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Commissioner Of Income-Tax v. Ramchandra Keshardeo

Patna High Court

Apr 9, 1948

Judgment

Subsequent
References

CaseIQ

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Structured Summary of the Opinion (Manohar Lall, J.)

Factual and Procedural Background

These are two references under section 66(1) of the Income-tax Act made by the Income-tax Tribunal at the instance of the Commissioner of Income-tax, Bihar and Orissa. Each reference relates to a distinct assessment year and raises a similar question about whether remittances from a foreign branch (Mandraila) to British India represented profits assessable under the Act.

Assessment Year 1943–1944

Assessees: Residents and ordinarily residents in British India, carrying on arhat and gram business at Mokamah and a money-lending business at Mandraila (Jaipur State).
Previous year (Sambat): 1998–1999 Sambat (21 Oct 1941 – 7 Nov 1942).
Remittances recorded in books of the Mokamah business: Rs. 5,810-2-0 remitted from British India to Mandraila; Rs. 5,522-15-3 remitted from Mandraila to British India.
The Income-tax Officer (ITO) called for the source/nature of receipts from Mandraila; assessees admitted money-lending business at Mandraila but denied having account books.
ITO concluded that the Rs. 5,523 (approx.) remitted from Mandraila to British India represented income and added it to assessable income.
On appeal the Assistant Commissioner refused to admit claimed books of account (existence denied at assessment) and agreed with the ITO's conclusion. No books were produced before the Tribunal.
The Tribunal accepted the assessees' contention (relying on Multan Chand Jahurmull) that only the net difference between remittances should be treated as taxable; because more was sent to Mandraila than received, it concluded nothing was taxable for that year.
Reference question to this Court: whether the Tribunal could properly conclude that no amount of profits of the Mandraila business was brought into British India and assessable under section 4(1)(b)(ii) read with section 14(2)(c).

Assessment Year 1944–1945

Previous year (Sambat): 1999–2000 Sambat (8 Nov 1942 – 8 Oct 1943).
Remittances: Rs. 9,000 from British India to Mandraila; Rs. 11,002-13-0 received from Mandraila to British India during the year.
ITO added the entire Rs. 11,002-13-0 to the assessable income; Appellate Assistant Commissioner affirmed that finding.
The Appellate Tribunal, following its view in the earlier year, held only the difference (Rs. 2,002) was the profit assessable as brought into British India.
Reference question to this Court: whether the Tribunal could properly conclude that only Rs. 2,002 and not Rs. 11,002 was the profit of the Mandraila business brought into British India and assessable under section 4(1)(b)(ii) read with section 14(2)(c).

Legal Issues Presented

Whether, in the circumstances of the assessment year 1943–1944, the Tribunal could properly conclude that no amount of profits of the Mandraila business was brought into British India so as to be assessable to income-tax under section 4(1)(b)(ii) read with section 14(2)(c) of the Act.
Whether, in the circumstances of the assessment year 1944–1945, the Tribunal could properly conclude that a sum of Rs. 2,002 only and not Rs. 11,002 was the profit of the Mandraila business brought into British India and assessable as such under section 4(1)(b)(ii) read with section 14(2)(c) of the Act.

Arguments of the Parties

Assessees' Arguments

For 1943–44: The remittances received from Mandraila during the accounting year could not be treated as profits of the money-lending business for that year because profits are determined only at the end of the year; during the year receipts might later result in a loss rather than profit.
Before the Tribunal the assessees also contended that amounts sent from British India to Mandraila were stock-in-trade/capital and that only the net difference between remittances to and from Mandraila could be brought under assessment; since outward remittances exceeded inward remittances for the year, nothing should be taxed.
For 1944–45: The assessees argued again (by inference from the record) that only the net difference should be treated as profit liable to tax.

