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The Commissioner Of Income Tax v. The Ahmedabad Advance Mills Ltd.
Summary of the Opinion
Factual and Procedural Background
The respondents are cotton spinners and weavers in British India who owned certain sterling bonds of the Government of India, the interest on which was payable in England. For the year ending 31 March 1936, interest on those bonds was paid in sterling in England to agents of the respondents; the rupee-equivalent of that interest was Rs. 18,333. The agents used that sterling in England to purchase mill stores and machinery on behalf of the respondents, which were then shipped to and used by the respondents in British India.
The Income-tax Officer assessed the respondents and included Rs. 18,333 in their income for 1935-36 as income "brought into British India" under Section 4(2) of the Indian Income-tax Act, 1922. The respondents appealed to the Assistant Commissioner, who dismissed the appeal and confirmed the assessment. The respondents then sought a reference on a question of law to the High Court under Section 66(2). The Commissioner referred the following question to the High Court (and expressed the opinion that the answer should be affirmative):
Whether in the circumstances of the case the Income-tax Officer has rightly included in the income liable to tax the amount of Rs. 18,333 on account of interest on sterling securities on the ground that though the said income accrued or arose in England it was received or brought into British India within the meaning of Section 4(2) of the Act.
The High Court (Beaumont C.J. and Blackwell J.) answered the referred question in the negative on 27 September 1937. The present opinion reviews and affirms that conclusion and dismisses the appellant's appeal.
Legal Issues Presented
- Whether interest on sterling securities that accrued or arose outside British India but was applied abroad to purchase goods (mill stores and machinery) which were subsequently brought into British India constitutes income "received in or brought into British India" within the meaning of Section 4(2) of the Indian Income-tax Act, 1922, and is therefore taxable in India.
Arguments of the Parties
Respondents' Position
- The respondents received sterling interest in England and that amount (rupee equivalent Rs. 18,333) was expended in England by their agents to buy mill stores and machinery for the respondents.
- The goods purchased were shipped to British India and used by the respondents in their business; the Commissioner found that the stores and machinery were required for their business and were not to be sold or employed otherwise.
Appellant's Arguments
- The appellant contended that the use to which the stores and machinery have been put in India is immaterial: because they were bought with the sterling equivalent of Rs. 18,333, their arrival in India resulted in Rs. 18,333 of foreign income being "brought into British India" for the purposes of Section 4(2), irrespective of how the money had been expended abroad.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax, Bombay v. Ahmedabad Advance Mills, Limited (1937) 40 Bom. L.R. 171 at p. 173 | Statement that foreign income need not be brought into India in the exact form in which it was received (i.e., income received abroad may be brought into India in another form). | The Court cited Beaumont C.J.'s observation to show that while income can be transmitted in different forms (sterling, drafts, rupees, bonds), that principle does not mean every conversion or expenditure abroad that results in goods coming to India constitutes "income" brought into India for tax purposes in cases where the original receipt has been spent and ceased to be income. |
| Cresham Life Assurance Society v. Bishop (1902) A.C. 287 | Authority for the proposition (Lord Brampton and Lord Lindley) that income may be received "in specie or in any form known to the commercial world for the transmission of money" and that receipts may take various forms (transfer of coin, negotiable instrument, settlement in account). | The Court relied on that passage to explain the kinds of transmission that may amount to bringing income into a jurisdiction, but distinguished those situations from the present case where the foreign income had been expended abroad so as to cease to exist as income before anything of value (goods) was brought into India. |
Court's Reasoning and Analysis
The Court's analysis proceeded from the statutory premise that the Act taxes "income and nothing but income." The Court emphasized that Section 4(2) deems foreign income to have accrued or arisen in British India if it is "received in or brought into British India," and thus only income that is in fact received or brought back is chargeable.
The Court reasoned that where foreign income is spent or otherwise dealt with abroad so that it "ceases to be income" (for example, by being converted into goods consumed or used abroad), that does not amount to bringing income into British India merely because the thing purchased abroad is later imported. The conversion of income into non-income items abroad removes that amount from the class of "income" chargeable under the Act.
