The judgment of the court was delivered by
KAPUR, J.--This is an appeal brought pursuant to a
certificate under article 133(1)(c) of the Constitution from the judgment and
order of the Division Bench of the erstwhile Pepsu High Court pronounced on 10th
March, 1953, modifying in appeal the order of the liquidation judge.
The facts are fully recited in the judgments of the courts
below and comparatively a brief recital will be sufficient for the purpose of
this judgment. The appellant company was incorporated in 1934 under the
Companies Act of the erstwhile Patiala State. It carried on the business of
commission agency for dealing in forward transactions in various kinds of grain
and other commodities. The respondent--firm Ganpat Rai Hira Lal of
Narnaul--besides being a shareholder of the appellant company had dealings with
it and entered into several forward transactions of sale and purchase of grain
and other commodities. The appellant, acting as a commission agent of the
respondent and its other constituents entered into several transactions of
forward delivery at Hapur with Firm Pyarelal Musaddi Lal, who were carrying on
commission agency business at Hapur (and will hereinafter be termed the Hapur
firm). The total profits of the transactions entered into by the appellant with
the Hapur firm was Rs. 48,250 on which the Hapur firm paid Rs. 14,730-8-0 as
income-tax. The profits accruing on the transactions entered into on behalf of
the respondent amounted to Rs. 29,275-2-6 on which the proportionate income-tax
claimed to have been paid was Rs. 9,314-13-4. On 20th May, 1943, the appellant
was ordered to be wound up and Udmi Ram Aggarwal, a pleader of the old Patiala
High Court, was appointed its liquidator. The list of contributories was settled
on 21st October, 1943, and the respondent was placed on that list. Though this
matter was challenged in the appeal before the High Court it is no longer in
controversy between the parties.
The official liquidator on 18th March, 1944, applied under
section 186 of the Patiala Companies Act, for a payment order for Rs.
12,204-12-3 against the respondent and in support of his claim he filed, with
this application, copies of the respondent's account in the books of the
appellant showing how the amount claimed was due from the respondent. This
amount included the sum of Rs. 9,476-13-0, on account of income-tax paid by the
Hapur firm for and on behalf of the respondent on the profits of the forward
transactions at Hapur and the commission of the Hapur firm. The respondent
raised several objections and pleaded inter alia that the Hapur firm with whom
the appellant had entered into forward transactions had no right to demand any
income-tax from the appellant as no profit had accrued to the appellant which
was acting as a commission agent and "was only entitled to the
commission." It was also pleaded that as on the total number of
transactions entered into between the respondent and the appellant there was a
loss, the respondent was not liable to pay any income-tax and that the
respondent had no taxable income in the year under dispute or in any other year.
On 23rd May, 1944, the respondent filed an application in which it was submitted
that the Hapur firm, who were agents of the appellant at Hapur, had retained Rs.
14,730-8-0, "which was in trust with them under section 42 of the
Income-tax Act" and prayed that the official liquidator be directed to
apply to the Income-tax authorities for a refund of the amount retained and paid
by the Hapur firm, as no tax was really due on the transactions entered into by
the appellant with the Hapur firm and none was payable by the respondent.
After evidence was led by both parties the payment order
was made by the learned liquidation judge on 18th January, 1949, for a sum of
Rs. 8,191-0-9 which included a sum of Rs. 6,867-9-6 the proportionate amount of
income-tax due on the profits accruing on the respondent's transactions. Against
this order the respondent took an appeal to the Division Bench and canvassed two
points : (1) that the respondent could not be settled on the list of
contributories, and (2) that it was not liable for the amount retained for
payment of income-tax from out of profits on the transactions entered into on
its behalf by the appellant with the Hapur firm and subsequently paid by the
latter. The court negatived the former contention and held that the respondent
had rightly been settled on the list of contributories and upheld the latter
contention and held, following a judgment of the Judicial Committee of the
Ijlas-khas of Patiala in Panna Lal Mohar Singh v. Aggarwal Chamber, that the
official liquidator of the appellant was not entitled to claim the amount of
income-tax paid by the Hapur firm. The Judicial Committee Ijlas-khas had held :
"Before the liability of the contributory can be
fixed it must be shown that his income was such on which income was
assessable.........It is not denied that the contributory was carrying on other
transactions in India as it stood before partition through other persons. It was
therefore his entire income that was to be taken into consideration to assess
his liability to income-tax."
