Rajagopalan, J. - (1.)THE question referred to this Court under Section 66 (1) of the Income-tax Act, "Whether the payment of Malayan Estate Duty of Rs. 3,29,746 is a proper deduction out of the earlier unassessed profits of the assessee from 1-4-1933", arose out of the assessment proceedings for the year 1949-50, the corresponding previous year having ended on 12-4-1949.
(2.)THE headquarters of the business which the assessee's family carried on was at Paganeri in Ramanathapuram district, and it had branches in Burma and Singapore among other places. THE accepted basis for assessing the Hindu undivided family, of which the assessee Annamalai was a member, was that it was resident and ordinarily resident. In the year of account that ended on 12-4-1949 the assessee received as remittances from abroad a total sum of Rs. 1,25,238 of which Rs. 1,25,034 came from Singapore and the balance of Rs. 204 from Burma. Rs. 80,652 represented the profits that had accrued to the assessee at Singapore in the year of account.
THEre was no dispute about the liability of the assessee to be assessed to tax on that sum under Section 4 (i) (b) (ii) of the Act. THE Income-tax Officer upheld the claim of the assessee that the balance of the remittance, Rs. 44,586 fell outside the scope of Section 4 (l) (b) (ii). THE Income-tax Officer recorded :

"THE representative raised the question of availability of profits. This has been examined. It is found that there are no prior unassessed and unremitted profits available, Hence this will be treated as from capital."

To appreciate the finding of the Income-tax Officer it. Is necessary to set out some more facts. The figures themselves were never in dispute. Annexure-A to the statement of the case showed that the balance of the unassessed and unremitted profits of the assessee between the years 1933 and 1839 at Singapore amounted to Rs. 3,38,576. The claim of the assessee was that this sum had been expended at Singapore itself, and no portion 6f that was available to him for the remittances made in the year of account.

That was the claim the Income-tax Officer upheld. The assessee's grandfather died on 4-13-1931, and the assessee's adoptive father died on 10-12-1945. Estate duties were payable at Singapore, and a total sum of Rs. 3,29,746 was paid by the assessee's family at Singapore. Though the question as framed by the Tribunal is only limited to this amount, the further claim of the assessee was, that there were two other items of expenditure to be taken into account in deciding whether any portion of the profits that had accrued to the assessee's family between 1933 and 1939 was available for remittance in the year of account.

The assessee claimed that a sum of Rs. 89,053 had been expended abroad, though this expenditure would not have been allowable had there been a computation under Section 10(2) of the Act. The assessee also claimed that Rs. 73,249 represented un-absorbed losses covered by the special scheme sanctioned by the Central Board of Revenue.

The Commissioner exercised his revisional power suo motu and came to the conclusion, that the sum of Rs. 44,586 which the income-tax Officer had excluded, was also assessable to tax in the assessment year 1949-50. The Commissioner recorded;

"The correct legal position under the Amendment Act of 1939 however, is that it is for the assessee to prove that the remittances are out of capital and not profits. The learned counsel has, however, made no attempt to prove this, his entire stand being based on merely legal grounds. It is well settled that prima facie remittance is out of profit subject to the proof by the assessee to the contrary for all the facts are always within his special knowledge. It should not therefore be difficult for him to prove that the remittance was out of capital.

Unless therefore this presumption is firmly rebutted by the petitioner with the help of account entries or other evidence the remittance has to be treated as profit undiminished by any capital expenditure. Unfortunately the Income-tax Officer instead of ascertaining whether the remittance was out of capital or profits, went on to determine the profits available for remittance. However, as the assessee failed to establish that it was out of capital and the onus was entirely or him to do so, that remittance should have been deemed to come out of profits."

The assessee appealed without success to the Tribunal. With reference to the claim for the loss -- which does not really arise for consideration by us now, if we have regard to the frame of the question referred to us--the finding of the Tribunal was :

"......in our opinion, earlier losses necessarily encroach into the capital, deplete it to that extent, and thereby get extinguished. Such losses cannot consequently be available as set off for subsequent profits."