The Court acknowledged that income received abroad may be transmitted to India in many commercial forms (sterling, francs, banker's drafts, bonds, rupees), citing Beaumont C.J.'s earlier comment and the authority in Cresham Life Assurance Society v. Bishop. However, the Court drew a distinction between transmission of income in a commercially recognized form and expenditure abroad that expends the income on items that are not themselves income.
The Court found it impossible to accept the appellant's contention that every conversion of foreign income into goods abroad, followed by importation of those goods into India, amount to bringing the original foreign income into India. To illustrate the absurdity of that position, the Court used the factual example of a resident who spends £500 on clothing and a motor car while abroad and later brings the worn clothing and a depreciated car into India; the Court held the wearer has not "brought back" the £500 as income.
The Court also relied on factual findings by the Commissioner that the mill stores and machinery were required for the respondents' business and were not intended for sale or for use other than in their mills; the Court observed there was no suggestion that the purchases were a device to transmit money into India.
Holding and Implications
HOLDING: The appeal is DISMISSED; the High Court's answer to the referred question was correct (i.e., the amount of Rs. 18,333 was not income "brought into British India" for the purposes of Section 4(2) and therefore was not chargeable to income-tax in India on that basis).
Implications: The direct effect is that the respondents are not liable to be assessed in India on the Rs. 18,333 as income "brought into British India" under Section 4(2). The Court ordered that the respondents' costs of the appeal be paid by the appellant. The opinion does not purport to establish a broader new precedent beyond the application of the statutory principle that only income (not non-income items into which income has been expended abroad) can be taxed as being brought into India under Section 4(2).
1. The respondents, who carry on the business of cotton spinners and weavers in British India, are the owners of certain sterling bonds of the Government of India, the interest on which is payable in England.
2. In the year ending March 31, 1936, interest on such bonds was paid in sterling in England to certain agents of the respondents, the amount of such interest expressed in rupees being Rs. 18,333. This sum was expended by such agents in the purchase in England on behalf of the respondents of certain mill stores and machinery which were then sent to the respondents in British India and there used by them for the purposes of their business.
3. In these circumstances the Income-tax Officer in assessing the respondents to income-tax for the year of assessment 1936-7 included in their income for the year 1935-6 the sum of Rs. 18,333 as being income " brought into British India " within the meaning of Section 4 (2) of the Indian Income-tax Act, 1922.
4. It will be convenient at this stage to set out Section 3 of the Act and the material portions of Section 4 as these Section s stood in the year of assessment.
Section 3.-Where any Act of the Indian Legislature enacts that income-tax shall be charged for any year at any rate or rates applicable to the total income of an assessee, tax at that rate or those rates shall be charged for that year in accordance with, and subject toi the provisions of this Act in respect of all income profits and gains of the previous year of every individual, Hindu undivided family, company, firm and other association of individuals.
Section 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.
(2) Income, profits and gains accruing or arising without British India to a person resident in British India shall, if they are received in or brought into British India, be deemed to have accrued or arisen in British India and to be income, profits and gains of the year in which they are so received or brought notwithstanding the fact that they did not so accrue or arise in that year.
5. The respondents in due course appealed to the Assistant Commissioner against the assessment in respect of the Rs. 18,333, but he dismissed the appeal and confirmed the assessment.
6. The respondents then applied to the Commissioner of Income-tax, Bombay Presidency, to refer a question of law with respect to their liability to be assessed to income-tax in respect of the amount in question to the High Court under Section 66(2) of the Act. The Commissioner accordingly made a reference of the following question :-
Whether in the circumstances of the case the Income-tax Officer has rightly included in the income liable to tax the amount of Rs. 18,333 on account of interest on sterling securities on the ground that though the said income accrued or arose in England it was received or brought into British India within the meaning of Section 4(2) of the Act.
7. In making the reference the Commissioner, as required by the Act, expressed His own opinion upon the question referred. His opinion was that the answer to the question should be in the affirmative.