The appellant then applied for a certificate to appeal
under article 133(1)(c) which was granted in the following terms :
"The first question is whether a decision given by
one judge of the Judicial Committee can be regarded in law as a decision of the
Committee. The second is whether the principle laid down by the learned Judge of
the Judicial Committee that the Aggarwal Chamber of Commerce was not entitled to
recover from its clients the proportionate share of the income-tax paid by it
unless it was shown that the total amount of income of the clients was
assessable to income-tax, was sound.
Accordingly we allow the petition and grant the
certificate."
The first point has not been canvassed before us and in
the view that we have taken it would be unnecessary to go into that matter. The
sole point for decision is whether the respondent is liable for income-tax,
which has been paid by the Hapur firm on the transactions, which were entered
into by the appellant with the Hapur firm for and on behalf of the respondent ?
There is no finding by the High Court that the respondent had entered into any
forward transactions in British India or at Hapur with any firm other than the
Hapur firm and this matter was not agitated before us, nor is there any finding
as to the total world income of the respondent and there is no material on the
record from which it could be determined.
The appellant is a non-resident company and the respondent
is a non-resident, residing at Narnaul in what was the Indian State of Patiala.
The appellant entered into forward transactions on behalf of the respondent at
Hapur in which there was a considerable amount of profit. The High Court has
found that the Hapur firm paid Rs. 6,867-9-0 on account of income-tax which was
payable on the profits made on the transactions entered into with the Hapur firm
for and on behalf of the respondent. The respondent challenged its liability to
pay income-tax on the ground that, it was liable :
"only on his total earnings during the year under
assessment and since, as is clear even from the books of the respondent, he had
suffered heavy losses in his business at Narnaul, his total income was not
assessable to any income-tax."
The learned liquidation judge held the respondent liable
for the amount of the income-tax by applying section 69 of the Contract Act. The
Division Bench on appeal disallowed this item on the ground that it had not been
shown that the "total earnings" of the respondent were taxable under
the Act. Neither of the courts below have discussed the relevant provisions of
the Act, not even section 42 which was mentioned by the respondent in his
application of 23rd May, 1944, nor have they given a finding as to the jural
relationship of the Hapur firm with the respondent. The agency of the Hapur firm
was not seriously disputed before us nor repudiated. The case seems to have
proceeded on the basis of this agency in the courts below. The Hapur firm was
employed by the appellant for forward transaction business of the respondent who
has accepted the transactions entered into as also the amount of the profit
accruing, on those transactions and is only disputing the amount of income-tax
deducted, retained and paid on those profits. Under the law the Hapur firm would
be an agent of the respondent for that part of the business of the agency as was
entrusted to it and "privity of contract arises between the principal and
the substitute." Section 194 of the Contract Act : De Bussche v. Alt.
It is now necessary to refer to the relevant provisions of
the Income-tax Act in force in the assessment year 1942-43 (hereinafter termed
the Act). It is not clear as to what was the signification of the words
"total earnings" used by the High Court because it is not used in the
Income-tax Act which uses two expressions, "total income" and
"total world income" in sub-section (15) of section 2 of the Act. The
definition of "total income" comprises two things (i) the total amount
of income, profits and gains referred to in section 4(1), and (ii) computation
in the manner laid down in the Income-tax Act. "Total world income"
includes all income, profits and gains wherever accruing or arising except
income to which under the provisions of section 4(3) the Act does not apply.
Thus in the case of the respondent who is a
"non-resident", "total income" would comprise income,
profits and gains received or accrued in British India or deemed to be received
or to accrue in British India. Section 17 of the Act which was relied upon by
the respondent's counsel occurs in Chapter III dealing with "Taxable
Income". It provides for the determination of the tax payable in certain
special cases of which the case of a non-resident is one. It provided :
"Where a person is not resident in British India and
is a British subject as defined in section 27 of the British Nationality and
Status Aliens Act, 1914 (4 & 5 Geo. V, c. 17), or a subject of a State in
India or Burma, or a native of a Tribal Area, the tax, including super-tax,
payable by him or on his behalf on his total income shall be an amount bearing
to the total amount of the tax including super-tax which would have been payable
on his total world income had it been his total income the same proportion as
his total income bears to his total world income........"
