V.V.R.N.M. Subbayya Chettiar vs Commissioner Of Income-Tax, Madras

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. XXXVIII of 1949

Decision Date: 21 December 1950

Coram: Saiyid Fazal Ali, B.K. Mukherjea, N. Chandrasekhara Aiyar

The Supreme Court of India rendered its judgment on 21 December 1950 in the case of V.V.R.N.M. Subbayya Chettiar versus the Commissioner of Income-Tax, Madras. The bench was composed of Justice Saiyid Fazal Ali, Justice B.K. Mukherjea and Justice N. Chandrasekhara Aiyar. The decision is reported in 1951 AIR 101 and 1950 SCR 961, and is also cited in later authorities such as R 1958 SC 779, E&R 1960 SC 1147 and several sections of the Indian Income-Tax Act of 1922, particularly section 4A(b). The central question before the Court concerned the interpretation of section 4A(b) as it applied to a Hindu undivided family and the burden of proof required to establish an exception to the presumption of residence in British India.

Section 4A(b) states that, ordinarily, a Hindu undivided family is deemed resident in the taxable territory, but this presumption may be displaced if the “seat of direction and control” of the family’s affairs lies outside British India. The Court explained that the term “affairs” refers only to those matters that are relevant to the Income-Tax Act and have some connection with income. The expression “control and management” denotes the power to direct the family, often described as the “head and brain”. “Situated” requires that this power be exercised at a particular place with a degree of permanence, while “wholly” acknowledges that the seat of control may be split between two distinct locations, allowing a Hindu undivided family to have more than one residence in the same way as a corporation.

In the present case, the karta of the family lived with his wife and children in Ceylon, which had become his domicile. He owned immovable property, a house and investments in British India. During the year of account he visited British India for a total of one hundred and one days, during which he established two firms, personally attended to litigation concerning family lands, and appeared before the Income-Tax authorities in proceedings relating to the assessment of the family’s income. The Court held that these activities, while not conclusively establishing a centre of control and management in British India, were not irrelevant to the issue. The assessee had failed to meet the statutory onus of proving, by material evidence, that the affairs in India were being controlled from Colombo. Consequently, the presumption of residence under the first part of section 4A(b) applied and the assessee was to be treated as a resident in British India for that year. The Court further noted that the assessee could, in future years, discharge the burden of proof and demonstrate that the seat of control and management was wholly outside British India, citing precedents such as De Beere v. Howe and Swedish Central Railway Co. Ltd. v. Thompson.

The Court observed that, unless the assessee could produce the material evidence he was required to present to demonstrate that, as a regular practice and as a matter of course, the family’s affairs in India were also being directed from Colombo, the normal presumption contained in the first part of section 4A(b) had to be applied. Consequently, the assessee was to be regarded as a resident of British India for the year under consideration. Nevertheless, the Court noted that the assessee retained the opportunity to establish, in subsequent years, by competent proof, that the seat of control and management of the family’s affairs was entirely situated outside British India. The Court referred to the authorities De Beere v. Howe (5 Tax Cas. 198) and Swedish Central Railway Co. Ltd. v. Thompson (9 Tax Cas. 373) in support of this approach.

The appeal arose from a judgment of the High Court of Judicature at Madras, delivered by the Chief Justice and Justice Patanjali Sastri on 22 August 1947, pursuant to a reference made under section 66(1) of the Indian Income-Tax Act by the Income-Tax Appellate Tribunal (Reference No. 25 of 1946). The matter was brought before the Supreme Court as Civil Appeal No. XXXVIII of 1949, with counsel appearing for the appellant and for the respondent. The judgment was delivered on 21 December 1950 by Justice Fazal Ali. The central question referred to the High Court was whether, in the factual matrix of the case, the assessee – a Hindu undivided family – qualified as a “resident” within the meaning of section 4A(b) of the Income-Tax Act. The appellant, who acted as the karta of the joint Hindu family, resided in Ceylon with his wife, son and three daughters, and was domiciled there. He conducted business in Colombo under the name General Trading Corporation, and owned a house, immovable property and investments in British India, as well as shares in two firms located at Vijayapuram and Nagapatnam. For the assessment year 1941-42, which formed the basis of the present tax assessment, the appellant visited British India on seven separate occasions, totalling 101 days. During those visits, he personally attended litigation concerning the family lands in both the trial court and the appellate court, and also participated in income-tax proceedings relating to the family’s income, appearing before the tax authorities at Karaikudi.

