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Hiralal Kalyanmal Assessee v. Commissioner Of Income-Tax, Bombay
Concise Analytical Summary of the Opinion
Factual and Procedural Background
This opinion is a reference made by the Commissioner of Income-tax under Section 66(2) of the Income-tax Act of 1922, asking the Court to answer two distinct questions arising from assessments of the assessees.
The material facts relevant to the first question are: in 1919 Kalyanmal Mills, Ltd. (a joint stock company registered in Indore) entered into an agreement with the assessees under which the assessees were to receive a commission of one per cent on the gross sale proceeds of the company's cloth and yarn. Clause (5) of the agreement provided that commission would be due yearly on 31st December and paid immediately thereafter. Sales under the agreement were effected in Indore on terms "for Indore"; the purchasers were Bombay merchants. The Indore shop drew hundis on the Bombay merchants; those hundis were accepted by the Bombay merchants, collected by the assessees in Bombay, and after realisation the proceeds were paid to the company in Indore. The commission payable at year-end was paid in Indore and not received in British India. The first question asks whether the 1% commission realised by the assessees on hundis collected in Bombay is liable to income-tax and supertax in British India — i.e., whether that commission "accrued or arose" in British India within the meaning of Section 4(1) of the Income-tax Act.
The second question concerns the character of the assessees' other activities. Apart from the commission agency business, the assessees carried on (a) banking and cotton speculation (buying and selling cotton for forward delivery and related trading) and (b) a cotton jatha business (handling cotton on behalf of upcountry clients and earning brokerage, godown rent, muccadami, insurance differences, etc.). The Commissioner found the two sets of activities constituted two separate businesses: they were conducted in different names, with separate books, and were distinct in character. The cotton jatha business had been closed down before the year of assessment, but in the assessment year the assessees incurred expenses to collect outstandings of that business. The legal issue is whether, on the material before the Income-tax Officer, the cotton jatha business could properly be treated as a separate business that had ceased prior to the assessment year (with the consequence that certain expenses would not be allowable against the profits of the continuing business).
Procedurally, the Commissioner referred the two questions to the Court under Section 66(2). The Court considered the factual findings and arguments, and delivered answers to both questions. Beaumont, C.J. delivered the principal judgment; Kania, J. delivered a concurring opinion and agreed with the conclusions.
Legal Issues Presented
- Whether the commission of one per cent realised by the assessees on the value of the hundis collected by them in Bombay in respect of cloth sold by their Indore shop to Bombay merchants is liable to be assessed to income-tax and supertax in British India — i.e., whether that commission "accrued or arose" in British India within the meaning of Section 4(1) of the Income-tax Act.
- Whether there was material before the Income-tax Officer on which he could conclude that the cotton jatha business (in respect of the legal expenses claimed for recovery of outstandings) was a separate business of the assessees which had been closed at the time of the assessment in question — a determination that affects the allowability of those expenses under section 10(2)(ix) of the Income-tax Act.
Arguments of the Parties
Commissioner's Arguments
- On the first question: the Commissioner argued that the source of the commission is the receipt of the sale proceeds, and since the hundis (sale proceeds) were collected in Bombay, the commission either accrued or arose in British India or was received in British India.
- On the second question: the Commissioner maintained the view (as reflected in his findings) that the cotton jatha transactions constituted a separate business distinct from the banking/speculation and other activities, supporting a conclusion that the cotton jatha business had been closed before the assessment year.
Assessees' Arguments
- On the first question: the assessees' position (as reflected and accepted by the Court) was that the real source of the commission is the sale which took place in Indore; the commission was payable only at the end of the year and was paid in Indore, and therefore it did not accrue or arise in British India merely because the sale proceeds were collected in Bombay.
