Civil Appeal No 79 of 1954
938 Appeal from the judgment and order dated March 10 1953 of the former Pepsu High Court in Letters Patent Appeal No 493 of Samvat 2005 arising out of the judgment and order dated January 18 1949 of the said High Court in E As
78 96 of Samvat 2001
Naunit Lal for the appellants
Mohan Behari Lal for the respondents
November 11
The following Judgment of the Court was delivered by KAPUR J This is an appeal brought pursuant to a certificate under article 1331c of the Constitution from the judgment and order of the Division Bench of the erstwhile Pepsu High Court pronounced on March 10 1953 modifying in appeal the order of the Liquidation Judge
The facts are fully recited in the judgments of the courts below and comparatively a brief recital will be sufficient for the purpose of this judgment
The appellant company was incorporated in 1934 under the Companies Act of the erstwhile Patiala State
It carried on the business of commission agency for dealing in forward transactions in various kinds of grain and other commodities
The respondent firm Ganpat Rai Hira Lal of Narnaul besides being a shareholder of the appellant company had dealings with it and entered into several forward transactions of sale and purchase of grain and other commodities
The appellant acting as a commission agent of the respondent and its other constituents entered into several transactions of forward delivery at Hapur with Firm Pyarelal Musaddi Lai who were carrying on commission agency business at Hapur and will hereinafter be termed the Hapur firm
The total profits of the transactions entered into by the appellant with the Hapur firm was Rs 48250 on which the Hapur firm paid Rs 14730 8 as income tax
The profits accruing on the transactions entered into on behalf of the respondent amounted to Rs 29275 2 6 on which the proportionate income tax claimed to have been paid was 939 Rs 9314 13 4
On May 20 1943 the appellant was ordered to be wound up and Udmi Ram Aggarwal a pleader of the old Patiala High Court was appointed its liquidator
The list of contributories was settled on October 21 1943 and the respondent was placed on that list
Though this matter was challenged in the appeal before the High Court it is no longer in controversy between the parties
The Official Liquidator on March 18 1944 applied under section 186 of the Patiala Companies Act for a payment order for Rs 12204 12 3 against the respondent and in support of his claim he filed with this application copies of the respondent s account in the books of the appellant showing how the amount claimed was due from the respondent
This amount included the sum of Rs 9476 13 0 on account of income tax paid by the Hapur firm for and on behalf of the respondent on the profits of the forward transactions at Hapur and the commission of the Hapur firm
The respondent raised several objections and pleaded inter alia that the Hapur firm with whom the appellant had entered into forward transactions had no right to demand any income tax from the appellant as no profit had accrued to the appellant which was acting as a commission agent and  was only entitled to the commission 
It was also pleaded that as on the total number of transactions entered into between the respondent and the appellant there was a loss the respondent was not liable to pay any income tax and that the respondent had no taxable income in the year under dispute or in any other year
On May 23 1944 the respondent filed an application in which it was submitted that the Hapur firm who were agents of the appellant at Hapur had retained Rs 14730 8 0  which was in trust with them under section 42 of the Income Tax Act  and prayed that the Official Liquidator be directed to apply to the Income Tax authorities for a refund of the amount retained and paid by the Hapur firm as no tax was really due on the transactions entered into by the appellant with the Hapur firm and none was payable by the respondent
940 After evidence was led by both parties the payment order was made by the learned Liquidation Judge on January 18 1949 for a sum of Rs 8191 0 9 which included a sum of Rs 6867 9 6 the proportionate amount of income tax due on the profits accruing on the respondent s transactions
Against this order the respondent took an appeal to the Division Bench and canvassed two points 1 that the respondent could not be settled on the list of contributories and 2 that it was not liable for the amount retained for payment of income tax from out of profits on the transactions entered into on its behalf by the appellant with the Hapur firm and subsequently paid by the latter
The court negatived the former contention and held that the respondent had rightly been settled on the list of contributories and upheld the latter contention and held following a judgment of the Judicial Committee of the Ijlas khas of Patiala in Panna Lal Mohar Singh vs Aggarwal Chamber 1 that the Official Liquidator of the appellant was riot entitled to claim the amount of income tax paid by the Hapur firm
The Judicial Committee ljlas khas had held   Before the liability of the contributory can be fixed it must be shown that his income was such on which income was assessable 
It is not denied that the contributory was carrying on other transactions in India a  it stood before partition through other person
It was therefore his entire income that was to be taken into consideration to assess his liability to income tax The appellant then applied for a certificate to appeal under article 1331c which was granted in the following terms  The first question is whether a decision given by one Judge of the Judicial Committee can be regarded in law as a decision of the Committee
