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Bipin Lal Kuthialal v. Commissioner Of Income Tax, Punjab .
Factual and Procedural Background
The appellant, a forest contractor resident in Simla, leased forests in the erstwhile State of Jubbal during 1942-46 and sold a large lot of timber in 1942-43 for Rs 1,91,000 to the firm Sukh Dial Jagat Ram. Although no year-wise profit and loss accounts were prepared, consolidated figures were later worked out during income-tax assessments.
In the assessment for Assessment Year 1943-44, the Income-tax Officer determined a profit of Rs 20,967 (later reduced on appeal to Rs 18,758) on that timber sale, but treated the amount only for rate-fixing because no sale proceeds were received in that accounting year.
During Assessment Year 1944-45 it emerged that Rs 1,57,000 of the sale price had been realised in 1943-44, including two payments made in British India—Rs 29,000 to the appellant and Rs 3,000 to his creditor Sita Ram. The department held these two sums (aggregating Rs 32,000) to be constructive remittances of foreign profits taxable under Section 4(1)(b)(iii) of the Indian Income-tax Act, 1922.
The Appellate Assistant Commissioner and, on further appeal, the Income-tax Appellate Tribunal upheld that view. The appellant’s application under Section 66(1) for reference of five questions of law (one later withdrawn) was rejected by the Tribunal, and the Punjab High Court dismissed his Section 66(2) application on 25 June 1953, holding that no question of law arose. Special leave to appeal was granted by the Supreme Court on 18 May 1954, leading to the present judgment.
Legal Issues Presented
- Whether the two sums of Rs 29,000 and Rs 3,000 received in British India in 1943-44 constituted “constructive remittances” of profits that had accrued in Jubbal State in 1942-43.
- Whether, on the facts found, any real or substantial question of law arose so as to warrant a reference under Section 66(2) of the Indian Income-tax Act, 1922.
Arguments of the Parties
Appellant’s Arguments
- No profit could be said to have been remitted because, at the dates of receipt in British India, the entire outlay on the forest operations had not yet been recovered; profit arises only after full recoupment of expenditure.
- There was in fact no remittance by the appellant; the purchaser’s payments in British India were voluntary and could not be equated with a transfer directed by the appellant.
- Even if there was a remittance, only a proportionate part of the total profit should be deemed included in the Rs 32,000, relying on Turner Morrison & Co. Ltd. v. CIT.
Respondent’s (Revenue) Position
The opinion does not contain a detailed account of the respondent’s legal arguments; the court’s reasoning indicates acceptance of the departmental view that the sums were constructive remittances of profit.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT, Burma v. Bhagwandas Bagla (1942) 10 ITR 35 | Where sale proceeds remitted are merely the recovery of initial outlay, no profit is presumed until outlay is fully recovered. | Distinguished; Court held the present appellant could have remitted expected profit in anticipation of full realisation and, unlike Bhagwandas Bagla, had not shown that the amounts were only capital recovery. |
| Turner Morrison & Co. Ltd. v. CIT (1953) SCR 520; 23 ITR 152 | Possibility of treating only a proportion of remitted amount as profit. | Found inapplicable; because the payments in British India were made under the appellant’s directions, triggering the presumption that the entire profits were included in the remittances. |
Court's Reasoning and Analysis
1. Accrual of Profit: Profit accrued in the year of sale (1942-43); its quantum has been finally fixed at Rs 18,758, a finding binding on the appellant.
2. Presumption on Remittances: Established case-law creates a presumption that sums brought into British India from a foreign business are profits unless the assessee demonstrates otherwise.
3. Failure to Rebut Presumption: The appellant adduced no evidence that the Rs 32,000 represented capital or any non-profit component (e.g., need to wind up the business or reduce capital). Consequently, the presumption stood unrebutted.
4. Constructive Remittance: The purchaser’s payments in British India occurred only because of the appellant’s instructions. This amounted to the appellant receiving the money in Jubbal and, through the purchaser acting as his agent, remitting it to British India. Both the Rs 29,000 paid to him and the Rs 3,000 paid to his creditor were therefore constructive remittances.
5. Distinction from Bhagwandas Bagla: In Bhagwandas Bagla the remittances were of initial outlay by an agent; here the appellant anticipated profits and remitted them accordingly. Hence the earlier decision did not assist him.