Revenue / Income-tax Department's Arguments

For 1943–44: The Standing Counsel for the Department pointed to a statement of account to argue that, up to 30 June 1942, remittances from the Mandraila office to British India exceeded remittances from British India to Mandraila, and therefore the excess must be treated as profits in the absence of account books.
The Department argued that the accounts should not be dissected into convenient sub-periods at the assessee's option and that the ITO was entitled to treat receipts in excess of outward remittances as profits when no books were produced.
For 1944–45: The Department relied on the legal presumption (cited authorities) that remittances from a foreign branch to headquarters are prima facie profits assessable to tax until the assessee proves otherwise; because the assessees did not produce account books, the ITO was entitled to presume the remittances represented profits and assess the full amount.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Multan Chand Jahurmull v. Commissioner of Income-tax	Relied upon by the Tribunal to support the proposition that only the difference between remittances to and from a foreign branch should be taxed.	The Tribunal relied on it to accept the assessees' contention in 1943–44; the Court however considered it unnecessary to decide on its applicability once it reached its conclusion on other grounds.
Maharaja of Darbhanga (Privy Council)	Cited for the proposition that the duty of the Income-tax Officer is to find the income and not merely to calculate receipts of the assessee.	The Court invoked this as a supportive principle in rejecting the Revenue's submission that receipts should be dissected into parts of the accounting year to determine profit.
Govind Ram Tansukh Rai	Held that profits of a foreign business cannot be determined till the expiration of the year and therefore remittances during the year cannot be treated as profits before year-end.	The Court agreed with this principle and applied it to hold that remittances in 1943–44 (Rs. 5,523) could not be treated as profits of the Mandraila business brought into British India.
Scottish Provident Institution v. Allan (House of Lords)	Authority for the presumption that large remittances to head office from a branch will prima facie include profits, and that the burden is on the remitting party to show that remittances are not profits (e.g., are repayments of capital).	The Court treated this as a leading authority for drawing an adverse presumption against the assessee in 1944–45 for non-production of account books and for supporting the assessment of the full remittance as profit.
M. Murugappa Chettiar v. Commissioner of Income-tax (Madras)	Held that money remitted to headquarters from a branch outside British India is prima facie presumed to be profits assessable to income-tax until the assessee shows the contrary.	Followed by the Court as an Indian authority consistent with the House of Lords decision to justify treating remittances as prima facie profits in the absence of books.
Ramanathan Chettiar; Subbiah Iyer; Meyyappa Chettiar; Tara Chand Pohu Mal	Indian decisions cited as following the same view that remittances from an outside branch are prima facie profits until disproved by the assessee.	These authorities were cited to show consistent Indian jurisprudence supporting the presumption invoked by the Revenue and relied upon in assessing remittances as profits when no accounts were produced.
Sonaram Bihalchand (Lahore)	Where books were not produced, the assessing authority was justified in assuming that remittances to the head office represented profits even where receipts and remittances in the books showed mixed flows (and even where outward remittances exceeded inward).	The Court relied on this case to reject the argument that only the net difference should be treated as profit when the assessee failed to produce accounts; it supported assessing the entire remittance in appropriate circumstances.
P.L.S.K.R. Firm v. Commissioner of Income-tax	Held that under certain circumstances the Income-tax Officer may assume that remittances to British India from a foreign branch represented profits, even if total remittances were less than amounts sent out.	The Court cited this to support the view that the ITO could assume remittances represented profit in the absence of account books and that such an assumption can be justified under the circumstances.

Court's Reasoning and Analysis

The Court addressed each reference separately, applying established principles about when foreign branch receipts can be regarded as profits for tax purposes and how non-production of books affects presumptions.

Analysis in relation to Assessment Year 1943–1944

The ITO found specified remittances to and from the Mandraila branch and, because the assessees denied having account books, treated the inward remittance (approx. Rs. 5,523) as income and assessed it.
The Tribunal adopted the view that only the net difference between remittances to and from Mandraila should be treated as profit (relying on Multan Chand Jahurmull) and concluded nothing was taxable for that year.
The Revenue argued that parts of the accounting year could be isolated to show an excess of inward remittances and hence profit; the Court rejected dissecting the account year into convenient periods for the Revenue and emphasized the ITO's duty to find income rather than merely computing receipts.
The Court relied on Govind Ram Tansukh Rai to hold that profits of a foreign business cannot be determined until the expiration of the year, and that receipts made during the year cannot be treated as profits before the year is determined.
Applying that principle, the Court concluded that the sum of Rs. 5,523 could not be treated as profits of the Mandraila business for that accounting year, and therefore upheld the Tribunal's outcome (though for different reasons than the Tribunal).

