. Meyer admitted that this is a case of first impression, & it is not possible for him to be dogmatic on this point. He however argues that a reasonable construction should be given to the wordings in S. 18(3-B). In my opinion it is unreasonable to give it any special meaning and allow the respondents to assess the Investment Trust Co. on the one hand as a resident and for a part of the tax due on the same order of assessment, attempt to realise moneys from third parties on the footing that the company is non-resident. This is neither just nor reasonable. Since the Clive Investment Trust Co. Ltd. is a resident, the impugned order cannot clearly be supported. If the company is resident, then there is no scope for the application of S. 18(3-B). Mr. Mitter has taken a second point which is more debatable. He argues that under S. 18(3-B), even if the Investment Trust Co. was a person non-resident, in order to make his client liable, it must relate to “any other sum chargeable under the provisions of this Act”. He says that the amount that his clients had paid to the Investment Trust Company represented the price of certain shares and not as such chargeable to tax. He argues as follows: The Investment Trust Company deals in shares. It buys and sells, hundreds or even thousands of shares, in the open market. Can it be said that every purchaser paying or moneys as price of shares, was making payment of a sum which was “chargeable under the provisions of this Act”? According to Mr. Mitter, this constitutes an item of trading receipt and as such it is not chargeable with tax. He says that it was only when the trader had made up his accounts and by adjusting the credits and debits arrived at an amount which turned out to be a profit, that there could be said to be any income and the tax attached itself to that income. Mr. Mitter did refer me to certain text books which tended to lay down such a principle (see Kanga and Palkiwala, page 364). Mr. Meyer has however drawn my attention to the case of ‘Turner Morrison & Co. Ltd. v. Commissioner of Income-tax, West Bengal’, 1953 SC 140 (AIR V 40) (B). In that case, the Port Said Salt Association Ltd., a company incorporated in the United Kingdom, carried on business in Egypt and had its headquarters in Egypt, it manufactured salt in Egypt and part of the salt was consigned to Turner Morrison & Co. Ltd. (the assessee), for sale in India. After deducting the expenses and commission the balance was remitted to the Association in Egypt. One of the questions was as to whether the amounts in the hands of the assessee could be construed as income of the Association. Das, J. as he then was, said as follows:

“Finally Mr. Mitra urges that the gross sale proceeds were not really income, for they were only credit items in the account and that several amounts were to be debited in the same account and if there remained any credit balance such balance alone could be regarded as stamped with the formal impress of the character of income profits and gains and capable of being dealt with as such and income, profits and gains could be said to have been received only at that stage….. There can therefore be no question that when the gross sale proceeds were received by the Agents in India, they necessarily received whatever income, profits and gains were lying dormant or hidden or otherwise embedded in them. Of course, if on the taking of accounts it be found that there was no profit during the year, then the question of receipt of income, profits and gains, would not arise, but if there were income, profits and gains, then the proportionate part thereof attributable to the sale proceeds received by the Agents in India were income, profits and gains, received by them at the moment the gross sale proceeds were received by them in India and that being the position, provisions of S. 4(1)(a) were immediately attracted and the income, profits and gains so received became chargeable to tax under S. 3 of the Act.”

4. Applying this test it would seem that although payment for a particular bunch of shares may be one of a number of items in the company's business, nevertheless if ultimately the company made a profit, it could be said that the profit was embedded in each transaction or item, and was thus chargeable.

5. The next point taken is that the petitioner had a right of appeal and consequently there was an alternative legal remedy and as such an application for certiorari did not lie. Mr. Miter says that no appeal lies, whereas Mr. Meyer argues that an appeal would lie under Section 30(1-A) of the Income-tax Act. That provision runs as follows:

“Any person having in accordance with the provisions of sub-s. (3-B) of S. 18 read with sub-s. (6) of that section, deducted and paid tax in respect of any sum chargeable under this Act other than interest who denies his liability to make such deduction may appeal to the Appellate Assistant Commissioner to be declared not liable to make such deduction.”

