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Case Number

Miscellaneous Case No. 427 of 1942

Advocates

Dr. K.N Katju and Mr. B. Upadhiya, for the applicant.
Mr. G.S Pathak, for the opposite-party.

Judges

Braund
Malik, JJ.

Acts

section 4(2) of the Indian Income-tax Act (XI of 1922).
section 114 of the Indian Evidence Act
section 4(1) of the Income-tax Act.
section 4(2)

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Smart Summary

Structured Summary of the Opinion (Malik, J.)

Factual and Procedural Background

The assessee was the trading undivided Hindu family firm Ramlal Bechairam. The firm maintained a head shop and office at Semohi in the Jaunpur district of British India and a branch cloth shop at Bhadohi in the Benares State. Each branch maintained ledger accounts that recorded transactions with the other branch (Semohi books recorded an account in the name of Bhadohi and vice versa). In the assessment year 1938–1939 goods invoiced at Rs. 65,203-13-9 were sent from the Bhadohi shop to the Semohi shop. The invoice price charged by the Bhadohi shop included a profit margin (a notional profit as if Bhadohi had sold to external customers). During the year Semohi remitted Rs. 59,175-13-0 to Bhadohi, leaving a book credit balance of Rs. 6,028 in favour of Bhadohi in Semohi’s books.

The Income-tax Officer accepted the Semohi books but rejected the Bhadohi books and made a best judgment assessment fixing total profit at Bhadohi at Rs. 9,573. The Officer treated Rs. 6,028 as profit “brought into British India” under section 4(2) of the Indian Income-tax Act and, in the absence of satisfactory information about the remaining Rs. 3,545, presumed it also to have been brought into British India and assessed the whole Rs. 9,573.

The assessee appealed under section 30. The Appellate Assistant Commissioner (25 March 1942) held that no money had been transmitted and that Rs. 6,028 represented the unpaid price of goods (relying on the Privy Council decision in Commissioner of Income-tax, Bombay v. Ahmedabad Advance Mills Ltd.), allowed the appeal and directed exclusion of the Rs. 9,573 from assessment. The department appealed to the Income-tax Appellate Tribunal, which restored the Income-tax Officer’s assessment, treating the goods as stock-in-trade meant for resale and holding Rs. 9,573 taxable under section 4(2) as profits made outside British India and brought into British India.

The assessee applied under section 66(1) for a case to this Court. The Tribunal referred the legal question(s) to this Court for opinion, framed primarily around whether the profits (both the invoiced sale price and the estimated concealed sales profit) that accrued outside British India were properly included in taxable income as received or brought into British India within the meaning of section 4(2) as it stood before its 1939 amendment.

Legal Issues Presented

Whether, in the circumstances, the Income-tax Officer rightly included in the income liable to tax the amount of Rs. 9,573 as profits earned at Bhadohi in Benares State on the ground that, though the income accrued outside British India, it was received or brought into British India within the meaning of section 4(2) of the Indian Income-tax Act (as it stood before its amendment in 1939).
More specifically, whether (a) the profit on the sale of goods invoiced at Rs. 65,203-13-9 and (b) the estimated profit of concealed sales to Semohi (the residual Rs. 3,545) could be treated as income earned outside British India but brought into British India and therefore assessable under section 4(2).

Arguments of the Parties

Revenue / Income-tax Department

The Income-tax Officer took a best-judgment figure of total profit at Bhadohi as Rs. 9,573 and treated Rs. 6,028 (book balance) as profit brought into British India under section 4(2).
In respect of the residual Rs. 3,545, the department argued that, in the absence of information, it was permissible to presume the money had been brought into British India. Learned departmental counsel invoked the general presumption under section 114 of the Indian Evidence Act (that a court may presume facts likely to have happened in the ordinary course of events) to justify the inference that a man normally keeps his money where he resides and thus that the amount had been received in British India.
At the Tribunal stage the department contended that the goods sent from Bhadohi to Semohi were stock-in-trade intended for resale in British India and therefore that the profits were taxable as brought into British India under section 4(2).