Section 17 does not deal with or affect the rights and
liabilities of persons required under the Act to make deductions of income-tax
from sums payable to non-residents or the consequences of failure to make such
deductions.
The very next Chapter (Chapter IV) deals with deductions
which the Act requires to be made in regard to different heads of income.
Section 18 provides for deduction at the source. Sub-section (3A) of this
section was as under :
"Any person responsible for paying to a person not
resident in British India any interest not being 'interest on securities,' or
any other sum chargeable under the provisions of this Act, shall, at the time of
payment, unless he is himself liable to pay income-tax thereon as an agent,
deduct income-tax at the maximum rate."
The proviso to this sub-section made provision for payment
of monies without deduction if there was a certificate of the Income-tax Officer
to that effect. Under section 18(7) of the Act a person making the deduction was
required to pay the amounts so deducted to the Income-tax authorities. In
default of such deduction such person became an assessee in respect of the tax.
Chapter V of the Act deals with "Liability in special
cases" which includes agents. Section 40(2) dealing with the case of
trustees or agents of a person non-resident in British India provided :
"Where the trustee or agent of any person not
resident in British India and not being a minor, lunatic or idiot (such person
being herein after in this sub-section referred to as a beneficiary) is entitled
to receive on behalf of such beneficiary or is in receipt on behalf of such
beneficiary of, any income, profits or gains chargeable under this Act, the tax,
if not levied on the beneficiary direct, may be levied upon and recovered from
such trustee or agent, as the case may be, in like manner and to the same amount
as it would be leviable upon and recoverable from the beneficiary if in direct
receipt of such income, profits or gains, and all the provisions of this Act
shall apply accordingly."
Thus under this section which is essentially a machinery
and an enabling section the tax to be realised from a non-resident could be
levied upon the agent in the same manner as it could have been leviable upon and
recoverable from a non-resident. Section 42(1) of the Act provided :
"All income, profits or gains accruing or arising,
whether directly or indirectly, through or from any business connection in
British India, or through or from any property in British India, or through or
from any asset or source of income in British India, or through or from any
money lent at interest and brought into British India in cash or in kind, shall
be deemed to be income accruing or arising within British India, and where the
person entitled to the income, profits or gains is not resident in British
India, shall be chargeable to income-tax either in his name or in the name of
his agent, and in the latter case such agent shall be deemed to be, for all the
purposes of this Act, the assessee in respect of such income."
In proviso 2 to this sub-section any such agent who
apprehended that he might be taxed as such agent could retain out of any money
to payable to such non-resident a sum equal to the estimated liability under the
sub-section and in the event of any disagreement between the non-resident and
such agent a certificate could be obtained from the Income-tax Officer as to the
amount to be retained which shows that the Act had a provision for the
determination of the question. As was observed by Viscount Cave in Williams v.
Singer :
"The fact is that, if the Income Tax Acts are
examined, it will be found that the person charged with tax is neither the
trustee nor the beneficiary as such, but the person in actual receipt and
control of the income which it is sought to reach. The object of the Acts is to
secure for the State a proportion of the profits chargeable, and this end is
attained (speaking generally) by the simple and effective expedient of taxing
the profits where they are found."
See also Archer Shee v. Baker Executors of Estate Dubash
v. Commissioner of Income-tax.
This has rightly been stated to be the underlying
principle of the deduction under sections 40, 41 and 42. Section 48 of the Act
deals with "Refunds" and if the respondent thought that it was not
liable to the payment of any tax it could apply to the Income-tax Officer for
refund.
Thus the Hapur firm being an agent could be held liable
under sections 40(2) and 42(1) of the Act as an assessee for income-tax on the
profits made on the respondent's transactions at Hapur and was therefore
entitled under the proviso to section 42(1) to retain the estimate amount of
income-tax payable on the amount of the respondent's profits which in this case
was deducted, retained and actually paid. This fact has not been challenged
before us. The ground on which this liability is attacked is that the total
world income of the respondent was not taxable and therefore, on the profits
made on the Hapur transactions, the British Indian tax authorities could not
levy any tax. This contention disregards the provisions of and liability arising
under sections 40(2) and 42(1) and the proviso thereto. It also is contrary to
the principle of taxing statutes that the profits are "taxed where they are
found." In this case they were in the hands of the Hapur firm which was in
receipt and control of the income. The agent at Hapur, having lawfully and
properly paid the tax under the Act that amount has been rightly deducted from
the profits accruing on the Hapur transactions.
