Spedding, Dinga Singh and Co. v. Commissioner of Income tax

Coldstream, J.—This is a reference by the Commissioner of Income Tax, Punjab, Delhi and North West Frontier Provinces, under Section 66(2) of the Indian Income Tax Act, 1922. The circumstances leading to the reference are as follows :—

The assessee is a firm registered in Lahore as Spedding Dinga Singh and Company. The firm takes leases of forests in Kashmir and elsewhere, fell trees marked for it by the forest authorities and sells the timber. We are concerned at present with the assessment of profits arising out of two leases in Kashmir, one of the Lolab forests and the other of the Kamraj forest. Some of the timber is sold in Kashmir, part of the profits being utilised locally for further extraction expenses, but the greater part is floated down the Jhelum river and sold at the firm's depot at Jhelum in the Punjab.

The working expenses are remitted from British India, the firm's head quarters being at Lahore during the winter when very little work is done in Kashmir. The Jhelum depot is financed from Lahore also. Accounts are kept in Lahore in the winter but the books are taken to Srinagar in Kashmir in the summer, where some or all of the partners spend the hot weather.

During the accounting period with which we are now concerned, July 1931 to June 1932, the firm made a profit of more than three lakhs in British India and Rs. 67,095 in Kashmir. There is no dispute about the assessment of the profits in British India. The contest is about the Kashmir profits, which the Commissioner of Income-tax has taxed holding, on the reasoning made clear below, that the whole of these profits were received in India.

The amount assessed to tax by the Income-tax Officer in the first instance included a sum of Rs. 20,102 in addition to the ascertained profits of the firm arising in British India. The Income-tax Officer calculated this sum as follows: He found that Rs. 11,17,765 had been remitted to Kashmir to cover working expenses including royalty payable to the Kashmir State, and that the timber imported had been sold at Jhelum for Rs. 11,00,867. At a time when there was money in excess in Kashmir a sum of Rs. 37,000 had been sent from there to British India (Lahore) to clear or help to clear a bank overdraft. Adding this sum to the sale price of the timber he found that there had been remittances to British India to the value of Rs. 11,37,867. This amount exceeded the amount remitted to Kashmir for working expenses by Rs. 20,102 and assuming that the difference, which he called ' inwards excess', represented profits brought into British India he added the sum to the profits admittedly made in British India and liable to be taxed.

The assessee appealed. The contentions urged were that the cash remittance of Rs. 37,000 was not a remittance of profits, the money having been sent to India to repay capital borrowed and that in computing the difference between the 'outward' and 'inward' remittances regard should be had to the cost price of the wood sold and not its sale price. The Assistant Commissioner issued notice to the assessee to show cause why the whole of the Kashmir profits should not be assessed to tax. After considering the assessee's arguments his conclusion was that the whole of Rs. 67,000 was profits brought into British India, because (1) the purpose for which the sum of Rs. 37,000 was brought into India and used was not a test of its being or not being profits, (2) because the timber brought into India represented a remittance of profits equal to the amount for which it was actually sold and (3) because all the profits of the business, including the Kashmir profits, had been brought into the accounts kept in Lahore where control of the whole business was centralised and had been allocated to the partners as their profits.

On a further appeal to the Commissioner it was again argued for the assessee that the remittance of Rs. 37,000 was not a remittance of profits, that the distribution of the profits of the business in accounts kept in Lahore did not prove the receipt of the comprised profits at the place of account, that there was no "excess inwards" because regard should have been had to the cost price and not the sale price of the timber brought into British India, which cost price was shown by the accepted accounts to have been less than the cost price calculated by the Income-tax Officer, that in any case the timber imported was not profits imported but capital, and that the Kashmir profits were not ascertained when the timber was brought into British India.

During the hearing of the appeal the Commissioner asked the assessee to furnish further figures. From his appellate order it appears that what he asked for were figures showing the remittances sent to Kashmir for working expenses as distinct from the money sent to the forest managers from the Kashmir office. The figures were sent to the Commissioner by the assessee's auditor who, in a covering letter dated 14th May, 1936, a portion of which is quoted in the Commissioner's order of reference (appendix paragraph 7) noticed that the figures showed an apparent inward excess of about a lakh in the difference between outward remittances from British India and the cost price of the timber brought into British India, which was taken to be Rs. 8,34,000. From the figures supplied the Commissioner concluded and (this is common ground) that the remittances from British India to Kashmir amounted to Rs. 7,37,488. On these figures the excess inwards was prima facie Rs. 96,512.

