ivil Appeal Nos
782 783 of 1973
Appeals by Special Leave from the Judgment and Order dated 18 11 1972 of the Andhra Pradesh High Court in Cases Referred Nos 50 and 52 of 1970
P A Francis K C Dua and Miss A Subhashini for the Appellant
L A Subba Rao for the Respondent
The Judgment of the Court was delivered by VENKATARAMIAH J
These two appeals by Special Leave are filed against a common judgment dated November 18 1971 delivered by the High Court of Andhra Pradesh in Case Referred Nos 50 and 52 of 1970
Sri Bommidala Kotiratnam hereinafter referred to as the statutory agent  is a dealer in tobacco at Guntur in the State of Andhra Pradesh
During the previous year relevant to the assessment year 1962 63 the statutory agent purchased tobacco in India and exported it to Japan where it was sold through Ms Toshoku Ltd the assessee involved in Civil Appeal No 782 of 1973 a Japanese Company and admittedly non resident
Under the terms of the agreement between the statutory agent and the assessee referred to above the latter was appointed the exclusive sales agent in Japan for selling tobacco exported by the former
The assessee was entitled to a commission of 3 of the invoice amount
The sale price received on the sale of tobacco in Japan was remitted wholly to the statutory agent who debited his commission account with the amount of commission payable to the Japanese company and credited the same in the account of the Japanese company in his books on December 31 1961
The amount was remitted to the Japanese company on 589 February 1 1962 on which date an appropriate debit entry was made in the account of the Japanese company with the statutory agent
The statutory agent had similarly sold some tobacco during the same accounting period through another non resident business house by name Ms Societe Pour Le Commerce International Des Tobacs  the assessee involved in Civil Appeal No 783 of 1973 carrying on business in France
The terms of agreement were the same as in the case of the Japanese Company referred to above the only difference being the geographical area in which each of them had to render service as a selling agent
In this case also the statutory agent made similar entries in his books regarding the commission payable to the assessee and ultimately made a debit entry in the account of the assessee in his books when the amount was transmitted to the assessee
During the assessment year the question whether the commission amounts sent to the Japanese company and the French business house hereinafter referred to collectively as the assessees  were assessable in terms of section 161 of the Income tax Act 1961 hereinafter referred to as the Act  arose for consideration before the Income tax Officer
The statutory agent contended that the amounts in question were not taxable in view of the clarification of the legal position by the Board Circular XXVII I of 53 No 26 II53 dated July 17 1953 which stated A foreign agent of an Indian exporter operates in his own country and no part of his income arises in India
Usually his commission is remitted directly to him and is therefore not received by or on his behalf in India
Such an agent is not liable to Indian Income tax
 The Income tax Officer however came to the conclusion that the sums in question were taxable in view of the decision of this Court in P V Raghava Reddi  Anr
vs Commissioner of Income tax1 and assessed them under section 1433 read with section 163 of the Act
The appeals preferred by the statutory agent against the orders of assessment before the Appellate Assistant Commissioner of Income tax and the Income tax Appellate Tribunal were unsuccessful
Thereafter the following common question of law was referred to the High Court of Andhra Pradesh under section 2561 of the Act Whether on the facts and in the circumstances of the case the assessment on the appellant under section 161 of the Income tax Act 1961 is justified 590 The High Court held that the assessments were not justified and answered the question against the Department
Hence these appeals under Article 136 of the Constitution
The relevant provisions of the Act on which reliance is placed before us are sections 52 91i 160 161 and 163
Section 52 of the Act which deals with the chargeability of the income of a person who is a non resident under the Act provides that subject to the provisions of the Act the total income of any previous year of a person who is a non resident includes all income from whatever source derived a which is received or is deemed to be received in India in such year by or on behalf of such person or b accrues or arises or is deemed to accrue or arise in India during such year
Explanation 1 to section 52 of the Act declares that an income arising abroad can not be deemed to be received in India for the purpose of that section by reason only of the fact that it is included in a balance sheet prepared in India
Section 91i of the Act provides that all income accruing or arising whether directly or indirectly through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India
The explanation to this clause provides that in the case of a business of which all the operations are not carried out in India the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India and in the case of a non resident no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export
An agent of a non resident including a person who is treated as an agent under section 163 of the Act becomes according to section 1601 of the Act the representative assessee in respect of the income of a non resident specified in sub section 1 of section 9 of the Act
Section 161 of the Act makes a representative assessee who is an agent of a non resident personally liable to assessment in respect of the income of the non resident
Section 163 of the Act defines persons who may be regarded as agents of non residents for the purposes of the Act
Sections 160 161 and 163 of the Act are merely enabling provisions which empower the authorities at their option to make assessment on and to recover tax due under the Act from the representative assessee
It is not disputed in these cases that if the incomes in question of the assessees are taxable the statutory agent is liable to pay the tax
The real question which falls for determination is whether the said incomes are taxable
The facts found in these appeals are that the statutory agent exported his goods to Japan and 591 France where they were sold through the assessees
The entire sale price was received in India by the statutory agent who made credit entries in his account books regarding the commission amounts payable to the assessees and remitted the commission amounts to them subsequently
One extra feature in the case of the Japanese company is that it had been appointed as an exclusive agent for Japan
It is not disputed that the assessees rendered service as selling agents to the statutory agent outside the taxable territories
In order to establish its case the Revenue has strongly relied on the decision of this Court in the case of P V Raghava Reddy supra
A perusal of that decision shows that the said case is distinguishable on facts
In that case the assessee had exported in the years 1948 49 and 1949 50 certain quantity of mica to Japan
Mica was not exportable directly to Japanese buyers during those years as Japan was under military occupation but to a State organisation called Boeki Cho Board of Trade
To negotiate for order and to handle its other affairs in Japan in connection therewith the assessee engaged San Ei Trading Co Ltd Tokyo as its agent