6. No Substantial Question of Law: Given the factual findings and settled legal presumptions, the Supreme Court agreed with the High Court that no substantial question of law arose for reference under Section 66(2).
Holding and Implications
APPEAL DISMISSED WITH COSTS.
The Supreme Court affirmed the Punjab High Court’s refusal to compel a reference, holding that the Tribunal’s conclusion involved no referable question of law. The immediate consequence is that the assessment including Rs 32,000 as taxable remitted profit stands final against the appellant. The judgment applies existing principles and does not establish a new precedent beyond reinforcing the presumption regarding remittances of foreign profits.
The Judgment of the Court was delivered by
Sudhi Ranjan Das, C.J— This is an appeal filed with Special Leave granted by this Court on the 18th of May 1954, questioning the correctness of the judgment and order of the High Court of Punjab dated the 25th June 1953 delivered in an application under Section 66(2) of the Indian Income Tax Act, 1922, whereby the High Court dismissed the appellant's application on the ground that no question of law arose from the order of the Income Tax Appellate Tribunal dated the 4th November 1949.
2. The facts are shortly as follows:
3. The appellant, who is a resident of Simla, is a forest contractor and had taken certain forests on lease in 1942-43 in the erstwhile Indian State of Jubbal for exploitation. The work of felling of trees and extraction of timber continued up to 1945-46. No profit or loss account had been prepared for each of the aforesaid four years separately, but a consolidated balance-sheet and profit and loss account had been drawn up for all the four years. In the appellant's income tax returns, the income from the forest: business was calculated and shown by applying the rate of ten per cent net on the sales made in the relevant years.
4. In course of the assessment proceedings for Assessment Year 1943-44, it transpired that the appellant, who was resident and ordinarily resident in British India, had in the relevant Accounting Year 1942-43 sold in Jubbal a quantity of timber in one lot to a single party named Sukh Dial Jagat Ram, a firm carrying on business in Abdullapore in the district of Ambala, for a sum of Rs 1,91,000 (rupees one lakh ninetyone thousand). By his assessment order dated the 2nd February 1948 the Income Tax Officer held that on the sale of timber of the value of Rs 1,91,000 during the relevant accounting period 1942-43, the appellant had made a profit of Rs 20,967. As, however, no part of the sale proceeds was received during the relevant accounting period, the income from the forest business, less the statutory exemption of Rs 4,500, was taken into consideration only for the purpose of fixing the rate. The profits made on sales during the three succeeding accounting periods 1943-44, 1944-45 and 1945-46 were also determined by the Income Tax Officer as indicated in his assessment order.
5. On appeal by the appellant, the Appellate Assistant Commissioner allowed certain expenses, which had been disallowed by the Income Tax Officer, so that the total income from the forest business was reduced. The profit on the sale of timber during the Accounting Year 1942-43 was accordingly reduced from Rs 20,967 to Rs 19,767 and the profits for the three succeeding accounting years were proportionately reduced. On further appeal to the Income Tax Appellate Tribunal, the profits were further reduced by the allowance of a further sum of Rs 5000 so that the profit of the Accounting Year 1942-43 was finally ascertained and determined to be Rs 18,758.
6. In course of assessment for Assessment Year 1944-45, it transpired that out of the purchase price of Rs 1,91,000 for timber sold in the Accounting Year 1942-43, the sum of Rs 1,57,000 was realised from the purchaser in the Accounting Year 1943-44 in the following manner:
(a) Rs 1,25,000 received in cash in Jubbal State.
(b) Rs 29,000 received in cash by the appellant in British India.
(c) Rs 3,000 paid in cash in British India to a contractor named
Sita Ram, who was a creditor of the appellant.
7. The Income Tax Officer took the view that the sums of Rs 29,000 and Rs 3000, aggregating to Rs 32,000, received in the relevant Accounting Year 1943-44 included the entire profit that had accrued or arisen to the appellant on the sale of timber in 1942-43 for Rs 1,91,000 and such profit was assessable to tax under Section 4(1)(b)(iii) as income, profits and gains accrued or arisen to the appellant without British India before the beginning of the previous year, that is to say, in the Accounting Year 1942-43 and brought into or received in British India during the relevant Accounting Year 1943-44 and assessed accordingly.