Here I may mention that the figure Rs. 8,34,000 was calculated by deducting Rs. 2,66,000 (approximately, the exact figure being Rs. 2,66,587) which was the admitted amount of the profits made by the sale of Kashmir timber in British India, from the sale price of the timber Rs. 11,00,000 (exactly Rs. 11,00,867). There is no dispute, I may add, about the figures, although as will be made clear hereafter, the assessee's case is that Rs. 8,34,000 included working expenses incurred in British India which ought to have been deducted in order to arrive at a correct estimate of the cost price of the timber when it came into British India, Commissioner dismissed the appeal. His order is not throughout easy to follow. It seems however that he accepted the assessee's contentions that the distribution of profits in the head office accounts did not by itself imply a receipt of those profits in British India and that in calculating excess inwards or outwards it was the cost price of the timber and not its sale price that should be considered. It also appears that he did not accept either the Income-tax Officer's assessment or the assessment by the Assistant Commissioner as having been made on a proper basis. His conclusion he expressed as follows:—

"Receipts in British India were in excess of the available profits Rs. 67,095. The assessee has failed to establish that what was received did not include those profits, therefore it must be held to include them and they are assessable".

At the same time in view of "the nature of the enhancement practically as a new basis intact", be expressed his willingness to refer the case under Section 66 of the Income-tax Act not only in respect of the enhancement but so as to cover the whole amount.

The assessee petitioned the Commissioner asking for a reference under Section 66 (2) formulating two questions :

1.Whether as a matter of a law it was impossible to find that the assessee's evidence had not disproved the presumption that the cash and monies' worth which he received in British India from Kashmir comprised the available Kashmir profits amounting to the agreed figure assessed?

2.Whether in the circumstances of the case any presumption arises that any profits were received in British India ?

The Commissioner drafted a statement accordingly reversing the order of the questions proposed. To this statement the petitioner's counsel took objections in a letter addressed to the Commissioner. The Commissioner after hearing Mr. Sethi refused to entertain the objections but added to this statement an appendix incorporating this letter and giving his reasons for rejecting the objections. Counsel's submissions were that the figures on which the Commissioner had relied in estimating the cost price of the timber for the purpose of deciding whether there had been an 'excess inwards' were incomplete. It was explained that included in the cost price of the timber at the date of its sale was a sum of Rs. 1,22,000 which had been spent in British India on working expenses at the Jhelum depot, that the cost price of the timber when it entered British India was, therefore, not Rs. 8,34,000 but Rs. 8,34,000 minus Rs. 1,22,000 or Rs. 7,12,000 that is to say considerably less than the remittances from British India to Kashmir which remittances according to the auditor figures, accepted by the Commissioner, amounted to Rs. 7,37,488. The letter also asked that the facts and figures given by the auditor in his letter of the 14th May might be printed. This request the Commissioner has refused.

Before us assessee's counsel while conceding that there is good authority for the proposition that where money, or something equivalent to money, that is to say, something which can forthwith be used as an ascertained sum of money, is remitted to British India from a foreign country where a firm does business, and profits are available in that country, and the onus lies upon the person denying that the remittance is of profits to prove his case, contends, in the first place that no presumption arises that stock in trade brought into India by a firm whose normal business is investing in a commodity, importing it, and selling it, is profit, and in the second, that the evidence finally accepted by the Commissioner proves positively that no part of the Rs. 67,000 profit in Kashmir was received in British India, the timber received being merely stock in trade, the profit made by selling which has been taxed in India.

Before proceeding further, it is necessary to notice the following-ing facts.

