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Govind Ram Tansukh Rai, In Re

Allahabad High Court

Dec 23, 1943

Judgment

Subsequent
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Legal-Opinion Summary: Reference under Section 66(3) — Govind Ram Tansukh Raj

Factual and Procedural Background

This is a reference under Section 66(3) of the Indian Income-Tax Act (XI of 1922) by the Commissioner of Income-Tax. The assessee, Govind Ram Tansukh Raj, conducted businesses at Ujhani (Budaun District, British India) and at Sambhar (Jodhpur State) under different trading names (at Sambhar under Sri Narain Har Bilas and Govind Ram Tansukh Raj). For the assessment year 1934–35 (accounting year Sambat 1989–90, equivalent to November 1932 to October 1933) the assessee was originally taxed on a total income of Rs. 16,272. Supplementary proceedings under Section 34 produced a fresh assessment of Rs. 29,506 which included Rs. 12,405 alleged to be profits of the two businesses carried on outside British India and remitted to British India within the meaning of Section 4(2).

On appeal the Assistant Commissioner upheld the assessment. By combined application under Sections 33 and 66(2) the Commissioner reduced the amount considered to be profits remitted to British India to Rs. 8,895 but declined to state a case or frame questions for the High Court. On the assessee's subsequent application under Section 66(3), this Court ordered the Commissioner to state the case and referred three questions of law to the Court for determination.

Legal Issues Presented

Whether the income, profits and gains of Sambat 1989–90 (equivalent to 1932–33) can be presumed to have been brought into British India in that year; if not, can they be taxed in the assessment year 1934–35?
On whom does the onus lie when a question arises as to whether a particular sum of money remitted into British India represents capital or profits?
In the circumstances, did the sum of Rs. 12,405 represent profits or capital received into British India?

Arguments of the Parties

Department's Arguments

The Department contended that, because the proved or admitted profits of the foreign business (over the four-year period) exceeded particular remittances, there is a presumption that the remittances included profits — relying on several precedents cited in the opinion.
The Department also contended that the questions now raised before the Court had not been put forward previously before the Assistant Commissioner in appeal or before the Commissioner in revision.

Assessee's Arguments

The assessee maintained that the alleged profits of Rs. 12,405 were not included in the remittance of Rs. 42,852 made in Sambat 1989–90 and that the remittance came out of capital.
The assessee set up that earlier profits had been absorbed in later expenditure at the foreign office and therefore could not be presumed to form part of the later remittance; in other words, the assessee sought to rebut the presumption relied on by the Department.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
S.A.S. Subbiah Iyer v. Commissioner of Income-Tax, Madras (1930) 4 I.T.C. 360	Authority for presumption that remittances include profits where proved foreign profits exceed remittances.	The Court acknowledged this as one of the authorities relied upon by the Department for the general presumption, but distinguished its facts from the present case and did not apply the presumption to the 1932–33 profit of Rs. 4,553.
P.L.S.E.R. Firm v. Commissioner of Income-Tax, Madras (1930) 5 I.T.C. 55	Same general proposition: remittances presumed to include profits when foreign profits exceed remittances.	Relied on by the Department; Court noted the authority but found the circumstances here (timing and absorption of profits/losses) produced a different outcome.
V.V.R. Firm v. Commissioner of Income-Tax, Madras (1933) 6 I.T.R. 54	Same presumption regarding inclusion of profits in remittances.	Cited by the Department; Court treated it as part of the body of authorities but held the presumption did not operate in the specific facts of this case for the relevant sums.
A.V.K.B.M. Kasinathan Chettiar v. Commissioner of Income-Tax, Madras (1935) 8 I.T.C. 96, 3 I.T.R. 89	Authority supporting the presumption that remittances include profits when foreign profits exceed remittances.	Cited by the Department; Court acknowledged the principle but distinguished its application on the facts before it.
L.C.T.S.P. Subramanyam Chettiar v. Commissioner of Income-Tax, Madras (1935) 9 I.T.C. 47, 3 I.T.R. 346	Same general authority on presumption as to remittances and profits.	Relied on by the Department; Court did not apply the presumption to the specific year-end profits that could not legally be treated as profit at the time of remittance.
Chunnilal Nahtmal v. Commissioner of Income-Tax, Central Provinces and Berar (1931) 5 I.T.C. 221	Authority for the presumption that remittances may include foreign profits.	Counted among the authorities relied upon; Court noted the principle but distinguished the present facts and concluded the presumption was rebutted or inapplicable in part.
B.B. Seth Bansilal Abirchand v. Commissioner of Income-Tax, Central Provinces and Berar (1931) 5 I.T.C. 347	Similar authority about presumptions regarding remittances and foreign profits.	Cited by the Department; the Court treated it as part of the cited authorities but did not treat the present case as governed by that presumption in all respects.
Tara Chand Pohi Mal v. Commissioner of Income-Tax, Punjab, N.W.F. and Delhi Provinces (1936) 9 I.T.C. 256, 4 I.T.R. 312	Authority supporting the proposition relied on by the Department.	Relied on by the Department; Court recognized the authority but applied statutory timing rules and the facts to reach a different result for particular items.
M.R.A.R.P.L. Family v. Commissioner of Income-Tax, Burma (1935) 9 I.T.C. 158	Another authority cited for the general presumption that remittances include foreign profits if profits exceed remittances.	Included among the precedents relied upon by the Department; Court acknowledged the line of authority but limited its operation on the facts and timing considerations in this case.

