Beaumont, C.J:—

This is a reference made by the Commissioner of Income-tax under section 66(2) of the Indian Income-tax Act, 1922, and it raises a question of considerable importance, and not, I think, easy to answer.

The facts out of which the question arises are not in dispute. The assessee carries on business in Bombay as a broker in cotton, silver and other commodities, and he also as a regular business enters into contracts on his own behalf for the sale and purchase of such commodities with persons in British India and also with persons outside British India, particularly in New York and Liverpool, which are the places with which we have to deal on this reference. During the year of assessment, which is the year terminating on March 31, 1934, the assessee made a profit of Rs. 11,54,830 from the business of buying and selling commodities outside British India, and the question is whether he is liable to be assessed in respect of this sum.

The actual questions raised by the Commissioner are:—

(1) Whether in the circumstances of the case all the profits and gains which accrued and arose to the assessee from the business of future delivery contracts entered into with parties outside British India in which no delivery was ever taken or given or any part of such profits and gains can be said to have accrued or arisen in British India; and

(2) Whether as regards that part of the said business of future delivery contracts in which delivery had been actually taken or given outside British India, the profits or gains which accrued can be said to have accrued wholly or partly in British India.

In my opinion no distinction in law exists between the classes of business referred to in the two questions. It makes no difference whether the contracts of sale and purchase were followed, or intended to be followed, by actual delivery of the commodities; or, whether the contracts of sale and purchase were intended to be closed, and were closed, by corresponding contracts of purchase and sale, so as to result merely in payment of differences. In either case the nature of the contract in law is the same. Nor do I think there was any essential difference between the business conducted in New York and the business conducted in Liverpool, and I think the Commissioner has not correctly appreciated the rules of the Liverpool Cotton Exchange to which he refers. In the case of business contracted both in New York and Liverpool the essential features were the same. The assessee in Bombay instructed by telegram a broker in New York or Liverpool to buy or to sell commodities, and the broker accepted the instructions either in New York or Liverpool, as the case may be, and entered into the requisite contracts with third parties on the foreign exchange, and notified the assessee accordingly.

It is admitted that the profits arising from this class of business during the year of assessment have not been received in British India, and the question is whether these profits accrued or arose in British India. That question depends on the construction of section 4(1) of the Indian Income-tax Act, which provides:—

“4. (1) Save as hereinafter provided, this Act shall apply to all income, profits or gains, as described or comprised in section 6, from whatever source derived, accruing, or arising, or received in British India, or deemed under the provisions of this Act to accrue, or arise, or to be received in British India.”

There is no question here of the profits being deemed to accrue or arise in British India, the question is whether they did in fact accrue or arise in British India.

Now it is clear that the words “accruing or arising” extend the scope of the tax to income which may not be received in British India, and that if moneys are earned by carrying on a business or by exercising a profession in British India, liability to tax cannot be avoided by arranging that the moneys are to be paid outside British India. It is, I think, also clear that the question to be determined in this connection is the place where the profits accrue or arise, and not the place where the business in which the profits are earned is carried on, or where the assessee resides; and this point to my mind renders authorities on the English Act irrelevant, since the English Act does not deal with the place where profits accrue or arise.

