Pathak, J. -
(1.)THE assesses is a Hindu undivided family. THE head office is situated at Tulsipur in Indian territory, and there is a branch office at Koilabas in the State of Nepal. THE head office and the Nepal branch function as independent business units. THE Nepal branch sells goods to parties within the taxable territories in India either by way of outright sale or on consignment basis. THE sale proceeds of such transactions are collected on behalf of the Nepal branch by the head office, which remits them to that branch either in cash or in the shape of goods. THEre are no transactions of purchase and sale inter se between the head office and the Nepal branch. THE assessee has been uniformly treated as a resident in the taxable territories within the meaning of Section 4-A of the Income-tax Act, 1922, and has been assessed upon profits accruing or arising to it in the Nepal branch, apparently under Section 4 (1) (b) (ii), subject to a deduction of Rs. 4,500 by virtue of the proviso to Section 4 (1).
(2.)IN this reference we are concerned with the assessment year 1954-55, the relevant accounting year of the assessee being the year ended Kartik Sambat 2010. During this accounting year, the Nepal branch sold goods directly to various parties in the taxable territories. The sale proceeds were realised by the head office in due course, but the entire amount of the sale proceeds was not remitted by the head office to the Nepal branch. A credit balance in the sum of Rs. 34,332 at the close of the year was recorded in the account of the Nepal branch maintained in the books of the head office. It would contribute to the appreciation of the entries made in that account if a synopsis of the account is reproduced:
The Income-tax Officer treated the sum of Rs. 34,332 as a remittance of the assessee's profits from the Nepal branch to India liable to tax by virtue of Section 4 (1) (b) (iii). It was never disputed that the accrued income of the assessee without the taxable territories which had accumulated prior to the accounting year and had not been subjected to tax on account of the statutory allowance of Rs. 4,500 in each of the past years when aggregated with the accrued profits of the previous year covered the sum of Rs. 34,332. What the assessee contended before the Income-tax Officer was that the sum of Rs. 34,332 did not represent any remittance of the profits of the Nepal branch and that, therefore, Section 4 (1) (b) (iii) was not attracted. This contention was not accepted by the Income-tax Officer. In appeal before the Appellate Assistant Commissioner the assessee reiterated this contention. He also contended that if the sum could he said to represent such remittance, it must be treated as a remittance from out of the taxed profits of the Nepal branch and not from the untaxed profits.
The Appellate Assistant Commissioner, however, pointed out that the head office, which functioned as a collecting agency of the Nepal branch, should have remitted the entire sale proceeds to that branch, and its retention of the balance of Rs. 34,332 amounted in effect to a remittance by the Nepal branch of that sum in cash from Nepal to India and was liable to be treated as a constructive receipt of income in India from the Nepal branch during the year. He also held that there was no evidence to show that two separate funds were maintained by the Nepal branch, one in respect of taxed profits and the other in respect of its untaxed profits, and consequently no presumption could arise that the remittance must be treated as proceeding out of the fund constituted of un-taxed profits. He, therefore, confirmed the assessment. The assesses proceeded in appeal to the Income-tax Appellate Tribunal, and relied principally upon the decision of this Court in Ram Lal Bechairam v. Commr. of Income-tax, (1946) 14 ITR 1: (AIR 1946 All 8), in support of its contention that the amount could not be treated as remittance of profit and, therefore, Section 4 (1) (b) (iii) did not apply.
The Appellate Tribunal, however, agreed with the reasoning of the Appellate Assistant Commissioner and confirmed the finding that the sum of Rs. 34,332 represented the constructive receipt in India of the untaxed foreign profits of the assessee. Upon application made by the assessee under Section 66 (1), the Appellate Tribunal has referred the following question to this Court for its opinion;
"Whether on the facts and circumstances of the case the sum of Rs. 34,332 was a constructive remittance of untaxed profits of the Nepal branch and assessable to tax in terms of Section 4 (1) (b) (iii) of the Act?"