Assessee

The Appellate Assistant Commissioner found no money had been transmitted from Bhadohi to Semohi and treated Rs. 6,028 as the unpaid price of goods—i.e., not taxable—relying on the Privy Council decision in Commissioner of Income-tax, Bombay v. Ahmedabad Advance Mills Ltd.
Implicit in the assessee’s position (as accepted by the Appellate Assistant Commissioner) was that the notional profit included in the Bhadohi invoice represented internal accounting between branches of the same firm and should not be treated as profit earned outside British India and brought into British India for tax purposes.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income-tax, Bombay v. Ahmedabad Advance Mills Ltd. (Privy Council decision)	Relied upon by the Appellate Assistant Commissioner to hold that the book balance represented unpaid price of goods and was not taxable as profit brought into British India.	The Appellate Assistant Commissioner relied on this decision to exclude the assessed profit. The Tribunal regarded that decision as distinguishable on the facts. In this Court’s reasoning the Appellate Assistant Commissioner’s reliance did not prevail; the Court analysed the transactions as between parts of a single firm and treated the sale proceeds as taxable (but under section 4(1) rather than under section 4(2)).

Court's Reasoning and Analysis

The Court separated the referred question into two parts and addressed them sequentially.

On the estimated/“concealed” profit of Rs. 3,545:

The Court noted there was no direct or circumstantial evidence that this sum had actually been brought into British India.
The Court rejected the department's reliance on a presumption under section 114 of the Indian Evidence Act that a person keeps his money where he resides. The Court held there is no presumption of fact or law that, for income-tax purposes, a man carries all his money with him wherever he goes. Given the assessee was already subject to income-tax in the Benares State, and in the absence of evidence, the Income-tax Officer was not entitled to assume ordinary residence-based possession and therefore could not validly assess the Rs. 3,545 under section 4(2).
Conclusion on this part: the Income-tax Officer’s presumption as to the Rs. 3,545 was unjustified and assessment under section 4(2) could not stand for that amount.

On the profit arising from the goods invoiced at Rs. 65,203-13-9:

The Court accepted that the Income-tax Officer was entitled to include in taxable income the profit on the sale of those goods, because the goods were actually sold by the Semohi shop and the whole of the sale price was received in Semohi (in British India).
However, the Court held this liability to tax did not arise under section 4(2) (profits earned outside British India and brought in) but under section 4(1) (profits received in British India), as the sale proceeds were received in British India.
Key factual and legal analysis underpinning this conclusion:
- The Bhadohi and Semohi shops were parts of the same proprietary firm (an undivided Hindu family) and not separate legal entities. Thus the notional margin added by the Bhadohi branch in invoicing the Semohi branch could not properly be treated as profit earned by one legal person from another; "a man cannot make a profit out of himself."
- The appropriate method to determine taxable profit is to look to the substance of the transaction and the firm's overall business for the year. The cost base for the goods should include the actual purchase price paid by the firm, plus apportioned expenses such as warehousing and overhead charges attributable to those goods (pro rata to Bhadohi’s turnover). The taxable profit in British India would be the sale price realised in British India less that true cost.
- The bookkeeping form (a running internal account balance of Rs. 6,028) is not decisive. Internal account balances between branches of the same proprietor are matters of accounting convenience and do not establish a legal obligation to transmit money that would determine taxability under section 4(2).
- Accordingly, the margin included in the Bhadohi invoice could not be treated as profit "earned outside British India" for the purposes of section 4(2); the profit was to be ascertained and taxed as profit earned/received in British India under section 4(1).

Holding and Implications

Holding — core rulings:

The Income-tax Officer was entitled to include the profit arising from the sale of the goods invoiced at Rs. 65,203-13-9 in the income liable to tax. That liability arises under section 4(1) of the Income-tax Act (profit received in British India), not under section 4(2) as profit earned outside British India and brought into British India.
The Income-tax Officer was not justified in treating the residual Rs. 3,545 as taxable under section 4(2) in the absence of any evidence (direct or circumstantial) that it had been brought into British India.

Implications and immediate consequences:

The taxable effect for the invoiced goods is to be determined by reference to the firm's actual cost (purchase price plus apportioned warehousing and overheads) and the sale proceeds realised in British India; the notional intra-firm invoice margin cannot be treated as profit earned abroad for section 4(2) purposes.
The Income-tax Officer’s imposition of tax on the Rs. 3,545 under section 4(2) is reversed because it lacked evidentiary foundation.
The department was not awarded costs; the parties were directed to bear their own costs. The Court assessed counsel's fee for the department at Rs. 200 and allowed six weeks for filing the fee certificate.
The opinion does not purport to lay down any broader new legal rule beyond its application to the facts; it distinguishes prior authority cited to the extent necessary on these facts and explains the correct statutory basis (section 4(1) rather than section 4(2)) for taxing the sale proceeds received in British India.