The contention of the assessee is that his right to profits arose in each case under the contract made with his broker, that contract was made outside British India where the instructions were accepted and acted upon, that the carrying out of the contract by the broker, including the contracts with third parties, which he entered into, took place outside British India, and that accordingly the profits accrued and arose cut of British India. The assessee relies on two cases, Board of Revenue, Madras v. Ramanadhan Chetty and Aurangabad Mills, Limited, In re, in both of which a business owned by a person or company resident in British India was carried on by agents outside British India, and it was held that, as all the processes which resulted in profits took place outside British India, the mere fact that the owner and controller of the business was in British India did not make the profits accrue or arise in British India. The Advocate General contends, on the other hand, that in this case the whole control of the business was with the assessee in British India, that it was he who in Bombay, exercising his skill and judgment, gave the instructions which ultimately resulted in the accrual of profits, and that, therefore, the profits accrued in British India. He relies on various decisions on the English Act, which, for the reason I have already given, appear to me to be irrelevant, and he also relies on the decision of the Privy Council in Commissioners of Taxation v. Kirk. In that case their Lordships were considering a New South Wales statute in which the relevant word was “derive”, which their Lordships treated as equivalent to “arise or accrue”. The profits in question were derived from the business of mining on leasehold lands held from the Crown in New South Wales, and their Lordships held that the process resulting in the profits consisted of four parts, viz., (1) the extraction of the ore from the soil; (2) the conversion of the crude ore into a merchantable product; (3) the sale of the merchantable product; and (4) the receipt of the moneys arising from the sale; and they held that as the first two processes took place in New South Wales, the profits were derived there. The case may be an authority for the proposition that profits may be said to accrue in a country although all the acts which result in such profits do not take place there, but to my mind the case has no bearing on the matter with which we have to deal. The profits in the present case in fact accrued or arose under the contracts made by the broker. The broker in Liverpool or New York enters into a contract to buy 500 bales of cotton, and he enters into another contract for sale of 500 bales, and it is on the working out of those two contracts that profit accrues. The fact that the contracts are entered into by reason of instructions received from Bombay on behalf of a principal in Bombay does not to my mind affect the place where the profits accrue or arise, it only affects the title to the profits when made. The question which we have to determine is really this: Does the fact that profits arising under contracts made abroad depend on the exercise in Bombay of knowledge, skill and judgment on the part of the assessee, and upon instructions emanating from Bombay, involve that the profits accrued or arose in British India? To my mind it does not. Analogies in such cases are dangerous because not exact, but I will give one illustration which serves to illustrate my view of the matter. Take the case of a man exercising the profession of a novelist in British India. He writes a novel in British India and sends it to his agent in England with instructions for its publication there. The agent makes an agreement in England under which profits accrue to the author which are retained in England. In such a case can it be said that the profits accrued or arose in British India because the novel was written in British India and the instruction for its publication came from there? In my opinion the answer to that question must be in the negative. It seems to me that if the Crown is right, their case must be put as high as this (and the Advocate General did not hesitate so to put it): that once you find that a business is carried on in British India, all profits arising from that business must be held to accrue in British India. To my mind so to hold would be to strain the language of section 4, which deals with the place where the profits accrue or arise and not the place where the person who is the ultimate source of profit resides or carries on business. In construing a taxing Act the Court ought not to strain the language of the Act against the tax-payer. In my opinion, therefore, both the questions asked by the Commissioner must be answered in the negative.

The Commissioner to pay the costs of the assessee to be taxed on the Original Side scale.

Rangnekab, J.:—The question on this reference is whether the profits made by the assessee as the result of certain operations carried on by him on the New York and Liverpool Cotton Exchange are liable to be taxed under section 4(1) of the Indian Income-tax Act. The nature of the transactions and the manner in which they were carried on is not now in dispute, though it seems to me the Income-tax authorities have not properly appreciated the same.

The assessee has a business of his own in Bombay and he also does business on foreign exchange, and the way in which he does this is that he sends orders from Bombay by telegram to his broker at these places and the latter who is a member of the local exchange executes the orders as a broker on behalf of the assessee, and on the transactions being put through, informs the assessee of the same. As the result of these transactions the assessee in the accounting year earned a sum of rupees eleven lacs odd, which admittedly has not been brought into British India or received in British India, and it is this sum which the Crown says is liable to be taxed under the Indian Income-tax Act.

The learned Commissioner has held that the business was speculative. This, in my opinion, is due to the fact that he has not properly appreciated the legal position. However, the nature of the business in question is clearly irrelevant under section 4 of the Act, and I need not discuss this matter further.

The principal charging sections are sections 3 and 4. section 3 lays down who is to pay the tax. Section 4 describes the nature of the income that may be taxed. The scheme, therefore, is that the Act applies to all income from whatever source derived (a) accruing in British India, (b) arising in British India, or (c) received in British India. Then there are some sections under which although the income may not accrue or arise or be received in British India, still it may be deemed to accrue, arise or be received in British India.

The assessment in this case is made under the charging section 4(1) of the Act, and the only question which arises, for determination is whether within the meaning of that section this sum can be said to have accrued or arisen in British India. The section is in the following terms:—

“Save as hereinafter provided, this Act shall apply to all income, profits or gains, as described or comprised in section 6, from whatever source derived, accruing, or arising, or received in British India, or deemed under the provisions of this Act to accrue or arise, or to be received in British India.”