Section 4 (1) of the Income-tax Act, 1922, categorises the various cases where income, profits and gains form part of the total income of a person. Income, profits and gains may be received or be deemed to be received, or they may accrue or arise or be deemed to accrue or arise. Clause (a) deals with income, profits and gains which are received or are deemed to be received. Such income, profits and gains are liable to be included in the total income if they are received or deemed to be received in the taxable territories in the relevant previous year, and the law makes no distinction between an assessee who is resident or not resident in the taxable territories during the year. Clause (b) deals with income, profits and gains of a person resident in the taxable territories which have accrued or arisen or are deemed to have accrued or arisen during the previous year. If they have accrued or arisen or are deemed to have accrued or arisen in the taxable territories during the previous year, then by Sub-clause (i) they form part of the total income. If this has happened without the taxable territories, then by virtue of Sub-clause (ii) they are includible in the total income. And Sub-clause (iii) refers to income, profits and gains which,
"having accrued or arisen to him without the taxable territories before the beginning of such year and after the first day of April 1933, are brought into or received in the taxable territories by him during such year."
Clause (c) speaks of income, profits and gains of a person who was not resident in the taxable territories during the previous year and the income, profits and gains have accrued or arisen or are deemed to have accrued or arisen to him in the taxable territories during that year.
(3.)NOW in order that an amount should be includible in the total income of a person under Section 4 (1) (b) (iii), it must be (a) income, profits and gains of the person, (b) should have accrued or arisen to him without the taxable territories, (e) before the beginning of the previous year and after April 1, 1938, and (d) should have been brought into or received in the taxable territories by him during the previous year.
The question before us is whether the sum of Rs. 31,332 entered as a credit balance can he said to represent a remittance from the Nepal branch to the head office. Now it is clear upon the facts that the sum of Rs. 34,332 was not actually brought into or received in the head office from the Nepal branch. The head office collected the sale proceeds of goods sold in the taxable territories by the Nepal branch, and this sum represents a portion or those sale proceeds. Money was never in fact remitted by the Nepal branch to the head office. The Income-tax authorities, however, say that inasmuch as the sum of Rs. 34,332 constituted a part of the sale proceeds belonging to the Nepal branch, the head office was obliged to remit the entire amount of the sale proceeds to the Nepal branch and in retaining this part of the sale proceeds it must be deemed that the Nepal branch had remitted the said sum to the head office. The Appellate Assistant Commissioner refers to it as a constructive remittance by the Nepal branch to the head office, and the Appellate Tribunal has endorsed that finding.
The argument assumes that there was an obligation on the head office to remit forthwith the entire amount of the sale proceeds to the Nepal branch. It ignores the important circumstance that the two businesses, that at the head office and that at the Nepal branch, belonged to the same person, and that essentially it was a matter of internal accounting between the two business units. There is no evidence that the head office was bound to remit the entire amount of the sale proceeds to the Nepal branch. The head office performed the function of a collecting agent on behalf of the Nepal branch, but nothing has been shown to indicate that, functioning in that behalf, the head office was obliged to forward forthwith or even during the year of account, the entire amount of the collections realised by it. The case, it seems to us, falls within the scope of the following observations made by this Court in Ram Lal Bechairam's case (1946) 14 ITR 1: (AIR 1946 All 8) (supra).
"In an open and current account kept for the facility of accounting between the two shops belonging to the same proprietor, it is a matter of chance as to what is the balance that may remain due at any given moment or one to the other. It may vary from time to time and from day-to-day and it is always a matter within the discretion of the head office when, if at all, the balance shall be adjusted. It does not even follow that it will ever be adjusted since there could be no legal obligation on the Semohi branch (in the taxable territories) even to transmit money to its own Bhadohi branch (outside the taxable territories)."
It is true as pointed out by the Appellate Tribunal, that in Ram Lal Bechairam's case, (1946) 14 ITR 1: (AIR 1946 All 8) (supra) goods were supplied by the Bhadohi branch to the Semohi branch and conversely from the Semohi branch to the Bhadohi branch, and that inasmuch as the two businesses belonged to the same person, the decision in the case proceeded on the basis that no profits could have arisen, since no man can make a profit out of himself. This, however, in our opinion, does not detract from the force of the observations set out above. These observations were noticed in a subsequent case between the same parties, Ramlal Bechairam v. Commr. of Income-tax, (1951) 19 ITR 246 (All), by a Bench, of which one of the learned Judges was party to the earlier decision, and they were interpreted as laying down that the amount shown as a credit balance in the books of the Semohi shop in favour of the Bhadohi shop could not be treated as a remittance from the latter at all.