The judgment of the Judicial Committee of the Ijlas-i-khas
on which the High Court has based its decision suffers from the infirmity that
it ignores both the provisions of and principle underlying sections 40(2) and
42(1) of the Act and the proviso thereto relating to the liability of an agent
under the Act and the law of agency relating to employing of sub-agents by
agents. If the Hapur firm rightly paid the tax on the profits, the respondent
cannot be allowed to challenge the amount on the ground that his total world
income was not taxable and he was entitled to his profits without deductions.
That is a question which has to be agitated by the non-resident assessee at the
time of his assessment. Those persons who are bound under the Act to make
deduction at the time of payment of any income, profits or gains are not
concerned with the ultimate result of the assessment. The scheme of the Act is
that deductions are required to be made out of "salaries",
"interest on securities" and other heads of "income, profits and
gains" and adjustments are made, finally at the time of assessment. Whether
in the ultimate result the amount of tax deducted or any lesser or bigger amount
would be payable as income-tax in accordance with the law in force would not
affect the rights, liabilities and powers of a person under section 18 or of the
agent under sections 40(2) and 42(1). As to what would be the effect and result
of the application of section 17 if and when any appropriate proceedings are
taken is not a matter which arises in this appeal between the appellant and the
respondent nor can that matter be adjudicated upon in these proceedings. That is
a matter which would be entirely between the respondent and the Income-tax
authorities seized of the assessment.
Our attention was drawn to two cases (1) Commissioner of
Income-tax v. Currimbhoy Ebrahim & Sons. In that case the assessee company
had been treated, as an agent of the Nizam of Hyderabad who had lent to the
assessee company a sum of Rs. 50 lakhs. The assessee company had paid in the
assessment year a sum of Rs. 3 lakhs on account of interest and it was held that
the interest earned by the Nizam did not accrue or arise to the Nizam through or
from any business connection with the assessee company in British India or from
any property within British India and therefore section 42 was not applicable.
No question of "business connection" was raised in the court below and
the argument there proceeded on the basis that the respondent was not liable for
this amount on account of income-tax because the "entire income" was
not assessable to income-tax. The argument of isolated transactions based on
Anglo-French Textik Co. Ltd. v. Commissioner of Income-tax, Madras, is not
available to the respondent nor was the foundation for any such argument laid in
the courts below or raised in the statement of the case filed by the respondent
in this court. Another case on which reliance was placed is Greenwood v. F. L.
Smidth and Company. That was a case of a Danish firm resident in Copenhagen. It
manufactured and dealt with cement making machinery which it exported to other
countries. It had an office in London in charge of a qualified engineer who
received enquiries for machinery such as the firm could supply, sent to Denmark
particulars of the work which the machinery was required to do and when the
machinery was supplied he was available to give the English purchaser the
benefit of his experience in erecting it. The contracts between the firm and
their customers were made in Copenhagen and the goods were shipped f.o.b.
Copenhagen. It was held in that case that the firm did not exercise a trade
within the United Kingdom within the meaning of Schedule D of section 2 of the
Income-tax Act, 1853, and was therefore not assessable to income-tax. This
decision is not relevant to the case now before us as the facts were different
and the decision was under a different statute.
In our opinion the Judicial Committee of Ijlas-i-khas was
in error in holding that before fixing the liability of a contributory to tax
paid by an agent in British India for and on behalf of the non-resident
contributory, his liability to pay tax on his "entire income", really
total world income, had to be established. Therefore the finding of the High
Court that the liquidator cannot claim from the respondent the amount of tax
paid by the Hapur firm on transactions entered into by the appellant for and on
behalf of the respondent unless it was shown that his total world income was
taxable is unsustainable. As between the parties the tax paid by the agent had
to be taken into account irrespective of the ultimate result of the assessment
on the non-resident.
In the result this appeal is allowed and the judgment and
order of the Division Bench of the Pepsu High Court set aside and the order of
the learned liquidation judge restored but in the circumstances of this case the
parties will bear their own costs in this court and in the courts below.
Appeal allowed
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