Court's Reasoning and Analysis

The Court's reasoning proceeds from statutory definitions and the timing rules governing chargeability of income to tax under the Income-Tax Act and then applies those rules to the factual matrix of remittances and year-by-year profits and losses.

Statutory framework relied upon:
- Section 3 (charging section): tax is levied on income, profits and gains of the previous year.
- Section 2(11): definition of "previous year" as the twelve months ending on the 31st March next preceding the year for which assessment is to be made.
- Section 4(2): income, profits and gains accruing or arising without British India to a person resident in British India shall, if received in or brought into British India, be deemed to have accrued or arisen in British India and to be income of the year in which they are so received or brought, notwithstanding that they did not so accrue or arise in that year.
Application of the statutory timing rules to the facts:
- The Court emphasised that a foreign trader's receipt in the course of a year cannot be treated as a profit for that year if the profit cannot be determined until the end of the accounting year. Consequently, the profit shown for Sambat 1989–90 of Rs. 4,553 (the profit for that Sambat year) could not, as a matter of law, be included in remittances made during that Sambat year because that profit was only determinable at the year's end.
- Therefore, the Department's assertion of a presumption that the remittance of Rs. 42,852 in Sambat 1989–90 included the Rs. 4,553 profit of that year was legally incorrect.
Treatment of earlier years (1987–88 and 1988–89) and the presumption:
- For Sambat 1987–88 there was a profit of Rs. 5,810. The Court observed that if nothing more were known, it might be presumed that this profit remained available and could form part of later remittances.
- However, the record showed a remittance in 1988–89 of Rs. 4,070. The Court held it was reasonable to presume that this remittance was made out of the earlier profit, thereby absorbing Rs. 4,070 of the Rs. 5,810 and leaving Rs. 1,740.
- There was a loss of Rs. 1,308 in 1988–89, which the Court held would absorb Rs. 1,308 of the remaining Rs. 1,740, leaving only Rs. 432 available for transmission at the end of those operations.
- The assessee failed to account specifically for that Rs. 432, but had accounted for Rs. 42,420 out of the remittance of Rs. 42,852 and advanced an explanation that the whole remittance came from capital and that prior profits had been absorbed in expenditure at the foreign office.
- Given the substantial accounting for the remittance and the assessee's explanation, the Court found that the assessee had rebutted the presumption that the remittance came out of profits; thus, on the facts, there was no presumption that any portion of the prior profits was included in the remittance of Rs. 42,852.
On procedural objections and form of questions:
- The Department argued that the issues were not raised earlier before the Assistant Commissioner and Commissioner; the Court observed that the assessee had substantially placed the contention before both authorities (that alleged profits were not included in the remittance) and that it was not necessary to have articulated every legal argument at those earlier stages so long as the substantive contention was put forward.
- The Court accepted that Question No. 3 as originally formulated was somewhat defectively worded and reformulated it to make explicit that the issue was whether Rs. 12,405 represented profits or capital received into British India.

Holding and Implications

Holding (core rulings of the Court):
(a) The income, profits and gains of Sambat 1989–90 cannot be presumed to have been brought into British India in that year; (b) the burden of proof on the question whether a particular remitted sum represents capital or profits lies upon the assessee; and (c) in the circumstances of this case the sum of Rs. 12,405 did not represent the profits of the foreign business brought into British India.

Immediate consequences and costs:

The reference is answered accordingly.
The assessee is awarded costs from the Department assessed at Rs. 250.
The Department will bear its own costs and the fee of Mr. Malik (counsel for the Department) is fixed at Rs. 200.

Broader implications:
The Court applied established statutory timing rules and accepted the existence of a line of authorities that give rise to a presumption that remittances may include foreign profits when those profits exceed remittances. However, on the facts of this case (timing of determination of profit, intervening remittances and losses, and the assessee's accounting for the remittance), the presumption did not operate to make the remittance taxable as profits. The opinion does not purport to lay down a novel legal principle beyond this factual application.