8. On appeal by the appellant the Appellate Assistant Commissioner upheld the decision of the Income Tax Officer. On further appeal by the appellant the Income Tax Appellate Tribunal took the same view and dismissed the appeal. The Appellate Tribunal, in agreement with the Income Tax Authorities, held that the two payments in British India had been made by the purchaser according to the instructions of the appellant and were consequently tantamount to constructive remittances of those amounts from Jubbal State to British India and that the profits, in the absence of any evidence adduced by the appellant to the contrary, must be regarded as remittances of profits.
9. Being aggrieved by the decision of the Appellate Tribunal, the appellant applied to the Appellate Tribunal under Section 66(1) of the Indian Income Tax Act, 1922, praying that the Appellate Tribunal might state a case and refer to the High Court the following questions of law:
(i) Whether, in the circumstances of the case, there is any material for the finding that instead of direct remittance the assessee has chosen to instruct a debtor in Jubbal State to discharge a part of his debt by making the payment of Rs 32,000 in British India?
(ii) Whether, in the circumstances of the case, the receipt of Rs 32,000 has been correctly held to be a constructive remittance from Jubbal State to British India?
(iii) Whether, in the circumstances of the case, it has been correctly held that the assessee remitted the entire profits of the account year 1942-43 in the sum of Rs 32,000?
(iv) Is there any evidence to support the finding of the Appellate Tribunal that the sale proceeds of Rs 32,000 received in British India includes' entire profits earned or' accrued in Jubbal State in the account year 1942-43?
(v) Whether, there is any material on the record to justify a conclusion that sum of Rs 32,000 received in British India was “Income” and therefore liable to be taxed?
10. Question (v), however, was withdrawn by the appellant and the Appellate Tribunal by its order dated 7th August 1950 dismissed the application in respect of the other questions. The appellant thereupon applied to the High Court of Punjab under Section 66(2) of the Indian Income Tax Act, 1922, praying that the Income Tax Appellate Tribunal be directed to state the case and refer the following questions of law:
(i) Whether, in the circumstances of the case, there is any material for the finding that instead of direct remittance the assessee has chosen to instruct a debtor in Jubbal State to discharge a part of his debt by making the payment of Rs, 32,000 in British India?
(ii) Whether, in the circumstances of the case, the receipt of Rs 32,000 has been correctly held to be a constructive remittance from Jubbal State to British India?
(iii) Whether, in the circumstances of the case, it has been correctly held that the assessee remitted the entire profits of the account year 1942-43 in the sum of Rs 32,000?
(iv) Is there any evidence to support the finding of the Appellate Tribunal that the sale proceeds of Rs 32,000 received in British India includes entire profits earned or accrued in Jubbal State in the account year 1942-43?
11. The High Court issued a rule to the respondent to show cause why the application should not be granted. By its order dated the 25th June, 1953, the High Court dismissed the application with costs. Leave to appeal having been refused, the appellant obtained Special Leave to appeal from this Court.
12. Learned counsel appearing in support of the appeal has urged that the decision of the Tribunal had been arrived at as a result of its overlooking the fact that at the dates when the two sums were received in British India no profit had been made at all. The timber had been sold in the Accounting Year 1942-43, but no payment had been received during that year. In 1943-44 a total sum of Rs 1,57,000 had been received but that sum was much below the total outlay. It is contended that profit is the excess receipt over the aggregate amount spent in the business and, therefore, no profit can be said to have been received unless and until the entire outlay is recouped. At the date of the receipt of the two sums in British India the entire outlay had not been recovered and, therefore, no profit had been received by the appellant and consequently no profit could be remitted to British India. We are unable to accept this argument. There can be no getting away from the fact that profit accrues or arises on the sale, which in this case took place in 1942-43. Whatever profit there was, it certainly accrued or arose in that year. The profit on the sale of timber in 1942-43 has since been ascertained at Rs 18,758. This finding is final and the appellant cannot go behind it. There being this profit, as eventually ascertained, the presumption, according to the cases referred to in the judgment under appeal, will be that the remittances of money from foreign business to British India must be of profits, unless the contrary were shown by the appellant.