It will be seen from the language of section 4(1) that what it charges is the income in British India and that the place of the source is immaterial. It is the place where the income accrues, etc., that matters. Thus, for example, “Property”, which is one of the specified sources in section 6 of the Act, may not be in British India and yet the income from it may and can accrue, etc., in British India and then it will be caught under the section. Similarly, the right to receive the income in British India is also immaterial as also the question whether the income derived from any source is payable in British India. Nor does the question of residence of the person liable under section 3 arise under section 4(1). Therefore, what is important under these sections is the place where the income accrues, etc., and the person to whom it accrues, etc. It is clear that the latter question arises only under section 3 and not under section 4(1).

Then it seems to me there is a distinction between the terms “accruing” or “arising” and “receiving” in British India, and the terms “accruing” or “arising” must connote something more than the expression “received”. Income may accrue or arise outside British India, but if received in British India, it will attract the tax under section 4(1). Similarly, it is obvious that the income may accrue in one place, arise in another, and may be received in a third place, and before it can be taxed, it must be shown that either it has accrued or arisen or received in British India. The question then is, whether the income in this case, can be said to have accrued or arisen in British India.

Now, in considering this question, the circumstances of each case have to be considered, and the question becomes complex when as here the activities which resulted in the income took place partly in and partly outside British India. In this case the assessee employed a broker to put through certain transactions. There is no evidence before us as to the agreement between the broker and the assessee. Ordinarily the broker was not bound to put through the transactions and he could refuse to carry out the order sent to him. Then on the facts of the case the contract of agency must be deemed to have been made outside British India. Then the broker put through the transactions on the two exchanges. The contracts which resulted in the income also were made outside British India. A contract is made at the place where the offer is accepted. It is difficult, therefore, to hold in these circumstances that the profits accrued or arose in British India.

The Commissioner thought the assessee was carrying on business in Bombay, that the control of the business was with the assessee, and therefore the profits from the business accrued or arose in British India. The same argument has been put before us by the learned Advocate General, who seems to have gone much further. He says that if it is established that the assessee is carrying on business in British India, then the profits which he makes—which must be attributed to the business—, must accrue or arise in British India, because they come home to him in British India. I am unable to accept this contention. To accept this argument is to hold that if there is a right to receive the income in British India, then irrespective of all other considerations, the income must be deemed to accrue in British India. That, in my opinion, is clearly not what is within section 4(1).

Then it is said that the assessee was exercising control over the business and it was his skill and ingenuity that resulted in the income. I think it is established by authorities that even if the control of the business is exercised in British India, if the transactions which ultimately resulted in the income took place outside British India, then it could not be said that income accrued or arose in British India. I need refer only to Board of Revenue, Madras v. Ramanadhan Chetty and Aurangabad Mills, Limited, In re. The learned Advocate General has sought to distinguish these cases and he says that in those cases the real control was exercised not by the owner in British India but by his servants or agents who actually were entrusted to carry on the operations, which resulted in the income. One answer to that is that after all they were the servants of the owner of the business and it cannot be denied on the facts of these cases that it was open to the owner of the business to control their operations as regards the business. Then it is said that the assessee was exercising his judgment and skill in regard to the business which he put through the brokers on these exchanges. I feel some doubt as to the correctness of this position. Undoubtedly, to a certain extent, at any rate, initially, the assessee decided when to send the order to the broker and the nature of it. But that is not all. The subsequent transactions must, to a certain extent, having regard to their nature, depend upon the skill and judgment of the broker. But assuming the income entirely depended on the skill and judgment of the assessee in British India, what then? In my opinion this is not the test for ascertaining the nature of the income liable to tax under section 4(1), unless something more is read in the section.

In my opinion, the scheme of the Act, including in particular the sections under which the income which in fact had accrued outside British India is caught by providing that it shall be deemed to have accrued in British India, is against the contention of the Crown. To accept the contention of the Crown, it seems to me, you have got to read something in section 4 which is not there and to bring that section in conformity with the corresponding provisions under the English law. The English Act does not deal with the location of the income and thus differs from the law here. In this view I do not propose to refer to the case cited under the English or Colonial law.

Undoubtedly the question which is raised is not free from difficulty, and the present case is on the border line. I am not prepared to deny that there is considerable force in the view which the Crown wants us to take. It seems to me that when the position is such that either one or the other view is equally possible when construing a taxing statute, the principle laid down by Pollock C.B in The Dock Company at Kingston-upon-Hall v. Browne, namely, the subject is not to be taxed unless the language of the statute clearly imposes the obligation, should be followed.

For these reasons, I think, the questions must be answered in the manner proposed by my Lord the Chief Justice.

Answers accordingly.

Y.V.D