Show all summary ...

1. This is a reference under Section 66(3) of the Indian Income-Tax Act (XI of 1922), by the Commissioner of Income-Tax stating a case and the following questions of law for determination of this Court.

2. The assessee, Govind Ram Tansukh Raj carries on business at Ujhani in Budaun District in British India and at Sambhar in the Jodhpur State. This usiness is carried on under different names and at Sambhar it is earned on under wo names, viz., Sri Narain Har Bilas and Govind Ram Tansukh Raj. For the assessment year 1934-35 and for the accounting period Sambat 19;9-90 correspond to November, 1932, to October, 1933, the assessee originally was taxed on total income of Rs. 16,272; subsequently supplementary assessment proceedings were started by the Income-Tax Officer of Budaun under Section 34 of the Act pith a view to assess certain income which had escaped assessment and a fresh assessment was made by him on a total income of Rs. 29,506. This figure deluded a sum of Rs. 12,405 found to be the profits of the two businesses mentioned above carried on outside British India by the assessee and remitted to British India during the accounting year within the meaning of Section 4(2) of he Income-Tax Act. Against this assessment an appeal was made but the assistant Commissioner maintained the assessment and on a combined application by the assessee under Sections 33 and 66(2) of the Act, the Commissioner modified the assessment by holding that the profits received in British India were only Rs. 8,895 but he declined to state the case or any questions of law for the consideration of this Court. On the application of the assessee under Section 66(3) this Court directed the Commissioner to state the case and to refer he following questions to this Court:—

(1) Whether the income, profits and gains of Sambat 1989-90 equivalent to 933-34, can be presumed to have been brought into British India in that year? of not, can they be taxed in the assessment year 1934-35?

(2) On whom does the onus lie when a question arises as to whether a articular sum of money remitted into British India represents capital or profits?

(3) In the circumstances did the sum of Rs. 12,405 represent profits 01 capital?

3. The profit and loss of the assesses at its foreign business at Sambhar bat been determined by the Department and its statement is as follows:—

Profit or loss accruing or arising out of British India during the respective years Govind Ram Tansukh Raj, Sambhar. Sri Narain Har Bilas, Sambhar. Final result Rs. Rs. Rs (1) 1986-87 (1929-30) Loss 2202 Profit 2042 Loss–160 (2) 1987-88 (1930-31) Profit 937 Profit 4873 Profit 5810 (3) 1988-89 (1931-32) Loss 2574 Profit 1266 Loss 1308 (4) 1989-90 (1932-33) Profit 3348 Profit 1205 Profit 4553 Net Profit 8895

4. The remittances made by the foreign firm at Sambhar to the home firm a Ujhani have also been determined by the Department and their statement is a follows:—

Sambat Remittance Rs. 1986-87 15,475 1987-88 13,911 1988-89 4,070 1989-90 42,852 Total 76,308

5. Admittedly in Sambhat 1989-90 which is the accounting year of the assesses in dispute the remittance was made of Rs. 42852 by the foreign business of the assesses to the home business. There is also no diputeas to the profit and lose which the assesses bad made in his foreign business during the past four yean from Sambat 1986 to 1990 and the main controversy in the case is whether there is any presumption that the alleged profits were included in the remittance of Rs. 42,852 which was made in the Sambat year 1989-tO. The contention of the Department is that in two of these four years there was a loss and in the other two years there was a profit and after setting off the loss against the profits then was a net profit of Rs. 8,895 available to the assessee for transmission in the accounting year. The presumption therefore in law is that this profit was in eluded in the remittance and for this contention reliance is placed upon S.A.S Subbiah Iyer v. Commissioner of Income-Tax, Madras 1930 4 I.T.C 360., P.L.S.E.R Firn v. Commissioner of Income-Tax, Madras 1930 5 I.T.C 55., V.V.R Firm v. Commissioner of Income-Tax, Madras 1933 6 I.T.R 54., A.V.K.B.M Kasinathan Chettiar v. Commissioner of Income-Tax, Madras 1935 8 I.T.C 96, 3 I.T.R 89., L.C.T.S.P Subramanyam Chettiar v. Commissioner of Income-Tax, Madras 1935 9 I.T.C 47, 3 I.T.R 346., Chunnilal Nahtmal v. Commissioner of Income-Tax Central Provinces and Berar 1931 5 I.T.C 221., B.B Seth Bansilal Abirchand v. Commissioner of Income-Tax, Central Provinces and Berar 1931 5 I.T.C 347., Tara Chand Pohi Mal v. Commissioner of Income-Tax, Punjab, N.W.F and Delhi Provinces 1936 9 I.T.C 256, 4 I.T.R 312, and M.R.A.R.P.L Family v. Commissioner of Income-Tax, Burma 1935 9 I.T.C 158.. These cases are undoubtedly an authority for the proposition that if the proved or admitted profits of a particular assessee in his foreign business-exceeded the remittances made by the assessee to the home office there is a presumption that remittances made by him included the profits. But the problem in this case is a somewhat different one. The profits of the coreign firm for the accounting year 1989-90 which were a sum of Rs. 4,553 could not be determined till the expiration of the year and, therefore, they could act be included, in law, in the remittances which were made during the pendency and in the course of the year. Under Section 3 of the Act, which is the charging section, tax is levied on income, profits and gains of the previous year and under Section 2, clause (11), ‘previous year’ is defined as “the twelve months ending an the 31st day of March next preceding the year for which the assessment is to be made.” Clause (2) of Section 4 which deals with the taxation of foreign income, provides that 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 jr brought notwithstanding the fact that they did not so accrue or arise in that year.” 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 md 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. It follows that the sum of Rs. 4,553 which represents the profit of 1989-90 Sambat could not be included in the remittance of Rs. 42,852 made in the course of the Sambat year 1989-90 and the view of the Department that there was any presumption about its inclusion is legally incorrect.