Administrative note from the judgment: a copy of this judgment was ordered to be sent to the Tribunal and the Commissioner of Income-tax under the seal of the Court and the signature of the Registrar.

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Ramlal Bechairam v. Commissioner Of Income-Tax

Malik, J.:— The facts of this case are very simple. Messrs Ramlal Bechairam, a trading undivided Hindu family, had their head office, together with a cloth shop, at Semohi in the Jaunpur district in British India. They maintained also a branch cloth shop at Bhadohi in the Benares State. They were residents of Jaunpur in British India. In their books at Bhadohi the firm maintained an account in the name of their own Semohi shop. Conversely in the Semohi books they had similarly an account in the name of the Bhadohi shop. From time to time goods were sent from one shop to the other. In the year in question, that is in the assessment year 1938-1939, it was found that cloth worth Rs. 65,203-13-9 was sent from the Bhadohi shop to the Semohi shop. The invoice price of these goods was not, however, their cost price to the Bhadohi shop, but it included a profit margin equal to the profit that the Bhadohi shop would, or might, have derived from its customers in Bhadohi had the cloth been actually sold by that branch to customers in Benares State. In other words, its own head branch in British India was notionally treated by the Bhadohi branch as its trading customer in the ordinary course of business. The Semohi shop remitted to its Bhadohi branch in the course of the same year sums amounting to Rs. 59,175-13-0 only, leaving a credit balance of Rs. 6,028 in favour of Bhadohi in the Semohi books.

The Income-tax Officer accepted the Semohi books as correct and assessed the assessee as regards the income derived from the sale of goods at Semohi on the basis of the entries made in the account books. The Income tax Officer, however, did not accept the Bhadohi books to be correct and made a best judgment assessment and came to the conclusion that the total profit earned by the Bhadohi shop was Rs. 9,573. As the whole of the invoiced purchase price of Rs. 65,203-13-9 had not been transmitted by the Semohi shop to the Bhadohi shop in the course of the year, the Income-tax Officer held that the balance of Rs. 6,028 must be taken to be a profit which had accrued without British India, and, in the sense that as goods or money it was still in British India, had been brought into British India within the meaning of section 4(2) of the Indian Income-tax Act (XI of 1922). After having held that Rs. 6,028 out of the assessed profits of Rs. 9,573 was thus brought into British India, the Income-tax Officer went on to hold that the assessee had not given him any satisfactory information as to where he had kept Rs. 3,545, the balance of the assessed profit, after allowing for the above Rs. 6,028. In the absence of any information by the assessee the. Income-tax Officer held that he was justified in presuming that the whole of the profit earned outside British India was received in British India. The Income-tax Officer thus assessed the assessee on the whole sum of Rs. 9,573 which, he held, was the profit earned outside British India.

The assessee appealed against this assessment under section 30 of the Act. The Appellate Assistant Commissioner by his order dated the 25th of March, 1942, held that no money had been transmitted from Bhadohi to Semohi, that only goods had been sent from one shop to the other and that the sum of Rs. 6,028 represented nothing but the price of goods which remained unpaid by the Semohi shop to the Bhadohi shop. Relying on the decision of their Lordships of the Privy Council in the Commissioner of Income-tax, Bombay v. Ahmedabad Advance Mills, Ltd.(1), he held that the amount was not taxable. He allowed the assessee's appeal and directed that the whole of the sum of Rs. 9,573 should be excluded from assessment.

The income-tax department appealed against this decision before the Tribunal which held that the goods brought into British India were stock in trade which was meant to be resold at the first available opportunity, that they were not a capital asset and the decision of the Privy Council in the case of the Ahmedabad Mills was thus distinguishable. The Tribunal allowed and restored the order of the Income-tax Officer and held that the, sum of Rs. 9,573 was taxable under section 4(2) of the Act as profits made outside British India and brought into British India.

The assessee then applied under section 66(1) of the Act for the statement of a case to this Court and formulated a question of law which reads as follows:

“Whether, in the circumstances of the case, the Income-tax Officer has rightly included in the income liable to tax the amount of Rs. 9,573 on account of profits earned at Bhadohi in Benares State: on the ground that though the said income accrued or arose in Benares State it was received or brought into British India within the meaning of section 4(2) of the Act.”