8. The reference in due course came before the High Court before Beaumont C.J. and Blackwell J., and on September 27, 1937, the Court gave judgment answering this question that had been referred to them in the negative.
9. In so doing the High Court was, in their Lordships' opinion, plainly right. What the Act charges with tax is income and nothing but income, whether that income accrues or arises or is received in British India or is deemed so to arise or accrue or be received by reason of being brought into British India. But if income arising or accruing without British India is spent or otherwise so dealt with that it ceases to be income instead of being brought into British India, it is not, in their Lordships' judgment, chargeable under the Act merely because the thing upon which it has been expended or into which it has been turned is subsequently brought there. It is not necessary, of course, in order to attract tax that income received abroad should be brought into India in the exact form in which it has been received. As was said by Beaumont C.J. in his judgment in the present case (Commissioner of Income-tax, Bombay v. Ahmedabad Advance Mills, Limited (1937) 40 Bom. L.R. 171 at p. 173).
Foreign income may be received in sterling or francs or dollars, and may be brought into India in the form of rupees, or income received abroad may be remitted to India by means of a banker's draft. To use Lord Brampton's phrase in Cresham Life Assurance Society v. Bishop (1902) A.C. 287 the income may be received ' in specie or in any form known to the commercial world for the transmission of money from one country or place to another.
Much to the same effect was said by Lord Lindley in the same case (p. 296).
...a sum of money'' [he said] "may be received in morel ways than one, e.g., by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass.
10. Other examples can readily be imagined. Beaumont C.J., indeed, suggested the case of an assessee, who; was desirous of bringing into British India foreign income for use there as income, purchasing bonds with the foreign income, bringing the bonds to India, and then selling them and applying the proceeds as income. It is possible that such a case might occur, although it would give rise to the question, among others, whether the sum to be brought into tax in India should be the sum expended on the bonds in the foreign country or the proceeds of the bonds received in India. That question can be dealt with when it arises. It does not arise here. It is not and cannot be suggested in the present case that the mill stores and machinery were purchased in England and shipped out to India as a method of bringing over the sterling interest that had been received in this country. No one in bis senses would think of employing such a method of transmitting money. But apart from the inherent improbability of the thing it is found as a fact by the Commissioner that the mill stores and machinery were required by the respondents for their business in India, and it is not suggested that they will be sold or will be employed otherwise than in and for the purposes of the respondents' mills.
11. It is, however, contended on the part of the appellant that the use to which the stores and machinery are put in India is immaterial. They were bought, says the appellant, with the sterling equivalent of Rs. 18,333, and whatever their value, whatever the intention with which they were bought, whatever the purpose to which they are now being put, their arrival in India resulted in Rs. 18,333 foreign income being brought into British India.
12. Their Lordships are not prepared to accept so extravagant a contention. To show how extravagant it is many illustrations might be given. It will be sufficient to take one suggested by Mr. Hills in the course of his argument before their Lordships. A resident in British India when on a visit to this country receives here the sum of £500 sterling as interest on British Government Stock. He expends it here in replenishing his wardrobe and in purchasing a motor car. At the end of two years he returns to British India taking with him the garments and the motor car. The garments have been worn for two years and the car in that time may have been driven 40,000 miles or more. Yet if the appellant is right, the person in question will on his return to India be deemed to have brought back with him the £500 interest that he received in this country. The truth of the matter is that in such a case he does not bring back into India a penny of the £500. He has spent it all in England. If upon his return to India the question were put to him, " How much have you left of the £500 ? ", his answer would be " none," and the answer would be a true one whether addressed to a casual enquirer or to the Income-tax Officer. What he has taken back to India are some much worn clothes and a car much depreciated in value. But these things can in no sense be described as income ; and it is only income that can be taxed under the Indian Income-tax Act.
13. For these reasons their Lordships are of opinion, and will humbly advise His Majesty, that this appeal should be dismissed. The respondents' costs of the appeal must be paid by the appellant.
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