The second is whether the principle laid down by the learned Judge of the Judicial Committee that the Aggarwal Chamber of Commerce was not entitled to recover from its clients the proportionate share of the income tax paid by it unless it was shown that the total amount 1 C A 60 Of 2005 section 941 of income of the clients was assessable to income tax was sound
Accordingly we allow the petition and grant the certificate
 The first point has not been canvassed before us and in the view that we have taken it would be unnecessary to go into that matter
The sole point for decision is whether the respondent is liable for income tax which has been paid by the Hapur firm on the transactions which were entered into by the appellant with the Hapur firm for and on behalf of the respondent There is no finding by the High Court that the respondent had entered into any forward transactions in British India or at Hapur with any firm other than the Hapur firm and this matter was not agitated before us nor is there any finding as to the total world income of the respondent and there is no material on the record from which it could be determined
The appellant is a non resident company and the respondent is a non resident residing at Narnaul in what was the Indian State of Patiala
The appellant entered into forward transactions on behalf of the respondent at Hapur in which there was a considerable amount of profit
The High Court has found that the Hapur firm paid Rs 6867 9 0 on account of income tax which was payable on the profits made on the transactions entered into with the Hapur firm for and on behalf of the respondent
The respondent challenged its liability to pay income tax on the ground that it was liable  only on his total earnings during the year under assessment and since as is clear even from the books of the respondent he had suffered heavy losses in his business at Narnaul his total income was not assessable to any income tax
 The learned Liquidation Judge held the respondent liable for the amount of the income tax by applying section 69 of the Contract Act
The Division Bench on appeal disallowed this item on the ground that it had not been shown that the  total earnings of the respondent were taxable under the Act
Neither of the 942 courts below have discussed the relevant provisions of the Act not even section 42 which was mentioned by the respondent in his application of May 23 1944 nor have they given a finding as to the jural relationship of the Hapur firm with the respondent
The agency of the Hapur firm was not seriously disputed before us nor repudiated
The case seems to have proceeded on the basis of this agency in the courts below
The Hapur firm was employed by the appellant for forward transaction business of the respondent who has accepted the transactions entered into as also the amount of the profit accruing on those transactions and is only disputing the amount of income tax deducted retained and paid on those profits
Under the law the Hapur firm would be an agent of the respondent for that part of the business of the agency as was entrusted to it and  privity of contract arises between the principal and the substitute 
Section 194 of the Contract Act De Bussche vs Alt 1
It is now necessary to refer to the relevant provisions of the Income tax Act in force in the assessment year 1942 43 hereinafter termed the Act
It is not clear as to what was the signification of the words  total earnings  used by the High Court because it is not used in the Income Tax Act which uses two expressions   total income  and  total world income  in sub section 15 of section 2 of the Act
The definition of  total income  comprises two things i the total amount of income profits and gains referred to in section 41 and ii computation in the manner laid down in the Income Tax Act
 Total world income  includes all income profits and gains wherever accruing or arising except income to which under the provisions of section 43 the Act does not apply
Thus in the case of the respondent who is a  nonresident total income would comprise income profits and gains received or accrued in British India or deemed to be received or to accrue in British India
Section 17 of the Act which was relied upon by the respondent s counsel occurs in Chapter III dealing with 11878  311 943 Taxable income 
It provides for the determination of tax payable in certain special cases of which the case of a non resident is one
It provided  Where a person is not resident in British India and is a British subject as defined in section 27 of the British Nationality and Status of Aliens Act 1914 4  5 Geo
V Ch
17 or a subject of a State in India or Burma or a native of a Tribal Area the tax including super tax payable by him or on his behalf on his total income shall be an amount bearing to the total amount of the tax including super tax which would have been payable on his total world income had it been his total income the same proportion as his total income bears to his total world income  
Section 17 does not deal with or affect the rights and liabilities of persons required under the Act to make deductions of income tax from sums payable to non residents or the consequences of failure to make such deductions
The very next chapter Chapter IV deals with deductions which the Act requires to be made in regard to different heads of income
Section 18 provides for deduction at the source
Sub section
3 A of this section was as under S183A  Any person responsible for paying to a person not resident in British India any interest not being  interest on securities or any other sum chargeable under the provisions of this Act shall at the time of payment unless he is himself liable to pay income tax thereon as an agent deduct income tax at the maximum rate
 The proviso to this sub section made provision for payment of monies without deduction if there was a certificate of the Income Tax Officer to that effect