The Court observed that the appellant had also presented himself before the income-tax authorities in both Madras and Karaikudi, and on one of those occasions he succeeded in obtaining an extension of time for payment of the tax after interviewing the officer concerned. The revenue authorities relied on additional facts: they noted that the appellant failed to produce the correspondence file relating to his business in Colombo, a document that could have assisted them in ascertaining whether the management and control of that enterprise were situated in Colombo. Furthermore, they pointed out that the appellant had inaugurated two partnership firms in India on 25 February 1942 and had remained in India for a period of time after the commencement of those partnerships. Based on these factual findings, the Income-Tax Officer together with the Assistant Commissioner of Income-Tax concluded that the appellant qualified as a resident within the meaning of section 4A(b) of the Income-Tax Act and, consequently, was liable to be assessed on his foreign income. The Income-Tax Appellate Tribunal, however, arrived at a contrary conclusion. It held that, given the circumstances of the case, no act of management or control could be said to have been exercised by the appellant during his stay in British India; therefore, the tribunal determined that the appellant was not liable to assessment on income earned outside British India. This view was rejected by a Bench of the Madras High Court comprising the learned Chief Justice and Justice Patanjali Sastri. The High Court held that the Tribunal had misdirected itself in determining the “residence” of the appellant’s family. The Court found that, on the facts proved, the control and management of the family’s affairs could not be said to have been wholly situated outside British India, and consequently the family must be deemed resident in British India within the meaning of section 4A(b) of the Income-Tax Act. In the present appeal the appellant questioned the correctness of the High Court’s decision. Section 4A(b) of the Act provides: “For the purposes of this Act—a Hindu undivided family, firm or other association of persons is resident in British India unless the control and management of its affairs is situated wholly without British India.” It is noted that section 4A deals with the concept of residence in the taxable territories with respect to (a) individuals, (b) a Hindu undivided family, firm or other association of persons, and (c) a company. For each category, specific tests have been laid down, and the test relevant here is the one set out in section 4A(b). The provision appears to be largely derived from the rule applied in England to corporations, a rule articulated by Lord Loreburn in the case of De Beers Howe, where he said: “A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business…” The Court also referred to the decisions of Chief Baron Kelly and Baron Huddleston in The Calcutta Jute Mills v Nicholson and The Cessna Sulphur Company v Nicholson, decisions that, although rendered some thirty years ago, established the principle that a company resides for income-tax purposes where its real business is carried on. These authorities underpin the approach that residence is determined by the location of the central management and control.

The Court observed that, a few decades earlier, decisions had established the principle that a company was deemed to reside for income-tax purposes in the place where its real business was carried on. Those decisions had been consistently applied thereafter, and the Court regarded that principle as the correct rule, defining the real business as being carried on where the central management and control actually existed. The Court noted that the wording of section 4A(b) of the Income-tax Act expressed precisely the intention conveyed by Lord Loreburn when he spoke of “where the central management and control actually abides.” The Court then referred to well-known principles that had been firmly settled in England and clearly articulated in the leading case of Swedish Central Railway Company Limited v. Thompson. Those principles were summarised as follows: first, the concept of residence for a fictitious “person” such as a company was recognised as artificial, and the place of residence could be determined only by analogy, by identifying the head, seat and directing power of the company’s affairs; second, the words “control and management” in the present context meant the controlling and directive power, sometimes described as the “head and brain,” while “situated” indicated that such power functioned at a particular location with a degree of permanence, and the term “wholly” recognised the possibility that the seat of power could be divided between two distinct places; third, as a general rule, control and management of a business rested with a person or a group of persons, and the relevant inquiry was from where that person or group exercised control or direction; fourth, merely carrying out activity in a place did not create residence, so a company could reside in one place while conducting substantial business in another; fifth, the central management and control of a company could be split, allowing the company to keep house and do business in more than one place, potentially giving it more than one residence; and sixth, where dual residence existed, it was necessary to show that the company performed some vital organic functions essential to its existence in both places, thereby establishing two centres of management. The Court concluded that these principles must be kept in mind when construing section 4A(b) of the Act. The language of the provision clearly indicated that, as a general rule, a Hindu undivided family would be taken to be resident in the taxable territories, but that presumption could be displaced if the facts of the case warranted a different conclusion.

