Rajagopalan, J. -
(1.) UNDER Section 66 (1), Income-tax Act, the following question was referred to this Court:
"Whether on the admitted facts of the case the sum of Rs. 40070 remitted from Bhopal to Manchester could in law be treated as a remittance of profits to British India."
The assessee, W. A. Beardsell and Co., Ltd., Madras, has its registered office at Madras. Messrs. Calico Printers Association Ltd., Manchester, hold a large block of shares in the assessee company. The assessee company was the managing agents of the Bhopal Textiles Ltd., with its registered office at Bhopal. The income which the assessee company derived as Managing Agents of the Bhopal Textiles Ltd. was credited to the assessee's account with the Imperial Bank of India, at Bhopal. A sum of Rs. 61500 was payable as dividend to Calico Printers Association Limited, Manchester, under the dividend declared by the assessee company on 30-11-1945 at a meeting held at Madras that day. A dividend warrant was issued at Madras. In partial discharge of that liability to pay Rs. 61500 to the Calico Printers Association Ltd., Manchester, the assessee firms directed the Imperial Bank of India at Bhopal to transfer a sum of Rs. 40070 to Manchester to be paid to the share-holder, the Calico Printers Association Ltd. at Manchester. In its accounts at Madras, the assessee company credited the Imperial Bank of India at Bhopal with this sum of Rs. 40,070, thus reducing the bank balance at Bhopal and debited the profit and loss account or dividends account with this sum.
(2.) THE Income-tax Officer held that the payment of Rs. 40070 was a constructive receipt of the assessee company's Bhopal income at Madras. THE Appellate Assistant Commissioner reversed that decision. But on further appeal to the Appellate Tribunal, it agreed with the Income-tax Officer.
The claim of the assessee company, that Rs. 40070 that was remitted from Bhopal to Manchester was not "received" by it at Madras within the meaning of Section 4 (1) (iii), Income-tax Act must prevail. The claim falls within the scope of the rule in -- 'Multanchand Johurmul In re', AIR 1931 Cal 737 (SB) (A), which was followed by our Court in -- 'The Commr. of Income-tax, Madras v. Murugappa Chettiar', AIR 1941 Mad 331 (SB) (B), and by the Bombay High Court in -- 'Sarupchand Hukumchand In re', AIR 1945 Bom 258 (C). The case law on the subject was exhaustively reviewed by Kania C. J. in -- 'AIR 1945 Bom 258 (C)'. It may not therefore be necessary to traverse the whole ground again.
In -- 'AIR 1931 Ca! 727 (SB) (A)' one Joyachand Lal Kothari resided in Cooch-Behar. He sent jute for sale to the Calcutta business of the assessees. They sold it and a certain amount was due to him by the Calcutta business. Instead of sending money from Calcutta to Joyachandlal Kothari, the assessee got their Cooch-Behar branch or branches to pay to Joyachandlal Kothari in Cooch-Behar the debt which was really due from the Calcutta business. On these facts, the learned Judges held that the amounts paid at Cooch-Behar by the Cooch-Behar branches of the assessee firm to the creditor, Joyachandlal Kothari, were not received in British India even constructively.
In the present case, no doubt the assessee's liability to the Calico Printers Association Ltd., Manchester, was reduced to the extent of Rs. 40070 by the remittance from Bhopal to Manchester. The situs of the debt was Madras, in the sense that the Calico Printers Association Ltd. to whom the dividend was payable, would enforce payment of that amount at Madras. But then the assessee had the legal right, it was also an obligation to seek out the creditor and pay the debt due to him at Manchester. It was in the exercise of that right and in discharge of that obligation that the payment was made at Manchester by the Bhopal branch of the Imperial Bank of India under instructions from the assessee company. A mere lessening of the assessee's liability enforceable at Madras and with nothing more cannot amount to "receipt" of the money at Madras. That was the principle laid down in -- 'AIR 1931 Cal 727 (SB) (A)', The 'ratio deci-dendi' of Multanchand Johurmal's case (A) was explained by Kania C. J. in -- 'AIR 1945 Bom 258 (C)', at p. 261 :
"The short point which was decided was that as the money was lying in Cooch-Behar and paid to creditors in Cooch-Behar no portion thereof was received in British India."