- On the second question: the assessees contended that the cotton jatha activities and the banking/speculation activities were branches of the same overall business (i.e., two branches of one business) rather than two distinct businesses; if so, expenses to recover outstandings would be allowable under section 10(2)(ix).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| 33 Bom. L.R 382 | Illustrates a case where sales and receipt of sale proceeds were both in Bombay and the Court held that the commission accrued in British India; the Court considered whether the "real source" was the agreement or the local sales. | The Court relied on the distinction in facts: in 33 Bom. L.R 382 the sale and receipt occurred in Bombay and the commission accrued there; in the present case the sales and passing of property occurred in Indore and the Court held the decision must differ — the sale (in Indore) is the real source of commission here. |
| 52 Mad. 2962 | Referred to as an authority illustrating the difficulty and divergent views in determining whether two activities are separate businesses or branches of the same business. | Used to show that different benches of the Madras High Court adopted varying views; cited as demonstrating that the question is primarily one of fact for the tax authority and that no universal rule can be easily formulated. |
| (1934) 3 I.T.R 113 | Another Full Bench decision of the Madras High Court cited to show divergent approaches to the question whether two activities are separate businesses or branches. | Cited by the Court to reinforce the point that such determinations are fact-sensitive and that reported decisions may differ; supports the principle that the Commissioner’s factual finding is conclusive if supported by evidence. |
| (1927) 13 Tax Cas. 834 | Decision of Rowlatt J. suggesting that some inter-relation between activities is necessary to constitute them branches of the same business. | Quoted to emphasize that mere common ownership is not decisive and that inter-relation is a relevant factor; the Court relied on the principle that the presence or absence of inter-relation is a factual matter for the Commissioner. |
| 13 Tax Cas. 83 | Referenced in the opinion (as reflecting Rowlatt J.'s view) that there must be some inter-relation between activities to treat them as branches. | Again used to underline that the question is one of fact and that evidence of inter-relation (or its absence) is central to the Commissioner’s determination; the Court found there was sufficient evidence to support the Commissioner's conclusion of separateness. |
Court's Reasoning and Analysis
The Court's reasoning is presented separately for each question.
First question — source and situs of the commission
- The Court began by identifying the relevant contractual arrangement: the 1919 agreement provided that commission at the rate of one per cent would be due annually on 31st December and payable immediately thereafter. The commission was not payable on receipt of sale proceeds but only at year-end.
- The Court examined factual distinctions between the present case and 33 Bom. L.R 382. In that earlier decision, sales and receipts were both in Bombay and the court there held the commission accrued in British India. The present case differs because the sales were effected in Indore and the property in the goods passed there; the receipt of the hundis in Bombay was a consequence of the recovery mechanism rather than the contractual source of the commission.
- Beaumont, C.J. reasoned that the real source of the commission is the sale itself (as stated in 33 Bom. L.R 382), and where the sale occurred (Indore) is therefore decisive for the situs of the accrual. He observed that the commission would become due even if the company released the purchasers from their obligation to pay, and hence the commission does not depend on the accident of receipt of payment in Bombay.
- The Commissioner’s contention that the receipt of sale proceeds in Bombay constituted the source of the commission was rejected: the Court held that receipt of sale proceeds is not necessarily part of the contract between the seller and purchaser, and an accidental or intermediate collection point (Bombay) cannot convert the situs of accrual.
- Kania, J. reinforced this reasoning with an illustrative example: if a bank in Bombay recovered the sale proceeds and credited them to an account, that recovery would not create a source of income in Bombay. The receipt of sale proceeds in Bombay represented only the sale price received on behalf of the company and did not amount to receipt of the selling agents’ commission, which was a separate right contingent on the contractual arrangement and payable at year-end.
- Both judges concluded that on the facts as found, the commission neither accrued nor was received in British India; the real source was the sale in Indore and the commission was payable and paid in Indore.
Second question — whether the cotton jatha business was a separate business
- The Court framed the second question narrowly: its jurisdiction under the reference is to decide whether there was any evidence before the Commissioner to support his factual conclusion that the cotton jatha business was a separate business which had been closed at the time of assessment.
- The Court reviewed the factual findings recorded by the Commissioner: two separate businesses, separate books of account, different names under which they were conducted, and distinct characters of the activities. The cotton jatha business comprised handling cotton for upcountry clients and earning brokerage, godown rent, muccadami, insurance differences, whereas the other business involved banking, speculation and cotton on the assessees' own account.
- The Court considered authorities cited to illustrate difficulty and lack of a fixed rule for distinguishing separate businesses from branches (including divergent decisions of Madras benches and Rowlatt J.'s observation as to inter-relation), and concluded that no universal rule can be laid down; the issue is one of fact for the Commissioner.
- Applying those principles to the present facts, the Court held there was evidence enabling the Commissioner to conclude that the two activities were separate businesses: different names, separate accounts, and the closure of the commission agency business earlier all pointed to separateness and the capability of independent conduct.
- Because the Commissioner's finding of separate businesses was supported by evidence, the Court would not disturb the factual conclusion. The narrow question before the Court being whether there was material to support the conclusion, the Court answered in the affirmative.