This application was opposed by the department, but on the 24th of October, 1942, the Income-tax Appellate Tribunal referred to us the following question for opinion:

“Whether, in the circumstances of the case, the Income-tax Officer rightly included in the income liable to tax the profit on the sale of goods priced at Rs. 65,203-13-9 and the estimated profit of concealed sales to Semohi on the ground that though the said income accrued or arose without British India it was received or brought into British India within the meaning of section 4(2) of the Act, as it stood before its amendment in 1939.”

We shall deal with the second part of the question first which relates to the estimated profit of concealed sales to Semohi. The question itself is not very clear, but from what we can gather from reading the various orders, it appears that this part of the question relates to the sum of Rs. 3,545 which was the balance after deducting Rs. 6,028 from Rs. 9,573 which was the total profit estimated by the Income-tax Officer as having been earned by the Bhadohi branch outside British India. The only question that arose in connection with this sum of Rs. 3,545 was whether, in the absence of any materials on the record, the Income-tax Officer was entitled to assume that it was a profit earned outside British India which was brought into British India. Learned counsel appearing for the department has argued that there is a presumption that a man keeps all his money at the place where he resides and, in the absence of anything to the contrary, the Income-tax Officer's presumption was justified under section 114 of the Indian Evidence Act which reads as follows:

“The court may presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business, in their relation to the facts of the particular case.”

It is not said on behalf of the income-tax department that there was any evidence on which the department could find that this sum of Rs. 3,545 was actually brought into British India, and we do not consider that there is any presumption either of fact or of law that, for income-tax purposes, a man carries all his money with him wherever he goes. The assessee knew that, if he brought this money into British India, he would be liable to pay income-tax on it in British India. He was already subject to income-tax within the Benares State. In the absence of any evidence, direct or circumstantial, the Income-tax Officer could not assume that this amount was brought into British India and could not assess income-tax on it under section 4(2) of the Act as it stood before its amendment in 1939. This is our answer to this part of the question.

The other part of the question which remains for decision reads as follows:

“Whether in the circumstances of the case, the Income-tax Officer rightly included in the income liable to tax the profit on the sale of goods priced at Rs. 65,203-13-9 on the ground that though the said income accrued or arose without British India it was received or brought into British India within the meaning of section 4(2) of the Act, as it stood before its amendment in 1939.”

There is no difficulty in answering the first part of this question that the Income-tax Officer rightly included in the income liable to tax the profit on the sale of goods priced at Rs. 65,203-13-9. These goods, though brought from Bhadohi, were actually sold by the Semohi shop and the whole of the price was received in Semohi and there could be no manner of doubt that the Income-tax Officer was entitled under section 4(1) of the Income-tax Act, as it stood before its amendment in 1939, to tax the same as profit received in British India.