In the present case money lying at Bhopal outside (what was then) British India was transferred to Manchester, also outside British India, and the payment to the creditor to whom a dividend was due was at Manchester. The liability of the assessee no doubt enforceable at Madras was reduced by the amount of that remittance of Rs. 40070. Since that was all that was proved, it could not amount to a receipt of Rs. 40070 at Madras.
Mr. Rama Rao Sahib referred to -- 'Hall v. Mariana', (1935) 19 Tax Cas 582 (D) and --'Wilds y. King Smith', (1941) 24 Tax Cas 86 (E). and pointed out that in both these cases the debt itself was transferred from London to Colombo before it was discharged by payment at Colombo from out of the moneys of the assessee held at Colombo. We are unable to find anything in those judgments to sustain the contentions of Mr. Rama Rao Sahib, that there must be a transfer of the debt antecedent to its discharge to treat such a discharge abroad as non-receipt of money within the taxable territory. In -- 'AIR 1945 Bom 258 (C)', also there was apparently such an antecedent transfer outside British India. The facts set out at page 261 of the report were:
"In the Bombay books two persons of the name of Pannalal Khubchand and Parasaram Dalichand were creditors of the firm. The accounts of these two creditors were started in the Bombay books in Samvat year 1989-90 and at the beginning of the year of account in question Rs. 81603 and Rs. 38145 respectively stood to their credit. On 27-12-1933, their accounts were debited with Rs. 80000 and Rs. 9000 respectively by havalas passed on that date and corresponding amounts were credited to the Indore shop account. In the journal the entries were made as follows: 'Debited to your accounts, as per your instructions and credited to the Indore shop'. These creditors were paid at Indore the said two sums out of the cash of the Indore firm. In addition to these facts, the Commissioner has pointed out that on 29-11-1933, a sum of Rs. 85000 in currency notes was sent by the Bombay firm to the Indore firm and on 5-2-1934, another sum of Rs. 50000 was similarly sent from Bombay to Indore. The question is whether in these circumstances the two sums of Rs. 80000 and Rs. 9000 are to be treated as profits arising without British India to persons resident in British India and received or brought by them into British India."
(3.) THE question was answered in the negative and in favour of the assessee. Despite the fact that there was a 'navala' that is, that by an agreement between the creditor at Indore and the debtor at Bombay there was a transfer of the liability which had arisen at Bombay to Indore antecedent to the discharge of that liability. Kania C. J. held that the facts of -- 'AIR 1945 Bom 258 (C)', were similar to those in -- 'AIR 1931 Cal 727 (A)'. THEre" was no such antecedent transfer of liability either in -- 'Multanchand Johurmal's case (A)', or in -- 'AIR 1941 Mad 381 (B)'. In all the five cases we have referred to so far, the creditor accepted payment made abroad at a place other than the original situs of the debt and that was what really mattered the discharge of the obligation outside the taxable territory, with moneys held outside the taxable territory. That there was also an antecedent arrangement between the creditor and the debtor to transfer the situs of the debt to the place abroad where it was ultimately discharged in no way affected the principle on which was decided the question whether such a discharge amounted to receipt of the money within the taxable territory. That was apparently what Kania C. J. meant when he observed that the facts in -- 'AIR 1945 pom 258 (C)', were identical with those in --'Multanchand Johurmal's case (A)'.
As we have pointed out already, there was an antecedent arrangement in -- 'Sarupchand's case (C)' and none in --'Multanchand Johurmal's case (A)'. An antecedent arrangement between acreditor and a debtor to transfer the liability itself, that is, the situs of the debt itself, to a place outside the taxable territory is not indispensable. Even without it" the debtor has the right to seek out the creditor to pay. If the creditor lives outside the taxable territory, it is the payment abroad, accepted by the creditor in discharge of the liability incurred within the taxable territory, that matters in deciding the question whether such a payment amounts to receipt of money by the debtor (assessee) within the taxable territory. A payment abroad from out of moneys held abroad which results in extinguishment of the assessee's liability, total or partial, will not by itself amount to receipt by the assessee within British India of income etc.., which had accrued to the assessee outside British India within the meaning of Section 4(1)(iii) of the Income-tax Act.