Analysis in relation to Assessment Year 1944–1945

Facts were similar but this was the second year of the Mandraila money-lending business; remittances from the branch to British India totaled Rs. 11,002-13-0 while remittances from the head office totalled Rs. 9,000.
The assessees did not produce account books; the Court observed that non-production permitted the tax authorities to draw an adverse presumption against the assessees.
The Court treated Scottish Provident Institution v. Allan and subsequent Indian authorities (including M. Murugappa Chettiar and others) as establishing the principle that money remitted from an outside branch to headquarters is prima facie presumed to be profits assessable to income-tax until the contrary is shown.
The Court also relied on Sonaram Bihalchand and P.L.S.K.R. Firm to show that, under certain circumstances and in the absence of accounts, the ITO may assume remittances represent profits even when outward remittances exceed inward remittances in aggregate.
On this basis the Court held that it was open to the Income-tax authorities to treat the entire Rs. 11,002 as profits of the Mandraila business brought into British India and assessable as such, because the assessees had failed to discharge the burden of showing otherwise by producing their accounts.

The Court explicitly states where it arrives at the same result as the Tribunal for different reasons (first reference) and where it disagrees with the Tribunal and upholds the Income-tax authorities' approach (second reference).

Holding and Implications

First reference (Assessment Year 1943–1944): The Court answered the referred question in the affirmative — it held that the Tribunal could properly come to the conclusion that no amount of profits of the Mandraila business was brought into British India and assessable for that year (i.e., the Tribunal's conclusion was upheld, on the Court's view that remittances during the year could not rigidly be treated as profits before year-end).

Second reference (Assessment Year 1944–1945): The Court answered the referred question in the negative — it held that the Income-tax authorities were right in treating Rs. 11,002 as the profit of the Mandraila business brought into British India and assessable as such (given the assessees' failure to produce account books and the resulting presumption).

Direct consequences for the parties:

For 1943–44 the assessees effectively succeeded — the remittance in question was not treated as assessable profit for that year under the Court's reasoning.
For 1944–45 the assessees failed — the Income-tax authorities were justified in assessing the entire inward remittance of Rs. 11,002 as profits brought into British India.
The Court ordered no costs for the hearing of the two references, noting that the assessees succeeded in one reference and failed in the other.

The opinion applies and discusses established authorities concerning (a) when foreign branch receipts may be treated as profits and (b) the inference to be drawn from non-production of account books. The decision resolves the two referred questions on the facts before the Court; it does not purport in the text to lay down any additional general rule beyond the application of cited authorities to these facts.

Disposition: References answered. (Meredith, J. concurred.)

Show all summary ...

Manohar Lall, J.:— These are two references by the Income-tax Tribunal under section 66(1) of the Income-tax Act at the instance of the Commissioner of Income-tax, Bihar and Orissa, inviting us to give our opinion on the question which are similar in each case. It is desirable to state the facts of each case separately.

Assessment year 1943-1944.—The assessees are residents and ordinarily, residents in British. India having arhat and gram business at Mokamah in British. India and also money lending business at Mandraila in Jaipur State—an Indian State. The previous year for the assessment is the year 1998-1999 Sambat corresponding to the 21st October 1941 to 7th November, 1942. The Income-tax Officer found from the examination of the personal account of Jaliram Ramchandra in the books of the British Indian business at Mokamah that a sum of Rs. 5,810-2-0 was remitted from British India to Mandraila, and in the same period a sum of Rs. 5,522-15-3 was remitted from Mandraila to British India. The Income-tax Officer called upon the assessees to explain the source and nature of the receipts from Mandraila. The assessees admitted in writing that they were carrying on a money lending business at Mandraila but when called upon to produce the account books of the money lending business, they denied the existence of any account book. In these circumstances, the Income-tax Officer concluded that the amount remitted from: Mandraila to British India, namely, Rs. 5,523, in round figures, was the assessees' income from the money lending business carried on at Mandraila. Accordingly, he added this sum to the assessable income of the assessees. In appeal, the assessees sought to produce account books of the money lending business at Mandraila but the Assistant Commissioner refused to admit the books of account in evidence because “the existence of this very evidence was categorically denied at the assessment stage”. He agreed with the Income-tax Officer that the entire sum sent from Mandraila to British India must be treated as income accruing outside British India but brought into British India, within the account year under consideration. Before the Income-tax Tribunal no attempt was made to produce the books of account.