13. Learned counsel for the appellant does not seriously dispute the correctness of the decisions referred to in the judgment under appeal but raises two questions. In the first place, he contends that, at the date of the receipt of the amounts in British India, the entire outlay had not been recouped and the profit had not been recovered and, therefore, the presumption cannot arise. He relies on the decision in CIT, Burma v. Bhagwandas Bagla [1942] 10 ITR 35 in support of this contention. There is no force in this contention, because it may well be that the appellant knew that his party was solvent and sound and in anticipation of the realisation of the entire amount, the appellant remitted the entire profit, which he calculated would eventually come in, to British India. Indeed the events, as they transpired, fully support such view. The appellant cannot question that there was, in fact, profit which was less than the amount remitted. It was open to him to adduce evidence to show that he was winding up his business and reducing the establishment or was not in need of so much monies to be invested as capital in his business and, therefore, was remitting his capital which became unnecessary for the Jubbal business. This he failed to do. In the circumstances the appellant did not discharge the onus that was on him and the Income Tax Appellate Tribunal was quite correct in coming to the conclusion that the sum of Rs 32,000 included the profits made on the sale of timber for Rs 1,91,000 in the Accounting Year 1942-43. The facts of the case relied on by the learned counsel were quite different. There the assessee had sent timber to a foreign country for sale and his agent realised the sale proceeds and remitted the same to the assessee. Those sale proceeds were obviously return for the goods sent out for sale and therefore, as pointed out by Roberts, C.J, at p. 50 the amounts remitted by the agent wore the initial outlay and no question of profit could arise until the entire outlay was recovered. Therefore, that decision can have no application to this case.
14. Learned counsel then contends that there was no remittance by the appellant from Jubbal to British India. It may be recalled that the sum of Rs 3000 was paid by the purchaser to a creditor of the appellant. This circumstance itself clearly indicates that the purchaser must have been directed by the appellant to pay the amount to his creditor in British India. What did this amount to? Instead of receiving the money from the purchaser in Jubbal and remitting the money in his turn to his office in British India and directing his British Indian office to pay to his creditor in British India, the appellant directed his purchaser, who was indebted to him, to pay the amount direct to the appellant's creditor in British India. For this purpose the purchaser was-nothing but the appellant's agent. Therefore, the Tribunal was quite correct in saying that, in the circumstances, the payment was undoubtedly a constructive remittance of money by the appellant from Jubbal to his British Indian office. Similar considerations apply to the payment of Rs 29,000 by the purchaser to the assessee himself in British India. The purchaser bought the timber in Jubbal and floated them down to its place of business at Abdullapore in the district of Ambala. The price was payable in Jubbal. In fact it made the bulk of payment, namely, Rs 1,25,000 in Jubbal and ordinarily, left to itself, the purchaser would have also paid Rs 29,000 at Jubbal. Why then, did the purchaser pay that amount to the assessee in British India? Obviously because it was instructed to do so by the appellant. An affidavit affirmed by Sukh Dial, a member of the purchaser firm, was filed and it is significant that he does not state in his affidavit that his firm made the two payments in British India at its own volition and without being asked to do so by the appellant. In view of the surrounding circumstances the Appellate Tribunal and the Income Tax Authorities were, in our opinion, fully justified in concluding that the purchaser made the two payments in British India under the instructions of the appellant and that certainly amounts to a constructive remittance of those amounts by the appellant himself from Jubbal to British India. This conclusion naturally attracts the application of the decisions which clearly establish that remittances of money in such circumstances from foreign country to British India must be presumed to be of profits. There is no evidence adduced by the appellant to rebut this presumption.
15. It was next contended that the whole of the profit of Rs 18,758 cannot be regarded as having been brought into or received in British India, but that a proportionate part of the total profit attributable to Rs 32,000 should be regarded as having been included in that sum. Reliance was placed on the decision of this Court in Turner Morrison & Co. Ltd. v. CIT [1953] SCR 520, {1953} 23 ITR 152. That decision has really no application to the facts of the present case. As already stated the two amounts were paid in British India at the direction of the appellant, which means the same. thing as if the payment had been made by the purchaser and received by the appellant from his purchaser in Jubbal and then remitted by the appellant through the purchaser as his agent to himself and his creditor in British India. In such a situation the presumption is that the profit was included in the remittances and the decision referred to above can have no application.
16. On a consideration of the facts and circumstances of this case, no real or substantial question of law arises from the order of the Appellate Tribunal and the High Court was justified in dismissing the appellant's application under Section 66(2) of the Indian Income Tax Act, 1922. For reasons stated above this appeal is dismissed with costs.
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