- (1.) THIS is a reference under Section 66(1) of the Indian income-tax act, 1922, by the Income-tax appellate Tribunal (Bombay Branch). The assessee is a company called the Hira Mills Ltd., (hereinafter called the assessee), which is registered at Ujjain in Gwalior State. The business of the assessee is to manufacture cloth and its mills are situated at Ujjain. The assessee is accordingly a non-resident company for the purposes of the Indian Income-tax Act, 1922. Two questions said to be questions of law, have been set up by the Income-tax Appellate tribunal in the statement of the case which is has submitted. The first is, we think, readily answered, but the second is one of difficulty.
(2.) THE first question relates to the profits and gains of the assessee derived from the sale of cloth at, or through its establishment at Cawnpore in British India. In the accounting year the assessee sold its cloth manufactured in Gwalior at Cawnpore to the value of Rs. 3,87,305 gross, and the Income-tax Department has for the year 1939-40, the assessment year in question, sought to tax the assessee under Section 4(1)(c) upon the entire profits attributable to these gross sales, without allowing any apportionment of that profit between what is attributable to the manufacturing process in Gwalior up to the point of export from that State and what is attributable to the import into, and sale in, British India. The facts, as stated in the case submitted to us, show that the assessee maintains a salesman of its own at Cawnpore, to whom it makes a monthly allowance by way of wage or salary. This we take to mean that the salesman at Cawnpore is nothing more or less than a paid employee of the assessee at Cawnpore. The goods imported from the assessees mills in Gwalior are then sold by the assessees salesman in Cawnpore and it is not in dispute that the while of the sale proceeds are collected by the assessees salesman at Cawnpore. The contention of the assessee of before the Income-tax Appellate Tribunal was that the Cawnpore sales, being the result of an initial process of manufacture and production in Gwalior, could not be said to have produced profits and gains which accrued or arose wholly in British India within the meaning of Section 4(1)(e) of the Act, and must therefore, if assessable at all, be assessed as profits and gains which are merely deemed to accrue or arise under Section 42(1) of the Act and are as such, entitled to the benefit of the apportionment allowed by sub-section (3) of section 42. The question actually set by the Tribunal is this :- (1) Whether, on the facts of the case, the profits and gains derived from sales made at Cawnpore by the assessees salesman of the goods manufactured by the assessee at Ujjain outside British India were rightly held to accrue or arise to the assessee in British India within the meaning of the Section 4(1)(c) or received in British India by or on behalf of the assessee within the meaning of Section 4(1)(a) of the Indian Income-tax (Amendment) Act, 1939 ? 3. We think that this question is most easily disposed of on the ground, which has been noted by the Tribunal, that the profits and gains in question were actually received by or on the behalf of the assessee in British India and are, therefore, assessable under Section 4(1)(a) of the Act. That the gross profits indeed, the gross sale proceeds, were received in British India is not to be disputed. The answers given to this by the assessee are, first, that Section 4 of the Indian Income-tax Act does not apply at all to a non-resident, by virtue of the special provision made for him in Section 42, and, secondly, that even if that is not so, section 4(1) is introduced by the words subject to the provisions of this Act, which would suffice, even in the case of profits and gains received in British India, to entitle them to the benefit of Section 42(3). In our view, neither of these arguments can succeed. As to the former, we cannot accept it that Section 42(1) of the Act can be divorced from Section 3 and 4, so as to subject a non-resident assessee to a charge of income-tax arising only under Section 42, and not under sections 3 and 4. We appreciate, following the view expressed in Rogers Pratt Shellac & Co. v. Secretary of State for India and Commissioner of Income-tax, Bombay v. National Mutual Association of Australasia Ltd., that Section 42 of the Indian Income-tax Act is a charging section in the sense that, as the learned Chief Justice of Bombay has pointed out in the latter case at page 527, it does have the effect of rendering a non-resident liable to tax in respect of sources of income to which he would not be liable to tax if