Before the Tribunal it was contended on behalf of the assessees that the money sent out from British India was the stock-in-trade of the business' of the assessees and the British Indian business was entitled to claim repayment of the same from the Mandraila branch which was in the position of a debtor; and it was urged, therefore, that only the difference between the remittances from British India and those from outside British India could be brought under assessment, but as the sum sent out to Mandraila was more than the sum received from Mandraila, nothing could be taxed in this year. The Income-tax Tribunal relying upon the case of Multan Chand Jahurmull v. Commissioner of Income-tax, Bengal accepted this contention.

At the instance of the Commissioner of Income-tax, the following question has been referred to us for our opinion:

“Whether, in the circumstances of the case, the Tribunal could properly come to the conclusion that no amount of profits of the Mandraila business was brought into British India so as to be assessable to income-tax under section 4(1)(b)(ii), read with section 14(2)(c), of the Act?”

It is argued on behalf of the assessees that the remittances from Mandraila in the accounting year could not be treated as profits from the money lending business carried on in that year because the profits can only be determined at the end of the year when it may turn out that instead of making a profit the Mandraila business has made a loss.

On the other hand, it has been argued by the learned Standing Counsel for the Income-tax Department that the statement of the account year, Ex. A, will show that up to the 30th June, 1942, the assessees sent out roughly a sum of Rs. 2,700 only to Mandraila, and in the same period the Mandraila office sent to British India a sum of about Rs. 5,400. He therefore, contends that as the amount received was more than the amount sent out from British India, the difference must be treated as profits of the money lending business in the absence of any account books produced by the assessees. The statement of the account, however, further shows that a sum of Rs. 3,000 was sent from British India in July 1942. I am unable to see how the account of an assessee can be dissected into convenient periods at the option of the Income-tax Department. The argument is unsound and is not entitled to succeed. Moreover, the duty of the Income-tax Officer is to find the income and not to calculate the receipts of the assessee. [See the Privy Council case of Maharaja of Darbhanga]. The real question then is whether the amount sent from Mandraila to British India is the profit or income of the assessees from the foreign business.

It has been clearly pointed out in the case of Govind Ram Tansukh Rai that the profits of a foreign business cannot be determined till the expiration of the year, and therefore, they cannot be included, in law, in the remittances which were made during the pendency and in the course of the year. The learned Judges of the Allahabad High Court drew attention, to section 3, section 2, sub-clause (11) and section 4, sub-clause (2) of the Income-tax Act, and observed that “it is obvious that foreign income, profits and gains must accrue or arise without British India before they can be received or brought into British India and the receipt of a trader in the course of a year though ultimately it might result into a profit cannot be treated as profit before the determination of the year.” I respectfully agree with these observations ‘which are in accord with the general custom and the practice prevailing amongst’ commercial people; the Income-tax Department is to determine the profits in the sense that a commercial man would understand it unless the statute directs other Wise.

For these reasons, it follows, in my opinion, that the sum of Rs. 5,523 could not be treated as the profits received by the assessees from the money lending business in Mandraila. In this view of the matter it is not necessary to consider the applicability or the true import of the case of Multan Chand Jahurmull which was relied upon by the Tribunal. I have arrived at the same conclusion as the Income-tax Appellate Tribunal, though for different reasons.

I would answer the question in the affirmative.

“Assessment year 1944-1945.— The facts in this year are similar to the facts which gave rise to the question for the assessment year 1943-1944. In this year the previous year of the assessment was 1999-2000 Sambat, corresponding to the 8th November, 1942 to the 8th October, 1943. The remittances from British India to Mandraila in the year were Rs. 9,000, and the amount received from Mandraila in the same period was Rs. 11,002-13-0.

The Income-tax Officer added the whole amount of Rs. 11,002-13-0 in the assessable income of the assessees, and this finding was affirmed by the Appellate Assistant Commissioner. The Appellate Tribunal in accordance with the view which they had expressed for the assessment year of 1943-1944 ordered that only the difference of the sum received from. Mandraila and the sum sent out to Mandraila, that is to say, Rs. 2,002, can be deemed to be the profit of the money lending business brought into British India. At the instance of the Commissioner of Income-tax, who was aggrieved by this decision, the following question has been referred to us for our opinion:

“Whether, in the circumstances of the case, the Tribunal could properly come to the conclusion that a sum of Rs. 2,002 only and not Rs. 11,002 was the profit of the Mandraila business brought into British India and assessable as such under section 4(1)(b)(ii), read-with section 14(2)(c), of the Act?”.