6. In the Sambat year 1987-88 undoubtedly there was a profit of Rs. 5,810 to the assessee and if nothing else had been known about the disposal of this sum it may well have been presumed that this sum remained in the hands of the assessee undisposed of and was included in the remittance which was made in the year 1939-90 of Rs. 42,852. But we know that in the year 1988-89 the next year following the year when the profit was made there was a remittance by the assessee of Rs. 4,070 and the presumption is that this remittance was made out of the profits and it absorbed the profits of Rs. 5,810 to the limit of Rs. 4,070 leaving a balance of Rs. 1,740 and we also know that in the year 1988-89 there was a loss of Rs. 1,308 to the foreign firm with the result that the balance of the profit of Rs. 1,740 was absorbed by the loss of Rs. 1,308 and there remained only a figure of Rs. 432 available for transmission. The assessee has failed to account for this sum of Rs. 432, but in a case where he has accounted for a sum of Rs. 42,420 out of a remittance of Rs. 42,852 and when he sets up a case that the whole remittance came out of capital and the previous profits were all absorbed in expenditure at the foreign office the assessee has rebutted the presumption which stood against him of the remittance coming out of the profits md there was no presumption in the circumstances of the case that any portion of the profits were included in the remittance.

7. A contention has been raised on behalf of the Department that the questions now raised before us were not raised before the Assistant Commissioner in appeal and before the Commissioner in revision. A further contention has been raised that question No. 3 set out above is not in proper form. The assessee contended both before the Assistant Commissioner and the Commissioner that the alleged profits of Rs. 12,405 were not included in the remittance of Rs. 42,852 and the Commissioner granted to him relief to a certain extent by reducing the profits included in the remittance from Rs. 12,405 to Rs. 8,895. It is true that the precise ground upon which he has succeeded before us namely that the sum of Rs. 8,000 odd is made substantially of two items one of which could not be deemed, in law, to be the profit in the year of accounting and can only be deemed to be the profit in the following year and the other sum was included in an earlier remittance and was absorbed by the next year's loss was not put forward in so many words before the Assistant Commissioner or the Commissioner but it is not necessary that all legal arguments in support of a contention should be put forward before the Assistant Commissioner or the Commissioner so long as the contention itself is substantially put forward and variation is permissible in regard to legal arguments in support of the contention provided they clearly and properly arise on the facts found and on the contention raised by the assessee. In any case, the stage of taking this objection is now passed in view of the decision of a Bench of this Court at a previous hearing in this case by which the Department's contention was overruled and the Commissioner was directed to state the case under Section 66(3) of the Indian Income-Tax Act. We are now bound by the previous proceedings and must proceed to answer the questions. No doubt the question No. 3, as formulated above, is somewhat defective in form but the two preceding questions deal with income, profits and gains and sums of money having been brought into British India or remitted into British India. Similarly in question No. 3, it is to be understood that the question implies that the sum of Rs. 12,405 represents profits or capital transmitted, received or brought into British India. The third question should, therefore, read as follows:—

(3) In the circumstances did the sum of Rs. 12,405 represent profits or capital received into British India?

8. Our answer to the first question set out above is in the negative, to the second is that the burden of proof is upon the assessee and to the third question is that in the circumstances of the case, the sum of Rs. 12,405 did not represent the profits of the foreign business.

9. The asseessee will have his costs from the Department which we assess at Rs. 250 and the Department will bear its own costs and we fix the fee of Mr. Malik, counsel for the Department, at Rs. 200.

Reference answered accordingly.