COMMISSIONER OF INCOME-TAX, BOMBAY PRESIDENCY AND ADEN Vs. CHUNILAL B MEHTA, BOMBAY

JUDGEMENT

(1.) The High Court at Bombay has answered in favour of the respondent assessee two questions of law formulated and referred to the Court by the Commissioner of Income-tax (Bombay Presidency and Aden) under S. 66, Income tax Act, 1922. The assessee is resident in British India and the year of assessment is the year ending 31 March 1934. By order dated 13 December 1933, the Income-tax Officer assessed the respondent on a total income of Rs. 12,95,726, the total demand for income-tax and super-tax being Rs. 7,18,472. This order was confirmed by the Assistant Commissioner on 19 January 1934. By these orders the assessee was held liable to pay tax upon profits derived by him from contracts made for the purchase and sale of commodities in various foreign markets - Liverpool, London, New York and elsewhere outside British India. The assessee disputes his liability in respect of such profits on the ground that they were not profits "accruing or arising in British India." It is conceded that they are not otherwise chargeable: they have not been received in British India nor do they come under any of the provisions whereby they can be deemed to accrue or arise or be received in British India. No question arises as to the details of the transactions or as to the calculation of the tax. Though the transactions appear,to have been of a speculative character and of the kind compendiously described as "dealing in futures," it is not now sought to charge the assessee upon the basis of any allegation that his contracts were made by way of gaming and wagering. In case however the place at which the profits accrued or arose should be held to depend upon the facts as to delivery of goods thereunder or intention to deliver the question propounded to the Court was stated in a double form as follows: (1) Whether in the circumstances of the case all the profits and gains which accrued and arose to the assessee from the business of future delivery contracts entered into with parties outside British India in which no delivery was ever taken or given or any part of such profits and gains can be said to have accrued or arisen in British India. (2) Whether as regards that part of the said business of future delivery contracts in which delivery had been actually given or taken outside British India, the profits or gains which accrued can be said to have accrued wholly or partly in British India or otherwise.

(2.) As it is found that in no case was the taking or the giving of delivery done within British India, the second question is separately stated in the interest of the assessee and on the footing that to it an answer might be given more favourable to him than the answer to the first. This indeed was the view of the Commissioner. In his opinion the answer to the first question should be that all the net profits and gains from these contracts (after payment of the services rendered by the brokers outside British India) accrued or arose in British India. To the second question he answered that part only of the profit and not the whole can be said to have accrued in British India. The learned Judges of the High Court were of opinion that the whole of the profits referred to in both questions accrued or arose outside British India. Their Lordships will confine their attention, in the first place, to the cases mentioned in the first question, postponing the second. The narrative given by the Commissioner in his Letter of Reference to the High Court contains material for a contention that the place at which the assessee entered into the contracts of purchase and sale was Bombay. Before their Lordships this contention was disclaimed by learned counsel for the appellant whose argument took the forms that the exercise of skill and judgment in and the giving of directions for the formation of the contracts took place in Bombay and that Bombay was the place at which the assessee carried on the business which had produced the profit. This leaves little room for dispute is to the facts of the case, which in the circumstances are sufficiently represented by the following extracts from the Letter of Reference:2. The assessee has been trading in Bombay for several years past as broker and speculator in cotton, silver and other commodities. He has his office in Bombay only. He has also income from properties and dividends on shares in Joint Stock Companies. As regards the speculation business, the assessee does this on his own account as well as on account of his constituents and he carries on his business not only with parties in British India but also with parties outside British India, e. g. at Liverpool, London and New York. Profit or loss from such business as is done on his own account is his. As regards business done on account of his constituents, be charges brokerage and the profit or loss arising therefrom is theirs. 7. As in this connexion, it is necessary to have some idea of the exact manner in which the assessee does this speculation business, I beg to refer here to an actual transaction to show how it was put through. Taking up the New York Cotton Exchange, on 29 October 1930, the assessee sent a telegram to A. Norden and Co. of New York asking them to "Buy 500 March at the closing." A copy of the telegram is annexed hereto and marked Ex. E. This was done at 11.74 cents per 1b (a bale containing 500 1bs.), as appears from the reply telegram of the same date which runs "Bought March 500, 11.74" (copy annexed and marked Ex. F). On 1st December, the assessee sold the 500 bales by sending again a telegram to the above firm asking it to sell. The telegram ran "Sell 600 March" (copy annexed and marked Ex. G). The firm did so at 10.84 cents per 1b., as appear from the reply telegram of the same date which ran "Sold March 500. 10.84" (copy annexed and marked Ex. H). A copy of letter dated 1 December 1930, from the above firm confirming the salt is also annexed hereto and marked Ex. I. The difference between the purchase and sale price amounted thus to $2250 which the assessee had to pay along with the amount of $90.21 charged by the firm on account of brokerage and other expenses. The assessee neither paid the purchase price nor recovered the sale price nor did he take or give delivery of the said 500 bales. He paid only the difference between the two prices. (This is also what he would do with a broker in Bombay while dealing with a party here.) All that is to be done in a business of this kind is thus merely to issue an order to a broker for forward purchase or sale and then issue another order closing the transaction.

(3.) It is not necessary to refer to certain documents which in the case of the Liverpool transactions were sent to Bombay for signature, since these bear solely on the contention not now persisted in that the place of formation of the contracts was Bombay; but the following extract from the opinion of the Commissioner may be added as disclosing his view of the facts : 10. As regards question (1), I beg to say that the assessee has got his office here in Bombay alone where he does all the business, the profits of which are to be taxed. Each and every transaction which ended in these profits has been personally managed by the assessee and has not been left to the discretion of any agent of his abroad. These activities on his part which resulted in the profits or gains sought to be taxed all took place in Bombay and nowhere else, ..... He considered in Bombay the prevailing prices of cotton, silver, etc., at Bombay, London, Liverpool and New York and made up his mind here to enter into each of the future delivery contracts under consideration. . . . There must be two parties to a contract. Hence the assessee being one party thereto had to find another party and for that purpose had to employ brokers outside British India but that cannot be interpreted as meaning that what he earned by his efforts in British India was earned where the brokers were located. The brokers merely helped him in getting into contact with parties willing to enter into a contract with him. Surely the profit which the assessee earned must have accrued somewhere and when everything which he need do to earn it was done by him in Bombay (including employment of brokers which too was done from Bombay), it is difficult to see how the profit could be said to have arisen in London or New York where the assessee never set foot. All the activities on his part which resulted in this profit took place in Bombay and the profit which was the result thereof must be taken to have accrued here and nowhere else.