It would be noticed that this year was the second year in which the Mandraila money lending business was being carried on. It was open to the assessees to show from their account books that the amount of Rs. 11,002 did not represent any part of the profits which were assumed to be made in Mandraila in this year. But the assessees have not produced any accounts, and therefore, there is a presumption which the Income-tax authorities can draw against them from this non-production of accounts. The leading case is the House of Lords case, Scotish Provident Institution v. Allan. In that case the Lord Chancellor in his speech observed:

“Here is a large amount, putting these figures together, which, to my mind must include, and obviously does include, a large amount of profits. I think it is for the Company to show, if the fact be so, that ought to receive a certain amount of deduction, because a good deal of it was repayment of that which was in truth the capital and not profit at all. No attempt has been made to do that,……”

This case has been followed in numerous cases in India. It is enough to refer to [M. Murugappa Chettiar v. The Commissioner of Income-tax, Madras], where it was held that the money remitted to the headquarters of a firm in British India from its branch outside British India is prima facie to be presumed as having come out of profits rather than a remittance of capital and is assessable to income-tax as profits, until the contrary is shown by the assessee; the same view was taken in the case of Ramanathan Chettiar at page 348. See also the case of Subbiah Iyer the case of Meyyappa Chettiar, and Tara Chand Pohu Mal. This view of the law was not and could not be seriously challenged on behalf of the assessees. But it was argued on their behalf that only the difference between the amount sent out from British India and the amount received from Mandraila to British India should be treated ex facie as the profit which should be taxed. This argument is completely met by the Lahore case of Sonaram Bihalchand, where the facts are almost similar to the facts in the present case. The assessee in that case was carrying on a business at Peshawar and later on in 1929 he began to do business at Kabul. In the assessment year 1933-1934 the assessee refused to produce the account books of the Kabul business. The accounts of Peshawar showed that there were remittances from Kabul to Peshawar and from Peshawar to Kabul, although there was no evidence to show that the Kabul business made any profits or that the remittances were made out of profits. It also appeared that the receipts of money and goods from Kabul at Peshawar were less than the remittances of money and goods from Peshawar to Kabul. In these circumstances, the Income-tax Officer assessed the assessee at Rs. 20,000, assuming that he had made so much profit during the three years ending with 1933-1934, as the assessee had failed to produce his books of account. The following observations of Jailal, J., who delivered the judgment of the Division Bench, at page 491 are relevant:

“It would be observed that it is not the case of the Commissioner that as a result of the calculations made of the remittances from and to Kabul it is proved that the assessee made a profit in Kabul business. The assessing authority has made an assumption of this from the fact that the assessee has been carrying on business since 1929, and inspite of several opportunities having been given to him, has failed to produce his account books. He has also inferred that, assuming that the business in Kabul has been run on profit, the amount remitted to Peshawar represented profit also and that it was not wholly capital. In P.L.S.K.R Firm v. Commissioner of Income-tax it was held that under certain circumstances it is open to the Income-tax Officer to assume that the amount remitted to British India from a branch of the business outside British India represented profits made in such branch inspite of the fact that the total amount of such remittances is less than what has been sent from British India to such Branch.”

“So far as the total of remittances from Peshawar to Kabul and from Kabul to Peshawar are concerned they have been taken by the Income-tax Officer from the books of the assessee kept in Peshawar. There is, therefore, evidence on which the presumption made by the Income-tax Officer has been based and in my opinion he was entitled to make this assumption under the circumstances of the case and on the authority of the case cited above.”

I respectfully agree with these observations. It is the assessees' own fault it the amount assumed by the Income-tax authorities exceeds the actual amount of profits made by the assessees in Mandraila. He could have easily shown the account books and established that no part of 11,002 rupees was profit and that it was wholly capital remitted back to the head branch.

It was also argued that if is impossible to believe, when the amount remitted from British India was small, that the assessee would have made in Mandraila such a large amount of profits but this is really the same argument over again in another form. It may be that the assessees were able to invest other sums as capital in business by taking loans from Mandraila or that the assessees were able to invest the amount received from British India at a very high rate of interest.

For reasons given above, I would answer the question in the negative, and hold that the Income-tax authorities were right in treating Rs. 11,002 as the front of the Mandraila business brought into British India and assessable as such.

As the assessees have succeeded in one reference and have failed in the other, I would make no order for costs for the hearing of the two references in this Court.

Meredith, J.:— I am in complete agreement with my learned brother.

K.D

Reference answered.