The second part of the question, if we may say so without meaning any disrespect to the Tribunal, really amounts to a falsa demonstratio. The income on the sale of the goods invoiced from Bhadohi to Semohi at Rs. 65,203-13-9 is certainly taxable; but, as we have already said, it is taxable not under section 4(2) but under section 4(1) of the Act. The reason, to our minds, is obvious. The Bhadohi shop and the Semohi shop were not separate legal entities. They belonged to the same assessee firm, Ramlal Bechairam, an undivided Hindu family. These goods were purchased by the firm at a certain price; nonetheless so, because they were taken in the first place to the Bhadohi shop and kept there. It must be admitted that the Bhadohi shop must have incurred some expenses in warehousing the goods and a certain apportioned amount of the overhead charges of the Bhadohi branch must be held attributable to them. That would be in proportion to the quantity of these goods to the quantity of the total turnover at Bhadohi. When these goods were sent from Bhadohi to Semohi and a margin of profit was added on to the price in the invoice, could it be said that the Bhadohi shop earned this profit from the Semohi shop and that the cost price to the Semohi shop was the invoice price at which the goods were received by it from its own Bhadohi branch, and that thus the profit earned in Semohi was only the difference between the sale price at Semohi and the invoice price at which the goods had been received from Bhadohi? We think it is impossible to hold that a man can make a profit out of himself. If that were possible, then all that a businessman in British India need have done to escape payment of income-tax under section 4 before the amendment of 1939 was to have a branch outside British India and when sending goods from the branch shop to the shop in British India to include in the invoice price such a margin of notional profit, which would make it certain that, in selling the goods in British India, he would make no profit, even though in fact his firm as a whole derived a large profit from the entire transaction. We put a question to learned counsel for the department to the effect that, if the assessee had spent Rs. 10,000 on the purchase of cloth at Bhadohi and had mentioned the invoice as Rs. 15,000 when sending the cloth from Bhadohi to Semohi and had then sold it at Semohi for Rs. 13,000, could he be said to have made a profit of Rs. 3,000 or was he to, be said to have incurred a loss, of Rs. 2,000. The answer of course was that he had made a profit of Rs. 3,000. Even though the price of the cloth which was sent from Bhadohi to Semohi may have been paid from Bhadohi, the fact remains that the whole of the sale price of the cloth, the invoice price of which was Rs. 65,000 odd, was received in British India as soon as the goods were sold. The Income-tax Officer probably taxed the difference between the invoice price of Rs. 65,000-13-9 and the sale price in British India. But to our minds the amount taxable should have been based on the cost price, which would include, as we have already said, the price paid for these goods by the assessee, together with the apportioned expenses incurred by him for warehousing them, plus a certain amount for overhead charges at Bhadohi in proportion to the ratio that these goods bore to the total turnover at Bhadohi. The profit or gain would be ascertained by deducting the whole of this sum from the price for which the goods were sold; and, in case any portion of the goods were not sold, by taking the difference in the stock as on the opening day and the last day and including that in the profit and loss account prepared to show the amount of the net profit of the assessee earned in British India under section 4(1) of the Income-tax Act. In other words, our view is that it could not be said that the margin of profit added on at Bhadohi when the goods were sent to British India could be treated as profit earned outside British India. The whole of the profit, ascertained as above, which accrued to the assessee by the sale of these goods must be deemed to be profit earned in British India, and these goods could not be taken separately as an isolated transaction but must be treated as part of the whole business of the firm spreading over the whole year. In the view that the department has taken of this case all that was necessary for the assessee was to remit the sum of Rs. 6,028 within the year to the Bhadohi shop to escape assessment for this amount. In an open and current account kept for the facility of accounting between the two shops belonging to the same proprietor, it is a matter of chance as to what is the balance that may remain due at any given moment from one to the other; it may vary from time to time and from day to day, and it is always a matter within the discretion of the head office when, if at all, the balance shall be adjusted. It does not even follow that it will even be adjusted, since there could be no legal obligation on the Semohi branch ever to transmit money to its own Bhadohi branch. This type of business between one branch firm and another, even though they belong to the same proprietor, is not at all uncommon and, in our view, it is not the book balance that nominally remained due on the 31st of March that is the determining factor. We asked learned counsel for the department whether he was in a position to say that this amount was not transmitted from Semohi to Bhadohi on the 2nd of April. His answer was that he had no knowledge about it. It is true that, according to the system of accounting between the two branches, the head, office at Semohi did formally enter in its books an acknowledgment of its “liability” to pay this amount to its own branch at Bhadohi. But how the assessee, for the purposes of his accounts, keeps his books is not the test by which the liability to tax is concluded. We have to look to the substance of the transaction and to our minds, we cannot accept the Bhadohi shop and the Semohi shop as two different legal entities, one able to earn a profit from the other. Nor can we accept it that there was any legal liability on the part of the Semohi shop to pay the amount, to its Bhadohi branch. In the view that we have taken of this matter, our answer to the question must be that, in the circumstances of the case, the Income-tax Officer rightly included in the income liable to tax the profit on the sale of goods invoiced at Rs. 65,203-13-9. He was, however, entitled to do it only under section 4(1) of the Income-tax Act in the manner indicated by us above and not on the ground that, though the said income accrued or arose without British India, it was received or brought into British India within the meaning of section 4(2) of the Act, as it stood before its amendment in 1939.

In the view that we have taken of the case we think that the department is not entitled to its costs and that the parties should bear their own costs. We assess the fee of the counsel for the department at Rs. 200, and give him six weeks within which to file a fee certificate. A copy of this judgment will be sent to the Tribunal and the Commissioner of Income-tax under the seal of the Court and the signature of the Registrar.

Ramlal Bechairam v. Commissioner Of Income-Tax

Structured Summary of the Opinion (Malik, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue / Income-tax Department

Assessee

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Ramlal Bechairam v. Commissioner Of Income-Tax

Comments