The assessment in this case is based on the assessee's accounts which have been accepted as "duly and properly maintained", and not one based on an estimate of profits made under the provisions of Section 13 of the Income-tax Act nor one made to the best of the Income-tax Officer's judgment under Section 23(4). Parties agreed that the figures adopted by the Commissioner may be assumed to be correct and nothing turns upon their accuracy so far as we are concerned. Again it is not suggested that any part of the Kashmir profits has been brought into India by any of the partners. The partners put in an affidavit to the effect and the turth of it has not been questioned by the Commissioner. It is true that the Commissioner in his order under Section 32 (see para 8) appears to have rejected the assessee's argument that the remittance of Rs. 37,300 could not be a remittance of profits because it was used or mostly used to pay off a bank overdraft, but he has not taxed that remittance; what he has taxed is not this sum or any other particular item of the account but a sum which in his view was represented by or comprised in the timber imported for sale and he has done so only, so I understand, because, he believed it probable that the value of that timber exceeded the remittance outwards by more than the available (although at that time unascertained) profits in Kashmir. That this is so is obvious from his statement of the case where he remarks that he attaches no particular significance to this 'back remittance'. See also para 2 at page 2 and para 10 of his printed order under Section 32. 'It is admitted by counsel for the Income Tax Commissioner that it is to the remittance of Rs. 37,000 that the words 'back remittance' refer. Much more than this sum, I may note, was subsequently remitted to Kashmir for working expenses and we may take it that so far as this sum is concerned the assessee ultimately discharged to the satisfaction of the Commissioner the onus of proving that it was not a profit received in British India.

Having cleared the ground with these observations I return to the Commissioner's statement and objections pressed on behalf of the assessee.

That the Commissioner was entitled in the absence of any proof to the contrary to presume that the remittance of Rs. 37,000 was a remittance of profits is, as I have already indicated, not disputed, but as the Commissioner has made it clear that he does not now base his assessment on such a presumption the question whether the presumption arose in respect of this remittance becomes immaterial. In view of the final acceptance of the assessee's case (and I think that the language of the statement justifies the assumption that he has accepted it) that the remittance was merely a temporary transfer of capital the answer to the first question so far as it relates to the Rs. 37,000 should be ' no '.

For the proposition that there is a legal presumption in the circumstances of this case that the timber imported comprised all available profits in Kashmir I know of no judicial authority.

That the timber was stock in trade seems to be admitted by the Commissioner (paras 10 and 18 at page 10) and how such a presumption can attach to what is admittedly stock in trade by the sale of which profit has not been, but is hoped to be, made I find difficult to comprehend. The rulings cited by counsel for the Income Tax Commissioner in support of the Commissioner's proposition that until it is shown that stock in kind imported is not profit it must be presumed to be profit, even if there is no evidence that it is profit, do not appear to me to have any bearing on the point, dealing as they do with cases in which what is brought in is either money or securities or something which can take the place of money.

No doubt profits can be received in forms other than money; they can be in the shape of goods, but the rulings cited nowhere lay down that imported stock in trade is to be taxed as profits unless it is proved that it is not profits. We are dealing here, it is to be remembered, with undisputed facts and figures, not with a case where facts have been concealed or accounts found unsatisfactory. I would accordingly answer the first question so far as it relates to the timber also in the negative.

This brings us to the second question referred to us. Whether in this case profits were imported is no doubt a question of fact but our judgment is asked upon it and I have no doubt that were are at liberty to examine whether there was any evidence before the Commissioner to support his conclusion that the cash and monies' worth received by the assessee in British India comprised the available Kashmir profits amounting to Rs. 67,095 and whether this conclusion could be based on any legal presumption drawn from the admitted or proved facts: (see Scottish Provident Institution v. Allan [1903] 4 T.C. 409.

In view of the Commissioner's finding as to the remittance of Rs. 37,000 it is unnecessary to consider the question so far as it concerns that remittance, for as I have made clear, that sum has not been taxed as profits received. What has been taxed is an unascertained portion of the value of the imported timber, it having been presumed that the timber represented at least Rs. 67,000 of profits made in Kashmir.

The Commissioner's decision in his order under Section 32 that the timber imported comprised the Kashmir profits was based partly on the evidence of the accounts showing that the cost value of the timber when it came to British India exceeded the amount of the remittances to Kashmir and showing that the Kashmir profits were distributed among the partners in the account books in British India, partly on the contents of the Auditor's letter of the 14th May 1936, and partly on a purely theoretical presumption that because the timber was worth more than the Kashmir profits (Rs. 67,000) and the assessee had failed to establish that its value did not include those profits—those profits are assessable as received in British India.

In his statement of the case which is before us, of which the appendix must, I think, be regarded as in integral part the Commissioner first seeks to justify his order under Section 32 on the ground that the full facts were not before him when he passed the order, while there was, on the other hand, an admission by the auditor that there was an inward excess of nearly a lakh of rupees. Then, in his appendix, having acknowledged that the auditor's admission was erroneous, he refuses to reconsider the case because the assessee's petition asking for a reference to be made to this court did not set forth the specific contentions in which he has in the end apparently found some force.