6. Mr. Mitter says that his client cannot come within this section because it has not deducted and paid tax as required under the section, but disputes its liability to do so. Mr. Meyer on the other hand argues that if there is a legal liability to deduct tax then a person not having done so cannot by a contravention of the provisions of the Act argue that it is non-appealable. What he should do is to deduct the amount payable and if he denies liability to appeal to the appellate authority. There is considerable force in what Mr. Meyer says. But it is clear that whether it is appealable or not, no appeal would lie until the appellant had deducted and paid the entire sum chargeable or claimed to be chargeable, to the authorities. This is a condition precedent. If that is so, then the matter comes within the mischief of the ruling in ‘Himmatlal Harilal v. State of Madhra Pradesh’, 1954 SC 403 (AIR V 41) (C). lit was held there by Das, J. as he then was, that where a statute requires the entire money to be paid or deposited before an appeal could be preferred, that is not an alternative remedy which is adequate. Here also an appeal would be dependent on the petitioner depositing the entire sum claimed to be chargeable. Thus it is not an alternative remedy which precludes an application for a high prerogative writ. Lastly, it is argued by Mr. Meyer that a writ of certiorari would not lie because even assuming that the Income-tax authorities committed an error, it was permissible for that authority to construe the provision of law rightly or wrongly. He said that it was not an error which appeared on the face of the record. He cited before me the Supreme Court decision ‘H.V Kamath v. Ahmad Syed Isak’, 1955 SC 233 (AIR V 42) (D). In this case, as well as in case of ‘Basappa v. Nagappa’, 1954 SC 440 (AIR V 41) (E) the Supreme Court relied on the decision of ‘R. v. Northumberland Compensation Appeals Tribunal; Ex parte Shaw, (1951) 1 KB 711; on appeal (1952) 1 KB 338 (F). It is well known that in England, there has been a swing of the pendulum from one view to another. Sometimes it was held that Subordinate tribunals could do right or wrong and the scope of interference was limited. On the other hand, there are cases where a more liberal view has been taken, and nearly all kinds of errors of law have been rectified. The ‘Northumberland Compensation case’ (F) is one in the latter category and holds the field now. This has been approved by the Supreme Court in the two cases stated above. I might also cite a case in which the Supreme Court interfered although the error of law was not apparent at all. See ‘Raj Krushna v. Binod Kanungo’, 1954 SC 202 (AIR V 41) (G). The position, therefore, is that an error of law can be corrected if the error is patent on the face of the record. It is somewhat difficult to see how an error of law could be an error not patent on the face of the record. I suppose what it means is that if a point of law is dependant on disputed questions of fact, then if the facts are not patent, the error in law cannot be corrected. What then is the position here? If it was not an admitted fact that the company was taxed as resident during the year in dispute, then Mr. Meyer's contention would have been of some weight. The application of S. 18(3-B) would then be dependent on a question of fact in dispute. Mr. Meyer has however not disputed the fact that there has been an assessment on the footing of the company being a resident. In fact, a copy of the assessment order has been placed on record by consent of parties. The whole point turns round the method of construing the word ‘non-resident’ in that section. According to Mr. Meyer it means one thing and according to Mr. Mitter it means another. I therefore do not see how, if I accept the construction advanced by Mr. Mitter, is it not an error on the face of the record on the part of the Income-tax Officer. The record would include the record which had been called for including the assessment order. On the face of the record, it is found that the Income-tax Officer did make an error of law in construing certain provisions of the Income-tax Act. In my opinion it should be set right. The result is that the Rule must be made absolute and there will be a writ in the nature of certiorari quashing and setting aside the notice, under Section 46(5-A) of the Income-tax Act, issued by the respondents, dated 10-3-1954 or 15-3-1955 (Exs. A and E to the petition). There will also be a writ of mandamus and prohibition prohibiting the respondents from giving any further effect to the said notices and/or orders and/or realising the sums mentioned therein or any part thereof from the petitioners.

7. There will be no order as to costs.

V.B.B

8. Rule made absolute.