Holding and Implications
Holding:
- First question: Answered in the negative — the Court held that the one per cent commission did not accrue or arise in British India and was not to be treated as income accruing or received in British India for the purposes of assessment (the real source being the sale in Indore; commission payable and paid in Indore).
- Second question: Answered in the affirmative — the Court held there was material before the Commissioner on which he could conclude that the cotton jatha business was a separate business that had been closed before the year of assessment.
Implications:
- As to the first question, the practical consequence is that the assessees' 1% commission (arising from the Indore sales and payable in Indore) was not liable to income-tax and supertax in British India on the basis that it neither accrued nor was received there.
- As to the second question, because the Commissioner reasonably found that the cotton jatha business was a distinct and closed business, expenses incurred in relation to that closed business in the assessment year would not be allowable against the profits of the continuing banking/speculation business (the opinion explains that if the cotton jatha business had ceased and was distinct, related expenses could not be set off against the other business' profits under the statutory provision cited).
- The Court did not purport to establish any sweeping legal rule beyond its factual applications; it emphasized that the second question is a classical question of fact within the Commissioner's province and that reported decisions vary — no new general precedent was claimed to be created. The Court made no order as to costs, noting each side succeeded on one question.
Concluding procedural note: Beaumont, C.J. delivered the principal judgment answering the first question in the negative and the second in the affirmative; Kania, J. concurring, agreed with those answers. The reference was answered.
Beaumont, C.J:— This is a reference made by the Commissioner of Income-tax under Section 66(2) of the Income-tax Act of 1922, raising two quite separate and distinct questions. The first question is:
Whether the commission of one per cent, realised by the assessees on the value of the hundis collected by them in Bombay in respect of the cloth sold by their Indore shop to merchants in Bombay is liable to be assessed to payment of income-tax and supertax in British India?
2. The facts in relation to that question are that by an agreement made in 1919 between the Kalyanmal Mills, Ltd., which was a joint stock company registered in Indore of the one part, and the assessees of the other part, the assessees were to be entitled, amongst other things, to be paid by the company a commission at the rate of one per cent, on the gross sale proceeds of all cloth and yarn of the company, and it was provided in cl. (5) of the agreement that the commission should be due to the assessee firm yearly on 31st December in each and every year during the continuance of the agreement and be paid immediately there, after. The facts as found are that sales were effected in Indore, being on terms for. Indore; the purchasers being Bombay merchants, the purchase moneys were received in the form of hundis drawn by the assessees through their Indore shop, and accepted by the Bombay purchasers; such hundis were collected by the assessees in Bombay and after realisation paid to the company in Indore. So that, the position being that sales were effected outside British India, the proceeds of such sales were collected by the assessees in British India, and the commission of one per cent, was ultimately paid outside British India, the question is whether it can be said that the commission of one per cent, accrued or arose in British India within the meaning of Section 4(1) of the Income-tax Act. The commission payable at the end of the year was paid in Indore and not received in British India. We were referred to a decision of this Court in 33 Bom. L.R 3821, in which the facts were somewhat similar, but there were two important distinctions. In that case the assessees were also selling agents of a mill company registered in Indore, and they had an agreement under which they were entitled to a commission of one and a half per cent, on the gross sale proceeds of all cloth produced by the mill. So that the agreements in the two cases were very similar, except that there does not appear to have been any provision in the agreement dealt with in 33 Bom. L.R 382 that the commission was to be payable at the end of the year. In that case sales were effected in Bombay, and the moneys were received in Bombay, and the Court held that in that case, though rather near to the line, the commission accrued in British India. The Court held the question to be whether the real source of the commission was the agreement made in Indore, or the sales in Bombay and that the sales in Bombay were the tax source. The Court relied to some extent on the fact that under the agreement the assessees could deduct their commission from the proceeds of sales which they received in Bombay. Now, in this case the sales were not in Bombay, but in Indore, and the assessees could not deduct their commission until the end of the year, because nothing was payable until the end of the year. Those are two important distinctions. The argument on behalf of the Commissioner in this case is that the source of the commission is the receipt of the proceeds of sale on which the commission is calculated. But, in my opinion, that is not so. I think the source of the commission is the sale which took place in Indore. The commission would be payable, although the proceeds of sale were not actually received, if the company voluntarily released purchasers from their obligation to pay. In my opinion, it is impossible to say that the commission accrued or arose at the place where, and at the time when, the purchase moneys were received. I think it is more accurate to say, as we said in 33 Bom. L.R 382, that it is the sale which is the real source of the commission, and as in this case the sale took place in Indore, whereas in 33 Bom. L.R 382 the sale took place in Bombay, the decisions in the two cases must necessarily be different. I would therefore answer the first question in the negative.