Mr. Rama Bao Sahib also referred to --'Subramania Chettiar v. Commissioner of Income-tax, Madras', AIR 1936 Mad 282 (SB) (F). The facts of that case were : the assessees carried on business at Tinnevelly in British India and at Penang, outside British India. In or about July 1931, the trustee of a Patasala at Kunnakudi in British India deposited certain moneys with the Tinnevelly shop of the assessee. When the trustee applied for repayment of the money, the assessee issued two hundies on his Penang shop for the amount due. The Penang shop paid these amounts at Penang. The transactions were recorded in the Penang Polio of the Tinnevelly books and the Tinnevslly folio of the Penang Books. The profits at Penang were also sufficient to cover the payment. The learned Judges held that the sum of money so paid at Penang should be treated as a remittance of foreign profits to British India and was assessable to Income-tax under Section 4, Income-tax Act as income received by the assessee within British India. In distinguishing the facts of this case, Kania C. J. quoted with approval in --' AIR 1945 Bom 258 (C)', the observations of the learned Judges in --"'AIR 1941 Mad 381 (B)',
"There the creditor and the debtor both resided in British India and the creditor was paid by a hundi delivered to him in British India."
A hundi as a negotiable instrument is moneys worth and that was delivered to the creditor within British India in discharge of the liability to the debtor, a liability enforceable within British India, As pointed out in -- 'Gresham, Life Assurance Society Ltd. V. Bishop', 1903 AC 287 (G), receipt of income need not necessarily be in specie. In invoking the principle laid down in -- 'AIR 1936 Mad 282 (SB) (F)'. Mr. Rama Rao Sahib pointed out that the assessee in addition to issuing instructions to the Bhopal Branch of the Imperial Bank of India to remit the amount to Manchester drew a cheque on the Imperial Bank of India at Bhopal and that that cheque was drawn at Madras and sent to Bhopal. But quite obviously that cheque was not really a negotiable instrument in the sense that it was delivered as a negotiable instrument to the creditor. The cheque was in favour of an agent of the assessee. That was the position of the Imperial Bank of India at Bhopal, and the agent's instructions were to remit the money to Manchester; it was not as a negotiable instrument that the cheque 'was sent to that agent. The cheque was only really in confirmation of the instructions issued by the assessee to his agent. Further the issue of a cheque was not one of the facts relied upon by the Appellate Tribunal in the statement of the case it prepared for submission to this court.
Mr. Rama Rao Sahib sought to distinguish the assessee's case from -- 'AIR 1931 Cal 727 (A)', by the fact that cross-entries were made in the assessee's books at Madras. That is, the Imperial Bank of India at Bhopal was credited with Rs. 40070 and the profit and loss account or the dividend account was debited with this amount. That was what was recorded in the order of the Appellate Tribunal. The entry in the statement of the case prepared by the Appellate Tribunal, that the Calico Printers Association Ltd., Manchester, was debited with this amount of Rs. 40070 therefore appears to be incorrect. The entries merely evidenced the payment at Manchester that is, the extinguishment of the liability in part by such a payment. In - 'Commissioner of Income-tax, Bombay v. New India Assurance Co. Ltd.', AIR 1938 Bom 490 (H), Beaumont C. J. observed at page 492:
"If, for example, it were shown that a sum representing income received abroad had been exchanged by appropriate book entries, for an asset in India and had been applied as income in India, I should say that the foreign income had then been received in India."
Commenting upon that Kania C. J. observed in -- 'AIR 1945 Bom 258 (C), at p. 263', "I have noticed this sentence in particular because it brings out clearly what is intended to be conveyed by the word "received", in the section. It does not amount to merely 'lessening of liability in British India' as contended by the Commissioner. It means 'receipt in British India of the amount, or by appropriate book entries of an asset, which can be pointed out as resulting from the receipt."