because a resident. In that sense it is, of course, a charging section but that is along way from saying that section 42(1) has to be read independently of the general charging sections. In seems to us that the truth is that the general charge of income-tax is imposed by Sections 3 and 4 and that the general charge is given a particular application in respect of a non-resident by Section 42(1). Neither can we accede to the alternative proposition that the charge of a non-resident to income-tax on profits and grains actually received or accruing or arising in British India is, by virtue of the words. subject to the provisions of this Act, in any way modified by Section 42, sub-section (3). We think on construction alone that it is quite clear that the relief afforded by Section 42, sub-section (3), applies only to a case in which the profits and gains are deemed under Section 42 to accrue or arise in British India, and not to a case in which they actually so accrue or arise or are received in British India. Indeed, this is what the sub-section says. It in terms applies only to the profits and gains of a business deemed under this section to accrue or arise in British India..... We are unable, therefore, to read the sub-section as amounting to a general proviso applied to profits and gains received, accruing or arising under Section 4, which is the section clearly applicable in this case to the Cawnpore profits of the assessee. Dismissing, therefore, sub-section (3) of section 42 of the Act, we are bound to look at the language of Section 4 and to interpret the meaning of the words profits and gains. There is no reasons for giving to these words any thing but their usual meaning of the difference between the gross cost to the seller at Cawnpore was unquestionably the assessee. The cost to the assessee at the moment of sale in Cawnpore was the cost of, and other charges incidental to, the manufacture and export of them to Cawnpore and their sale there. The circumstances that the assessee produced the goods in an Indian State can, make no difference to the meaning of the words profits and gains, and, if the true construction of the Act gives rise, in this, as in other cases, to double taxation, that is not a matter by which we can be influenced in construing the Indian Income-tax Act. If assistance were needed in reaching this conclusion, it is afforded by the case of Erichsen v. Last in which a very similar contention in a different context was rejected by the English Court of Appeal. Our attention has been drawn to the decision of the High Court of Burma in Commissioner of Income-tax, Burma v. Messrs. Steel Brothers & Co., Ltd. But, even in this case there is no decision that the profits and gains of one continuous process between manufacture and sale can be apportioned so as to give rise to two processes, one, up to the point of export of the manufactured article, and the other, from that point onward until final sale. It is true that it was held in that case that, where there was the reverse operation of manufacture in India and sale in England, the non-resident company in England which handled the selling organization of the goods produced by its own Branch in Burma was entitled to deduct a proper commission from the profits accruing or arising in British India in consideration of its sales services. This, however, would appear to us, with great respect, to be a little difficult to understand as it is not easy logically to see how, if the net profits and gains received in England by Messrs. Steel Brothers & Co., Ltd., were taxable in British India as profits and gains accruing and arising in Burma, those net profits could again be diminished be deducting from them a sum for commission payable to the assessee company itself which would in effect represent a further taxable profit. We must, therefore, answer this first question by saying that the profits and gains referred to therein were rightly held both to have been received in British India by or on behalf of the assessee within the meaning of Section 4(1)(a) of the Indian Income-tax Act, 1922, as amended, and also to have accrued or arisen to the assessee in British India within the meaning of Section 4(1)(c) of the same Act. We feel it right to add, as was obviously intended by the case and since it has formed the sole subject for argument before us, that such profits and gains derived from sales made at Cawnpore by the assessees salesman of the goods manufactured by the assessee at Ujjain must be calculated without allowing any apportionment of that profit as between the period prior to the moment of export from Gwalior and the moment subsequent to that export.