We are not sitting as a superior Court dealing with an appeal against the order under Section 32 and we have to give our decision on the merits of the case now laid before us in the statement of the case including the appendix.

It is argued by counsel for the Income Tax Commissioner that the Commissioner's decision as to there having been an "excess inwards" is one of fact which cannot be questioned here. This is correct so far as the order under Section 32 is concerned. When the case came before the Commissioner on appeal no attempt, it seems, was made to bring it to his notice that a sum of Rs. 1,22,000 which was included in the "cost price" (Rs. 8,34,000) of the timber at the time of its sale in Jhelum had been supplied to the Jhelum depot from Lahore, and that the real "cost price" of the timber when it was brought into British India was therefore not Rs. 8,34,000 but Rs. 7,12,000 a sum less than the amount accepted by the Commissioner as representing the remittances outwards. Moreover, the Commissioner had before him the auditor's letter which admitted that on the assumptions that Rs. 7,37,488 had gone out, and that timber to the cost value of Rs. 8,34,000 had come in, there was prima facie an inward excess of approximately Rs. 96,500. We have it from the Commissioner's statement of the case (para 7 of the appendix and see also para 26(2) of the order under Section 32) that while he was aware that some expenditure had been incurred at headquarters and at the Jhelum Depot, no reference had been made to this depot in any part of the complete audited accounts. It is clear, therefore, that when he dealt with the case under Section 32, he had material for his conclusion in the Auditor's letters and the accounts before him. But he has now conceded that the Auditor's admission was erroneous, and accepted as true the firm's figures showing that Rs. 1,22,000 were spent on the timber in British India and that therefore there was not an 'excess inwards' of Rs. 96,000 (para 7 of the appendix). In his statement he goes on, however, to remark. "This does not enable me to say that there was not an excess inwards or to say what the excess really was." But if the admission in the Auditor's letter be excluded, what evidence is there that there was an excess ? I can find none and neither can counsel for the Income Tax Commissioner. It is remarkable that, even in his order under Section 32 the Commissioner himself, somewhat inconsistently, discounts the importance of the question whether there was or was not any excess (para 23— "Thus, I look on the "excess" detail as only one of the various considerations in evidence in support of the assessee's attempt to show that what came did not comprise profits.") and that in the beginning of his order he makes it quite clear that the conclusion as to what the excess was is not based on any evidence other than the Auditor's admission (para 2 at page 2). He did not "find it necessary to come to any finding of what the respective outwards and inward totals were." It seems obvious, then, that if the assessee's figures are correct (the Commissioner has accepted them and their genuineness is not disputed before us) and the admission by the auditor is found erroneous, there is no material-left for the conclusion that there was an excess inwards. The question of the value, as evidence, of the material in the shape of the admission (before the admission was discovered to be erroneous) is not, I think, open to us for consideration, but I am constrained to observe that it is difficult to see why the auditor's remark should in any way estop the assessee, as the Commissioner appears to hold that it does, from implementing his statement with further true details. It was not known, when the auditor wrote his letter, on what "new basis intact" the Commissioner was about to assess the tax. As a matter of fact the auditor's 'admission' (he was not examined about this) was simply that between the totals of the outward remittances (Rs. 7,37,488) and the cost price of the timber at the date of sale (Rs. 8,34,000) there was an apparent inward excess of more than Rs. 96,000 and this iact could never be denied.

It follows that as the case submitted stands there is no evidence proving that there was an inward excess.

The fact that the Kashmir profits were distributed among the partners in the firm's account books in British India is not by itself proof that profits were received in British India. For this proposition there is ample authority and, as I have already noticed, the Commissioner himself does not dispute it.

The only other 'material' relied on by the Commissioner for his decision that this imported timber comprised the Rs. 67,000 Kashmir profits is the fact that the assessee failed to show that it did not do so. This brings us back to the question whether there was a legal presumption against the assessee. My view is that there was none. On the other hand, the evidence establishes the assessee's case that what was received in the shape of timber was capital. The Commissioner has admitted that it was stock in trade.