Under section 187 of the Act a person making the deduction was required to pay the amounts so deducted to the Income Tax authorities
In default of such deduction such person became an assessee in respect of the tax
Chapter V of the Act deals with  Liability in Special Cases which includes agents
Section 402 120 944 dealing with the case of trustees or agents of a person non resident in British India provided S40 2 Where the trustee or agent of any person not resident in British India and not being a minor lunatic or idiot such person being herein after in this such section referred to as a beneficiary
is entitled to receive on behalf of such beneficiary or is in receipt on behalf of such beneficiary of any income profits or gains chargeable under this Act the tax if not levied on the beneficiary direct may be levied upon and recovered from such trustee or agent as the case may be in like manner and to the same amount as it would be leviable upon and recoverable from the beneficiary if in direct receipt of such income profits or gains and all the provisions of this Act shall apply accordingly
 Thus under this section which is essentially a machinery and an enabling section the tax to be realised from a non resident could be levied upon the agent in the same manner as it could have been leviable upon and recoverable from a non resident
Section 421 of the Act provided  All income profits or gains accruing or arising whether directly or indirectly through or from any business connection in British India or through or from any property in British India or through or from any asset or source of income in British India or through or from any money lent at interest and brought into British India in cash or in kind shall be deemed to be income accruing or arising within British India and where the person entitled to the income profits or gains is not resident in British India shall be chargeable to income tax either in his name or in the name of his agent and in the latter case such agent shall be deemed to be for all the purposes of this Act the assessee in respect of such income In proviso 2 to this sub section any such agent who apprehended that he might be taxed as such agent could retain out of any money payable to such non
resident a sum equal to the estimated liability under the sub section and in the event of any disagreement between the non resident and such agent a certificate 945 could be obtained from the Income Tax Officer as to the amount to be retained which shows that the Act had a provision for the determination of the question
As was observed by Viscount Cave in Williams vs Singer 1 The fact is that if the Income Tax Acts are examined it will be found that the person charged with tax is neither the trustee nor the beneficiary as such but the person in actual receipt and control of the income which it is sought to reach
The object of the Acts is to secure for the State a proportion of the profits chargeable and this end is attained speaking generally by the simple and effective expedient of taxing the profits where they are found
 See also Archer Shee vs Baker 2  Executors of Estate of Dubash vs Commissioner of Income Tax 3
This has rightly been stated to be the underlying principle of the deduction under sections 40 41 and 42
Section 48 of the Act deals with refunds and if the respondent thought that it was not liable to the payment of any tax it could apply to the Income Tax Officer for refund
Thus the Hapur firm being an agent could be held liable under sections 402 and 421 of the Act as an assessee for income tax on the profits made on the respondent s transactions at Hapur and was therefore entitled under the proviso to section 421 to retain the estimated amount of income tax payable on the amount of the respondent s profits which in this case was deducted retained and actually paid
This fact has not been challenged before us
The ground on which this liability is attacked is that the total world income of the respondent was not taxable and therefore on the profits made on the Hapur transactions the British Indian Tax authorities could not levy any tax
This contention disregards the provisions of and liability arising under sections 402 and 421 and the proviso thereto
It also is contrary to the principle of taxing statutes that the profits are  taxed where they are found
 In this case they were in the hands of the Hapur firm I  411 HL
2 1927 i i TC 749 770 HL
3  189 SC
946 which was in receipt and control of the income
The agent at Hapur having lawfully and properly paid the tax under the Act that amount has been rightly deducted from the profits accruing on the Hapur transactions
The Judgment of the Judicial Committee of the ljlas i khas on which the High Court has based its decision suffers from the infirmity that it ignores both the provisions of and principle underlying sections 402 and 421 of the Act and the proviso thereto relating to the liability of an agent under the Act and the law of Agency relating to employing of sub agents by agents
If the Hapur firm rightly paid the tax on the profits the respondent cannot be allowed to challenge the amount on the ground that his total world income was not taxable and he was entitled to his profits without deductions
That is a question which ha to be agitated by the non resident assessee at the time of his assessment
Those persons who are bound under the Act to make deduction at the time of payment of any income profits or gains are not concerned with the ultimate result of the assessment
The scheme of the Act is that deductions are required to be made out of  salaries   interest on securities  and other heads of  income profits and gains  and adjustments are made finally at the time of assessment