(3.) THE second question is more difficult. It is :- (2) Whether, on the facts of the case, the profits and gains derived from sales made from Ujjain to customers in British India through brokers in British India were rightly held to be profits or gains deemed to have accrued or arisen to the assessee company in British India within the meaning of Section 42(1) and assessable under sub-section (3) of that section ? THE facts relating to this question, so far as they have been stated to us, deserve careful attention. THE assessees goods are also marked in British India in other ways besides the sales through the medium of their Cawnpore salesman. THE following, as we understand it from the statement of the case, is the method employed. Brokers in British India, who are not the employees of the assessee, are, as part of their own business, in the habit of canvassing orders from purchasers of cloth in British India. There is nothing in the case to lead us to suppose that these brokers are in the any sense specially engaged by the assessee. It has not been found that they canvass orders exclusively for the assessee; neither is their anything to establish either that individual brokers are retained by the assessee, or that the assessee has any special arrangement with any particular broker or brokers to canvass systematically on his its behalf. The brokers are free lance brokers, and, so far, at least, as the assessee is concerned, are at liberty to place the orders obtained by them where they will. We are vouchsafed no information as to the supply of catalogues or other canvassing material by the assessee to the brokers. Officers of purchase obtained by the brokers are, in paragraph 3(b) of the Appellate Tribunals judgment, stated to be first sent by the brokers to the assessee at Ujjain for acceptance or rejection either by letter or on the brokers own contract forms used in the general course of their business. We understand that the brokers did not use any special form in the case of the assessees business. The assessee then either endorsed its acceptance or its refusal, and it is mentioned in the assessment order that in the great majority of cases this was done over a Gwalior State stamp. The brokers accepted form was then returned to the broker for the purchasers signature. Apparently the contracts are all for delivery F. O. R. Ujjain. Nothing is stated in the case as to the who the actual consignee is; but we understand that the goods are generally consigned to self" at the place of destination, while the railway receipts are sent (to make the words of the Appellate Tribunals judgment) by the applicant, i.e., the assessee, to the purchasers through he said brokers or bankers.The Appellate Tribunal in paragraph 7 of its judgment says that presumably, also, the goods were paid for at Ujjain. The actual facts, however, appear to be that the purchasing merchant took delivery by paying the invoiced price, plus freight and insurance, to a broker or bankers in British India and receiving in exchanges as endorsed railway receipt. The original assessment order only mentions payment through brokers. If the question had been one under Section 4(1)(a) or 4 (1)(c) of the Act, is might have been very material to know more exactly in what capacity such bankers and brokers received these payments. Those, as we understand them, are the facts to be gathered from the statement of the case and the accompanying judgments and orders. Perhaps we may properly observe that it would be a practice more in conformity with Section 66(1) of the Act and with general convenience, if the statement of the case itself had contained all the relevant facts, rather than that they should have had to be sought for in the judgments. No question of law is raised by the question submitted to us whether, in the circumstances set out above, the profits on such sales as we have described were actually received or "accrued or "arose in British India under Section 4(1)(a) and 4(1)(c) of the Indian Income-tax Act. The question is expressly and distinctly confined to Section 42(1) of the Act. The Appellate Tribunal, in fact, itself decided that the profits were not received and did not accrue or "arise in British India, and in his reply dated the 15th May 1943 to the statement of the case the Commissioner took exception to the omission from the question of law stated by the Tribunal of any reference to Sections 4(1)(a) and 4(1)(c) of the Act and himself submitted an alternative question, which raised no issue under Section 42(1), but rested solely on Sections 4 (1)(a) and 4(1)(c). Which of these two alternatives was right we do not feel called upon to consider, since the only question of law which has come before us to be considered is the one under Section 42(1) of the Act propounded by the Appellate Tribunal. The Commissioner, had he been so minded, could have required the Tribunal to submit the question propounded by him, either alternatively, or in addition to its own, and, if the Tribunal had refused, the Commissioner could have taken steps under Section 66 to compel it to state that question. But the Commissioner has not taken that course, though obviously alive to it, and we do not think therefore, that we are bound, or, indeed, entitled, to propound for ourselves a question of law, which apparently the Commissioner decided not to press, as an alternative to the only one set up by the Appellate Tribunal. ;