Case: P. V. Raghava Reddi And Another Vs. Commissioner Of Income-Tax

1. The appellant is a firm at Gudur (Andhra Pradesh), which was doing business in Mica under the name and style of the Continental Export and Import Company. During the years of account, 1948-49 and 1949-50 (corresponding to the assessment years, 1949-50 and 1950-51), the assessee firm exported Mica to Japan. Mica was not directly exportable to Japanese buyers during these years, as Japan was under military occupation, but to a State Organisation called Boeki-Cho (Board of Trade). To negotiate for orders and to handle its other affairs in Japan in connection therewith the assessee firm engaged SanEi Trading Co. Ltd., Tokyo, as its agents. The Japanese Company was admittedly a non-resident Company. Two agreements were entered into by the assessee firm and the Japanese Company, the first for the quarter, July to September 1948, during which period a commission of 4 per cent. on the gross sale proceeds was payable to the Japanese Company,and the second, for an indefinite period, with the commission reduced to 2 per cent.2. During the years of account, the amount of commission due to the Japanese Company was respectively Rs. 26,254-9-1 and Rs. 11,272-8-8. These amounts (included in the price of Mica exported) were received by the assessee firm in India, but due to the restrictions imposed by the Exchange Control laws, they could not be sent to the Japanese Company. The agreements between the assessee firm an the Japanese Company, therefore, provided for this contingency by the inclusion of the following termview 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 definite instructions are received by the firstthe two account years, a total amount of Rs. 13,3l9-l2A was paid to the Japanese Company either directly or through others, to whom the assessee firm was instructed by the Japanese Company to pay the amount. The Income-tax authorities treated the assessee firm as the statutory agent of the Japanese Company, and assessed tax on the two amounts in the respective years of assessment. The order of the Income-tax officer was confirmed on appeal; but the Tribunal set aside the order on the ground that the income to the Japanese Company had accrued or arisen in Japan and could not be said to have been received by the Japanese Company in the taxable territories, since S. 4(1)(a) was subordinate to S. 4 (1)(c). The Tribunal thus concludedreference in Section 4(1)(a) to income received in India can, in our opinion, refer only to the situation more specifically provided for in section 4(1)(b) as sub-section (a) provides a general cover for both the immediately following sub-sections (b) and (c). Section 4(1)(a) cannot therefore by itself add a new liability to non-residents, the extent of which is clearly delimited under section A(1)(c) of the Act to only incomes that accrue to them within the taxable territories. To read any further in section 4(1)(a) will totally nullify the effects of sectionthat has accrued once abroad cannot by any means accrue again in India. If such income is later remitted to India and received by or on behalf of such nonresidents in India such subsequent receipt cannot be chargeable under theassessment was, therefore, ordered to be cancelled. The Commissioner of Income-tax, however, obtained a reference to the High Court of Madras on the questionthe aforesaid sum of Rs. 26,255-0-0 and Rs. 11,272-0-0 being selling commission credited to the aforesaid nonresident companys account in the books of the assessee are chargeable in the hands of the assessee under S. 4(1)(a) for the assessment years 1949-50 and 1950-51?"3. The High Court answered the question against the assessee firm. The High Court observed that the learned advocate for the assessee firm "confessed his inability to support the decision of the Tribunal on the grounds on which itHigh Count further observed that the answer to the question did not "admit of doubt or difficulty". The High Court, however, granted a certificate, and these appeals have been filed.

Reasoning: 4. Under S. 42, all income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories are deemed to be income accruing or arising within the taxable territories, and if the person entitled to the income, profits or gains is not resident in the taxable territories, it is chargeable to income-tax either in his name or in the name of his agent, and in the latter case, such agent is deemed to be, far all the purposes of the Act, the assessee in respect of such income-tax. The provisos to the section enable the application of S. 18, and the tax may be recovered by deduction under that section and the agent or any person who apprehends that may be assessed as such an agent is also enabled to retain out of the money." payable to the non-resident person a sum equal to his estimated liability. The section thus creates a vicarious liability in so far as the agent is concerned, for, the tax which the non-resident has to pay; but as a safeguard for him, he is enabled to retain from the money he has to pay, a sum equal to his own liability in the event of his being treated as the assessee. Section 43 lays down who can be deemed to be an agent, and it is provided that any person having any business connection with a nonresident person or through whom the nonresident is in receipt of any income profits or gains is to be deemed to be such an agent, if the Income-tax Officer has caused a notice to be served of his intention of treating him as the agent of the non-resident person. Such persons are conveniently described as "statutory agents".In our opinion, as (a) and (c) of S. 4 (1) can be read disjunctively, and cl. (a), which provides for receipt of income, profits and gains in the taxable territories cannot be subjected to the limitation that the income must also accrue or arise in the taxable territories. To make cl. (a) depend on cl. (c) is to make the "accrual" the test, while cl. (a) only considers receipt in the taxable territories sufficient. The clauses are capable of being read independently, though, sometimes, they may operateargument 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, for it is not necessary to go to 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 much the same way as if it was credited in a Bank to 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 S. 4 (1) (a). 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.