With reference to the payments towards estate duty the Tribunal recorded :

"The contention that estate duty payments are available as a set off against the computed profit fund, need not tarry us long. Estate duty is clearly a charge, against capital and in no sense against profits. It is the theoretical profits of the foreign business that are computed for availability, and the question whether the same cash inflow representing profits is utilised for the purpose of the discharge of this liability has therefore, no place in the present discussion. Estate duty is clearly not a charge against profits and consequently not a deduction against the fund." What Section 4 (1) (b) (iii) of the Act lays down is :

"Subject to the provisions of this Act the total income of any previous year of any person includes all income, profits and gains from whatever source derived which--having accrued or arisen to him without the taxable territories before the beginning of such year and after the 1st day of April, 1933, are brought into or received in the taxable territories by him during such year." That really it is the period between l-4-1933 and 31-3-1939 during which the income, profits or gains should have accrued or arisen outside the taxable territories was not in dispute. The contention of the learned Advocate General, who appeared for the assessee, was that it was the factual existence or unexpended profits of that period that was relevant in deciding whether a given remittance fell within the scope of Section 4 (1) (b) (iii) and not a notional or fictitious fund made up of the profits that arose or accrued abroad minus what had been remitted in fact out of these profits to the taxable territories at any point of time, even after 1-4-1939.

The learned counsel for the respondent urged that the actual availability of profits for remittance was not a relevant factor. He contended that, if profits accrued or arose abroad, and those profits were not computed for taxation under the Indian Income-tax Act and were not taxed -- that was the position between 1933 and 1939 -- any amount brought into the taxable territories by the assessee during the accounting year subsequently to 1-4-1939 should be presumed to be a remittance out of these profits, unless the assessee proved that it was a remittance out of the capital he held abroad. The learned counsel conceded that it was a rebuttable presumption, but he pointed out that in this case the finding was that the assessee did not offer any evidence to show from what source abroad he received the sum of Rs. 44,586.

The learned Advocate General was right when he pointed out that Section (4) (1) (b) (iii) did not enact any legal fiction. Is any presumption of law permissible, and if so, under what circumstances, is the next question.

(3.)THE basis for any presumption should be, as the learned Advocate General urged, the normal course of conduct of a prudent man of business. He would rather meet any call for expenditure out of his Income than deplete his capital, if the amount of the unexpended income still available to him is sufficient to meet that expenditure, and if there was no other factor to be considered.
Let us examine the case of the assessee from that view point. The profits that the assessee had earned at Singapore between 1933 and 1939 minus what he remitted to India amounted to Rs. 3,38,576. Between 1-4-1933 and 12-4-1949 the assessee had to make two payments towards the estate duty payable at Singapore totalling Rs. 3,29,476. He paid those amounts. There was no evidence to show that he paid them out of his capital held at Singapore. There was no evidence either that he paid them from out of the computed sum of Rs. 3,38,576. He just paid. The learned Advocate General claimed that there was no accretion to the capital of the assessee at Singapore in 1949 compared to the position in 1933, and that in fact there was a diminution.

That aspect of the case does not appear to have been examined by the Tribunal. We shall proceed on the basis that there was no evidence either way. If the assessee was a prudent business-man--and there was no evidence to show that he was not--the assessee would have met the charges not from his capital but from his accumulated income. If that is the presumption that should prevail, the answer to the question referred to this Court should be in favour of the assessee.

What is taxable under Section 4 (1) (b) (iii) of the Act is only the income remitted and not any remittance from capital. If an assessee kept separate accounts for his capital and income abroad and proved that a given remittance was from the capital, that is not taxable. Kneen v. Martin, 1934 19 TC 33 (A), was a case of that kind. If the assessee held both capital and profits abroad--we are concerned with the profits that accrued or arose abroad between 1933 and 1939--the Income-tax Act did not impose any obligation upon the assessee to meet any given expenditure either from out of the capital or from out of his profits. His discretion was unhampered by any statute.

He was not bound to find(?) the profits and keep them for remittance to the taxable territories, without expending any portion of those profits abroad. Payments towards estate duty constituted an item of expenditure. The assessee could make the payments out of his profits. The same principle would apply to any other item of expenditure. No doubt it was held in Ramaswami Aiyangar v. Commr. of Income-tax, 1943-11 ITR 597:. (AIR 1944 Mad 154) (B) and in Ramaswami Aiyangar v. Commr. of Income-tax, (C), that payments towards estate duties would not fall within the scope of Section 10 (2) (xv) of the Act. But then, there was no need for computation under Section 10 in the case of profits that accrued or arose abroad between 1933 and 1939.

If the assessee proved that he had paid the estate duty out of his profits, to that extent there would be adiminution, in fact, of his profits which he held abroad. Of course, if there was proof, that he had made the payments out of his capital and the capital to that extent was diminished, the profits would still be available for any remittance that he subsequently effected. Again it would be a factual position that would arise for consideration. Such were the contentions of the learned Advocate General.