3. The second question arises in this way. The assessees had, apart from their commission agency business, two other businesses, one of them being cotton speculation and banking, and the other cotton jatha business. The findings of the Commissioner are that there were two separate businesses; separate sets of account books were maintained for the two businesses; they were conducted in different names; and to a great extent they were distinct in their character. The cotton jatha business consisted in selling cotton belonging to upcountry clients and earning income thereby in the form of brokerage, godown rent, muccadami, insurance differences, etc.; while the other business consisted of banking, speculation and cotton on the assessees' own account. On those facts the Commissioner came to the conclusion that the two businesses were separate. On the other hand, the assessees maintain that they were two branches of one business. The relevance of the question is this. The cotton jatha business was closed down before the year of assessment, but in the year of assessment the assessees incurred certain expenses in endeavouring to collect outstandings of that business. If the business was still subsisting, because it was merely a branch of a still subsisting business, then the expenses would be allowable under section 10(2)(ix) of the Income-tax Act. If on the other hand, the cotton jatha business was a distinct business, and it had ceased to exist before the year of assessment, the expenses incurred in relation to it would not be allowed against the profits of the other business. Now, whether these two businesses were separate businesses, or were really two branches of the same business, is obviously a question of fact for the Commissioner to decide, and the only question raised, and the only question that can be raised, is:
Whether there was material before the Income-tax Officer on which he could come to the conclusion that the cotton jatha business, in respect of the legal expenses for which allowance has been claimed by the assessees, was a separate business of the assessees which had been closed at the time of the assessment in question?
4. All that we have to consider is whether there was evidence before the Commissioner on which he could reach the conclusion that these were two separate businesses. We were referred to various cases which demonstrate that it is not always easy to determine whether businesses are independent businesses, or separate branches of the same business. But the difficulty of determining a question of fact does not make it a question of law. We were referred to 52 Mad. 2962 which was a decision of a Special Bench of the Madras High Court and another decision of a Full Bench of the same Court in (1934) 3 I.T.R 113, and in those two cases the Courts to a great extent adopted different views. We were also referred to a decision of Rowlatt J. in (1927) 13 Tax Cas. 834. I think it would be very difficult, if not impossible, to formulate any rules for determining questions of this nature. It is obvious that mere common ownership of two businesses does not mean that they are merely branches of the same business. It is also I think obvious that the mere fact that the two businesses are of a distinct nature does not necessarily mean that they are distinct businesses. You can have two branches of a multiple store, one selling drugs, and the other selling cloth. Nobody would suggest that these two departments constitute two different businesses. On the other hand, if you have a shop in Bombay selling cloth, and a shop in Ahmedabad selling drugs under different names and different management, and with separate accounts, common ownership would hardly make them one business. Rowlatt J. in (1927) 13 Tax Cas. 83 suggests that there must be some sort of inter-relation between the two businesses to constitute them branches of the same business. At any rate, all these cases recognize the fact that this matter is a question of fact to be determined by the Commissioner, and if there is any evidence enabling him to determine the question, then his determination is final. I am unable to say that there was no evidence in this case on which the Commissioner could come to the conclusion which he reached that there were two distinct businesses. The two businesses may have overlapped to some extent, but there was evidence that they were separate in their character. I am not prepared to say that there was no evidence on which the Commissioner could reach the conclusion he reached. Therefore, the answer to the second question will be in the affirmative. There will be no order as to costs, each side having succeeded on one question.
