KESHAV MILLS CO LTD Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) THE assessee company is a company registered in the Baroda State and the assessment year of this reference is 1942-43 (calendar year 1941 ). This company is a nonresident company. It manufactures textile goods, and after the goods are manufactured, they are sold by the company ex-mills. THE company has their guaranteed brokers Messrs. Jagmohandas Ramanlal & Co. , and they guarantee the payment by the merchants to the company and they receive a commission for the work which they do. THE contention of the company was that the company being a non-resident company it was not liable to pay any tax on its profits or income as none of the profits made by the company had been received in British India. In order to decide this question we have to consider separately three items which are the subject-matter of this reference, viz. , (1) an item of Rs. 12,68,480, (2) an item of Rs. 4,40,878 and (3) an item of Rs. 6,71,735. Now, with regard to the first item of Rs. 12 68,480 the company debited in their books of account a sum of Rs. 13,41,744 to Messrs. Jagmohandas Ramanlal & Co. and credited it to the sales accounts, thereby representing that the goods covered by this amount had been sold by the company for this sum. I may mention that the company maintains its accounts on a mercantile basis and not on cash basis. Messrs. Jagmohandas Ramanlal & Co. realised from various merchants from Ahmedabad to whom goods had been sold the sum of Rs. 12,68,480 and they utilised that sum in paying off various creditors of the company at Ahmedabad. On these facts there can be no doubt that the sum of Rs. 12,68,480 was received by the assessee company in Ahmedabad. A contention was put forward by the assessee company that the company was not concerned with payments made by the merchants in Ahmedabad and that they were only concerned with Messrs. Jagmohandas Ramanlal & Co. being their guaranteed brokers. It was argued that the sum of Rs. 13,41,744 was debited to Messrs. Jagmohandas Ramanlal & Co. and the company only looked to Jagmohandas Ramanlal & Co. for the payment. It must not be forgotten that Messrs. Jagmohandas Ramanlal & Co. were merely guaranteed brokers. THE primary liability to pay for the goods was upon the merchants to whom they were sold by the company. Messrs. Jagmohandas Ramanlal & Co. were mere guarantors and their guaranteeing the payment by the merchants did not in any way affect the primary liability of the merchants to pay the company. THErefore, when the merchants paid to Messrs. Jagmohandas Ramanlal & Co. they were discharging their primary liability to the company, and Messrs. Jagmohandas Ramanlal & Co. having made use of this sum of Rs. 12,63,480 according to the instructions of the company, they in law did receive this sum on behalf of their principals, the assessee company.

(2.) BUT an important contention has been raised by Mr. Kolah on behalf of the assessee company, viz. , that the receipt of Rs. 12,68,480 by Messrs. Jagmohandas Ramanlal & Co. was not a receipt of the sale proceeds of the goods sold by the company but was merely realisation of the debt due by the merchants to the company. This argument is based on the fact that the company maintains its accounts on the mercantile basis and not on cash basis. It is urged that under the mercantile basis the actual receipt of money is irrelevant and has not got to be considered. Under the mercantile basis the company debits and credits various sums of money either as they become liable to pay money or become entitled to receive money and under the mercantile basis profits accrue to the company when the necessary entries are made in the books of accounts. The actual receipt of cash is irrelevant for the determination of the profits earned by a company. In contradistinction under the cash basis the amount received or expended is the basis for the determination of income and profits to the assessee who maintains accounts in that form. It is perfectly true that when the company made the entry of Rs. 13,41,744 in its books of account, as the system of accounting was mercantile basis, it must be deemed that at that date and at that time profits accrued or arose to the company and these profits accrued or arose to the company at Baroda, where the entry was made. BUT as the company is a non-resident company, mere accrual of income or profits or the mere fact that profits or income arose to the company in Baroda would not entitle the taxing authorities to tax any of the profits of the assessee company. It must be shown that these profits were received or deemed to be received in British India in the year of assessment in order that they can be taxed. Now, in my opinion, there is a clear distinction between the accrual or arising of an income and the actual receipt of an income and there is also a clear distinction between the notional accrual or arising of an income and a notional receipt of an income. In this case we are not concerned with whether the income or profits accrued or arose in British India, because as I stated before, we are not dealing with an assessee resident in British India. What we are concerned with is whether in this case a non-resident assessee received any income or profits in British India in the year of assessment.

(3.) MR. Kolah then relied on a Full Bench decision of the Allahabad High Court, Commissioner of Income-tax v. Shingari Bai, I. L. R. (1945) ALL. 577 : (A. I. R. (32) 1945 ALL. 102 ). This was really a converse case from the case which we are considering. There the assessee who had chosen the mercantile basis for keeping accounts contended that she was not liable to pay tax on certain amounts which had not in fact been received by her. In the judgment of the learned Chief Justice the distinction between receipt and accrual is clearly illustrated. This is what the Chief Justice says (p. 585): ". . . . . Where the assesses has himself chosen a mercantile basis, then the Income-tax Officer is bound to concede that basis to the assessee, provided the assessee's accounts regularly kept on that basis, afford a proper and sufficient means of deducing what the profits or gains on that basis have been. In such a case the Income-tax officer has no option but to do what be has done in the present case, that is to say, to take the assessee's own method of accounting and to compute from it what profits or gains had 'arisen' or 'accrued" to (not merely been 'received' by) the asseasee according to it. "