None of the rulings to which our attention has been drawn by counsel for the Income Tax Commissioner dealt with a case on all fours with the present case. That on which reliance has been mainly placed is the New Mexico case, Scottish Mortgage Company of New Mexico v. McKelvie [1886] 2 Tax Case 165. But I find no feature in common between that case and the present one, in which there has been no conversion of money received in one country as capital into an equivalent for interest on investments in another. The profits stayed in Kashmir. No use was made of them in British India and the Rs. 67,000 was not made a debit entry in the Lahore books. Standard Life Assurance Co. v. Allan [1901] 4 T.C. 446, the next case cited, appears to me to go against the Commissioner. No doubt it was remarked in his judgment by Lord Trayner (p. 457) that it is not necessary that what is brought in must be in forma specifica before it can be treated as profit for purposes of income-tax and these words are authority for the proposition that profits may be received in other forms than in cash But the question still remains whether this profit of Rs. 67,000 was brought into India in the shape of timber. Nor can I see how the judgment in Californian Copper Syndicate v. Harries [1904] 5 T.C. 159 referred to by Counsel for the Income Tax Commissioner helps him. That merely decided that where there is a company whose business is the organising and selling of mining property, and a sale of such property is made at a profit, the price being received in shares, the difference in the exchange is assessable to income-tax. Chidambaram Chettiar v. Commissioner of Income Tax, Madras AIR 1936 Mad. 776 has also been cited but that case is not to the point here, the question there having been simply whether money in the shape of house-sites was received in a particular year. Pressed to its logical conclusion the Commissioner's decision would appear to justify the assessment to tax of a sum equal to the value of all the timber imported. He has not, however, assessed the tax on this basis and he has deliberately declined to estimate what proportion of the value of the timber represented profits. Once it was found that the timber was capital, and that the account did not prove an inward excess, the onus lay on the department to satisfy itself as to what amount, if any, of the timber represented profits. But having no evidence to go upon the department could not do this. The Legislature makes taxable only gains, profits and income and nothing else Kneen v. Martin [1935] 19 T.C. 33 and what we have to decide in this case is simply whether the timber or its market value, was as a fact profits. Can it be said on the evidence that the timber in this case was the produce of carrying on the assessee's business, and not merely an element in the process of production ? I think not. The case might have been different if as soon as it came into British India the timber had been allotted forthwith to the partners of a syndicate whose object had been, say, simply the purchase of timber at a cheap rate, but the business of the assessee is not the acquisition of timber but the sale of it and the profits of the business accrue and are ascertained not by the bringing of the timber into British India but by the selling of it. The profits thus made by the assessee have been duly taxed.

I may add that there is no evidence, nor is it the case put forward for the Income Tax Commissioner that any part of the Rs. 67,000 profits was invested in this or any other timber imported into British India.

My conclusion is that the second question should be answered in the affirmative. The Income Tax Commissioner will pay the costs of this reference.

Din Mohammad, J.—In my view, the questions propounded by the Commissioner are not happily worded. As these questions stand, they appear to me to be inter-dependent. If, for instance, the answer to question No. 1 be in the negative, question No. 2 does not arise. Question No. 2 presupposes that there is in existence as a matter of law a presumption that the cash and money's worth which the assessee received in British India from Kashmir comprised the available Kashmir profits and that that presumption was indisputable and undisputed. This, however, is not the case. The assessee in suggesting question No. 1 joined issue with the Commissioner on the existence of this presumption and in my view, therefore, the principal point for determination is, whether in the circumstances of the case before us, it is possible to raise a legal presumption against the assessee that what he received in British India in the shape of saleable timber, was as a whole or in part profits, gains or income, liable to be assessed to income-tax. This is what question No. I seeks to decide. Whatever is laid down in other decided cases and however permissible the presumption may be in different circumstances, I am definitely of opinion that on the facts of the present case, it is not possible to hold that such a presumption arises. The Commissioner himself has stated unequivocally that he attaches no importance to the cash remittance of Rs. 37,000. In sub-para 1 of para 10 of the appellate order, he says:

"As below I do not think the cash really comes into any separate consideration. If it stood alone in the middle of a year with general cash consignment outwards, nobody would imagine that it represented a drawal of profits".

In sub-para 2 of the same paragraph he even admits that "if what is sent can be specifically identified as a discrete slab of original capital, then even though profits were there and could have been taken it cannot be found that the remittance was of profits". In the face of these statements, it cannot be said that the legal presumption envisaged in the first question could arise in this case. As I take the facts of the case to be, the presumption is just the other way. The second question, therefore, does not arise, but, if it arose for the sake of argument, I am at one with my learned brother Coldstream, J., that it should be answered in the affirmative.