5. Kania, J.:— The Commissioner has referred two questions for the opinion of the Court. On the first question, the relevant facts are that the assessees are the managing agents and also the selling agents of a textile mill at Indore. An agreement in that connexion was made between the mill company and the assessees in 1919. That agreement provides for the opening of shops at Indore and Bombay for the business of the company and the company has agreed to pay the costs of running those two shops. At both those shops cloth and yarn produced by the mill company were sold. In respect of the sales effected in Bombay by the assessees they earned the selling agency commission, for which they have been assessed and the same is paid. In respect of the sales effected at the Indore shop the facts are found in the statement of case submitted by the Commissioner. According to that statement Bales took place at the Indore shop on for terms to Bombay merchants. To recover the sale proceeds the Indore shop drew hundis on the Bombay merchants, which were in due course accepted and honoured by the Bombay merchants. The proceeds of those hundis were received by the assessees in Bombay. On those facts it is argued on behalf of the Commissioner that the commission at one per cent, on those gross sale proceeds either accrued or arose in British India, or was received in British India. 33 Bom. L.R 382 was relied upon in this connexion. The facts as reported in that case clearly show that the sales were effected there by the assessees in Bombay to Bombay merchants, and the sale proceeds were all recovered in Bombay. Therefore not only the contract of sale but the sale took place in Bombay in that case. On those facts the Court found that the income accrued in British India. In the present case those two vital factors are wanting. The sales took place at Indore, and the property in the goods also passed to the Bombay merchants as soon as the goods were railed at Indore. Therefore the sale was completed at Indore.
6. It was argued on behalf of the Commissioner that the receipt of the sale proceeds is the source from which the income accrued. In my opinion, this contention is unsound. The receipt of the sale proceeds at a particular place is not stated to be a part of the contract between the mill company and the merchants. The accident, therefore, of the sale proceeds being received in Bombay cannot make that the source of the income in Bombay. To illustrate, suppose instead of the assessees receiving the sale proceeds, the same were recovered by a bank in Bombay, and credited by the bank to the account of the assessees which was being operated upon by the assessees from Indore and also by their manager in Bombay, I fail to see how the receipt of the sale proceeds from the merchants in Bombay by the bank would constitute a source of income in Bombay. The underlying assumption that the receipt of the sale proceeds is a source, in my opinion, is unjustified. The commission had to be calculated on the amount of the sale proceeds. It was payable, however, only after the end of the year. Therefore, the receipt of the sale proceeds does not give rise to the accrual of the income in British India.
7. The second part of the argument was that the receipt of the sale proceeds included the receipt of the commission in British India, and, therefore, the commission was received in British India. This contention is also unsound. The amount that was received was only the sale proceeds. That amount, when paid to the mill company, would give rise to a right in the selling agents to receive their commission. To put it in other words, supposing the selling agents failed to pay the amount to the mill company, would they have a right to receive any commission at all? It seems to me certainly not, because they have committed a breach of their agency agreement, and, therefore, they will not be entitled to any remuneration for their work as agents. The receipt of the sale proceeds, therefore, means only the sale price received on behalf of the company, and because the agents are entitled to a commission worked out on the amount of the sale proceeds, the receipt of the sale proceeds does not amount, in my opinion, to the receipt of the selling agency commission.
8. The second question is limited by its very nature. The Court has jurisdiction only to inquire whether there was any evidence before the Commissioner for his conclusion on a question of fact that the two businesses were separate. According to the facts stated in the reference, the two businesses were one of banking and speculation which, I understand, would mean buying and selling cotton for forward delivery, and the other of commission agency which includes the receipt of cotton from upcountry constituents, advancing money to the constituents, and the earning of interest, brokerage, muccadami, insurance differences, etc., as stated in the reference. They were done in two different names. The assessees had kept also two separate books of account, and they certainly closed the commission agency business many years ago. On those facts the Commissioner had come to the conclusion that the two businesses were separate, and I do not think that the conclusion of the Commissioner is liable to be disturbed by this Court on the ground that he had no evidence before him to show that. The question of fact is bound to vary in each case, and little assistance is likely to be derived from reported decisions which hold that in particular cases the businesses were separate or were the same. It is difficult, if not impossible, to lay down any general standard by which the distinction could be clearly made and decided. The reported cases show that ownership is not the sole criterion. In the same way the decisions also show that the nature of the businesses must in some way be shown to be connected; otherwise there would be some reason to believe that the businesses were separate.
9. In the present case the assessees have kept the two businesses in separate names, and it cannot be disputed that an individual may carry on a commission agency business in cotton, without necessarily doing the business of a merchant, and vice versa. The fact that one business is done, while the other is closed, shows that the two are capable of being conducted independently. Under the circumstances, I am not prepared to say that the Commissioner had no evidence to come to the conclusion he did on this question of fact.
10. I agree, therefore, that the answers should be as indicated in the judgment of the learned Chief Justice, and agree with the order made therein.
11. Reference answered.
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