The Japanese Company was admittedly a non resident  company
Under the agreements the assessee under took to pay certain percentage of gross sale proceeds as commission to the Japanese Company
With regard to the mode of payment of commission the agreements provided a term which read thus In view of the difficulties in this country it is requested that the first party credits all these amounts to the account of the second party with them without remitting the same until definate instructions are received by the first party
 The first party to the agreement was the assessee and the second party was the Japanese Company
During the two accounting years a total amount of Rs 13319 12 4 was paid to the Japanese Company either directly or through others to whom the assessee was instructed by the Japanese Company to pay the amount
The Court rejected the contention of the assessee that the Japanese Company was not in receipt of the amount in the taxable territories and the amount was not income within the meaning of section 41a of the Indian income tax Act 1922 with the following observations This leaves over the question which was earnestly argued namely whether the amounts in the two accounting years can be said to be received by the Japanese Company in the taxable territories
The argument is that the money was not actually received but the assessee firm was a debtor in respect of that amount and unless the entry can be deemed to be a payment or receipt cl
a cannot apply
We need not consider the fiction 592 for it is not necessary to go into the fiction at all
The agreement from which we have quoted the relevant term provided that the Japanese Company desired that the assessee firm should open an account in the name of the Japanese Company in their books of account credit the amounts in that account and deal with those amounts according to the instructions of the Japanese Company
Till the money was so credited there might be a relation of debtor and creditor but after the amounts were credited the money was held by the assessee firm as a depositee
The money then belonged to the Japanese Company and was held for and on behalf of the Company and was at its disposal
The character of the money changed from a debt to a deposit in such the same way as if it was credited in a Bank to the account of the Company
Thus the amount must be held on the terms of the agreement to have been received by the Japanese Company and this attracts the application of section 41a
Indeed the Japanese Company did dispose of a part of those amounts by instructing the assessee firm that they be applied in a particular way
In our opinion the High Court was right in answering the question against the assessee The Court as it is obvious from the portion extracted above proceeded to hold that the amount in question was received by the Japanese Company in India and hence was taxable on that basis
In the cases before us there were no terms corresponding to the term extracted above which was found in the agreements between the assessee and the Japanese Company in P V Raghava Reddi s case supra
It cannot be said that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were non residents as the amounts so credited in their favour were not at their disposal or control
It is not possible to hold that the non resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited since a credit balance without more only represents a debt and a mere book entry in the debtor s own books does not constitute payment which will secure discharge from the debt
They cannot therefore be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period
The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued arisen or deemed to have accrued or arisen in India to the non resident assessees during the relevant year
This takes us to section 9 of the Act
It is urged that the commission amounts 593 should be treated as incomes deemed to have accrued or arisen in India as they according to the Department had either accrued or arisen through and from the business connection in India that existed between the non resident assessees and the statutory agent
This contention overlooks the effect of clause a of the Explanation to clause i of sub section 1 of section 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India
If all such operations are carried out in India the entire income accruing therefrom shall be deemed to have accrued in India
If however all the operations are not carried out in the taxable territories the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories
If no operations of business are carried out in the taxable territories it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India
See Commissioner of Income tax Punjab vs R D Aggarwal  Co  Anr1 and Ms Carborandum Co vs CIT Madras2 which are decided on the basis of section 42 of the Indian Income tax Act 1922 which corresponds to section 91i of the Act In the instant case the non resident assessees did not carry on any business operations in the taxable territories
They acted as selling agents outside India
The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause a of the Explanation to section 91i of the Act
The commission amounts which were earned by the non resident assessees for services rendered outside India cannot therefore be deemed to be incomes which have either accrued or arisen in India
The High Court was therefore right in answering the question against the Department
For the foregoing reasons the appeals fail and are hereby dismissed with costs
Hearing fee one set
VDK Appeals dismissed


Summary:
Dismissing the Revenue appeal by special leave the Court  HELD 1 The credit entries made in the books of a statutory agent do not by themselves amount to receipt by assessees who are non residents as long as the amounts so credited in their favour are not at their disposal or control
592 F The non resident assessees in this case neither received nor could be deemed to have received the sums in question when their accounts with the statutory agent were credited since a credit balance without more only represents a debt and a mere book entry in the debtor s own books does not constitute payment which will secure discharge from the debt
They cannot therefore be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period
592 F G P V Raghava Reddi  Anr
vs Commissioner of Income tax 1962 Supp 2 SCR 596 distinguished
2 Under clause a of the Explanation to clause i of sub section 1 of section 9 of the Income Tax Act
in the case of the business of which all the operations are not carried out in India the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India
If all such operations are carried out in India the entire income accruing therefrom shall be deemed to have accrued in India
If however all the operations are not carried out in the taxable territories the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories
If no operations of business are carried out in the taxable territories it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India
593 B D 588 In the instant case the non resident assessees did not carry on any business operations in the taxable territories
They acted as selling agents outside India
The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause a of the Explanation to section 91i of the Act
The commission amounts which were earned by the non resident assessees for services rendered outside India cannot therefore be deemed to be incomes which have either accrued or arisen in India
593 E G Commissioner of Income tax Punjab vs R D Aggarwal  Co  Anr and Ms Carborandum Co vs CIT Madras   referred to