Whether in the ultimate result the amount of tax deducted or any lesser or bigger amount would be payable as income tax in accordance with the law in force would not affect the rights liabilities and powers of a person under section 18 or of the agent under sections 402 and 421
As to what would be the effect and result of the application of section 17 if and when any appropriate prceedings are taken is not a matter which arises in this appeal between the appellant and the respondent nor can that matter be adjudicated upon in these proceedings
That is a matter which would be entirely between the respondent and the Income Tax authorities seized of the assessment
Our attention was drawn to two cases 1 Commissioner of Income tax vs Currimbhoy Ebrahim  Sons1 1 947 In that case the assessee company had been treated as an agent of the Nizam of Hyderabad who had lent to the assessee company a sum of Rs 50 lakhs
The assessee company had paid in the assessment year a sum of Rs 3 lakhs on account of interest and it was held that the interest earned by the Nizam did not accrue or arise to the Nizam through or from any business connection with the assessee company in British India or from any property within British India and there fore section 42 was not applicable
No question of business connection was raised in the court below and the argument there proceeded on the basis that the respondent was not liable for this amount on account of income tax because the  entire income  was not assessable to income tax
The argument of isolated transactions based on the Anglo French Textile Co Ltd vs Commissioner of Income tax Madras1 is not available to the respondent nor was the foundation for any such argument laid in the courts below or raised in the statement of the case filed by the respondent in this court
Another case on which reliance was placed is Greenwood vs F L Smidth and Company2 
That was a case of a Danish firm resident in Copenhagan
It manufactured and dealt with cement making machinery which it exported to other countries
It had an office in London in charge of a qualified engineer who received enquiries for machinery such as the firm could supply sent to Denmark particulars of the work which the machinery was required to do and when the machinery was supplied he was avilable to give English purchaser the benefit of his experience in erecting it
The contracts between the firm and their customers were made in Copenhagan and the goods were shipped F 0
B Copenhagan
It was held in that case that the firm did not exercise a trade within the United Kingdom within the meaning of Sch
D of section 2 of the Income Tax Act 1853 and was therefore not assessable to income tax
This decision is not relevant to the case now before us as the facts were different and the dicision was under a different statute
1  2 948 In our opinion the Judicial Committee of Ijlas i khas was in error in holding that before fixing the liability of a contributory to tax paid by an agent in British India for and on behalf of the non resident contributory his liability to pay tax on his entire income  really total world income had to be established
Therefore the finding of the High Court that the Liquidator cannot claim from the respondent the amount of tax paid by the Hapur firm on transactions entered into by the appellant for and on behalf of the respondent unless it was shown that his total world income was taxable is unsustainable
As between the parties the tax paid by the agent had to be taken into account irrespective of the ultimate result of the assessment on the non resident
In the result this appeal is allowed and the judgment and order of the Division Bench of the Pepsu High Court set aside and the order of the learned Liquidation Judge restored but in the circumstances of this case the parties will bear their own costs in this court and in the courts below
Appeal allowed


Summary:
The appellant company and the respondent firm were carrying on business in the erstwhile patiala State and were non residents in British India
The appellant acting as commission agent for the respondent entered into several forward transactions with a Hapur firm of commission agents
The profits accruing on these transactions amounted to Rs 29275 2 6 on which the Hapur firm paid a sum Of Rs 9314 13 4 as income
In 1943 the appellant was ordered to be wound up and the respondent was placed on the list of contributories
The Official Liquidator applied to the Liquidation judge for a payment order for a sum which included the amount of income tax paid by the Hapur firm for and on behalf of the respondent
The main contention raised on behalf of the respondent was that it had no taxable income in the year in dispute and was not liable to pay any income tax and that consequently it was not liable for the income tax paid by the Hapur firm
Held that the Liquidator was entitled to claim from the respondent the amount of income tax paid by the Hapur firm irrespective of the consideration whether its world income was taxable or not
Under the law the Hapur firm was an agent of the respondent for the business of the agency which was entrusted to it and was as such liable under ss 402 and 421 Income tax Act as an assessee for income tax on the profits made on the respondent s transactions at Hapur and was entitled to retain the estimated amount of income tax payable on the amount of the respondent s profits
As the Hapur firm had rightly paid the tax on the profits the respondent could not be allowed to challenge the liability on the ground that his total world income was not taxable and he was entitled to his profits without deductions
That was a question which must be agitated by the non resident assessee at the time of his assessment
As between the parties the tax paid by the agent had to be taken into account irrespective of the result of the assessment on the non resident