In considering whether the case could be brought under the second part of the provision, the Court first clarified that the term “affairs” must be understood to refer only to those matters that are relevant to the Income-tax Act and that have some connection with income. The Court then explained that, to apply the exception, it is necessary to determine whether the seat of direction and control of the family’s affairs lies inside British India or outside it. Further, the Court observed that the word “wholly” indicates that a Hindu undivided family, like a corporation, may possess more than one residence. Having set out these principles, the Court turned to the facts of the present case to decide whether the central control and management of the assessee’s family affairs had been shown to be divided. The Court held that the mere existence of a house at Kanadukathan, where the assessee’s mother resided, does not make that place the seat of control and management of the family’s affairs. Likewise, the Court was not persuaded to give great weight to the fact that the assessee spent 101 days in British India during a particular year. Although the assessee was understandably interested in litigation concerning family property and in the income-tax proceedings, the Court found that simply traveling to India to participate in those matters did not shift the seat of control and management of the family’s affairs nor create a second centre of such control. The same reasoning was applied to the establishment of two partnership businesses, with the Court stating that mere “activity” is not the test for residence. The Court further observed that the High Court judges had adopted a rather narrow interpretation of section 4A(b), apparently assuming that because the assessee attended to some family affairs during his visit to British India in the year in question, he had consequently brought himself within the scope of the rule. In contrast, the Court found the approach of the Appellate Assistant Commissioner of Income-tax to be more appropriate. In his order dated 24 February 1944, the Commissioner noted that during the major part of the accounting period ending 12 April 1942 the appellant was controlling businesses in Burma and Saigon, and there was no evidence that such control was exercised solely from Colombo. No correspondence or other evidence was produced to show that instructions concerning the management of affairs in British India were issued from Colombo, especially since an unauthorised clerk was handling those affairs. Accordingly, the presumption was that whenever the appellant came to British India, he was personally looking after those affairs.

In this case the Court noted that the record showed the appellant had personally attended to certain family affairs in British India and had exercised control by issuing instructions, and it was admitted that family affairs existed in British India. The Court then asked whether it had been definitively proved that control and management of those affairs were exercised solely from Colombo, and it held that such proof had not been established for the reasons previously explained. The burden of proving the facts that would bring the case within the exception contained in the latter part of section 4A(b) rested on the assessee, and the appellant was required to adduce evidence showing that control and management of the family affairs were situated wholly outside the taxable territories. However, the correspondence referred to by the Assistant Commissioner of Income-Tax and any other material that might have demonstrated that, as a matter of course, the affairs in India were also being directed from Colombo were not produced. The factual situation therefore comprised two contrasting elements. First, the head and karta of the assessee’s family, who exercised control and management of the family’s affairs, permanently resided in Colombo and the family was domiciled in Ceylon. Second, there were certain acts performed by the same karta while he was present in British India; although those acts alone did not conclusively establish the existence of more than one centre of control for the family affairs, they were not irrelevant and could not be wholly disregarded in determining where control was exercised. In the absence of the material evidence referred to, the finding of the Assistant Commissioner—that the burden of proving the facts necessary to fall within the exception had not been discharged by the assessee and that the ordinary presumption that income arising within the territory is taxable must therefore be applied—was deemed a legitimate conclusion. Accordingly the Court ordered that the appeal be dismissed with costs. The Court further observed that because the decision hinged primarily on the allocation of the burden of proof, the judgment was confined to the assessment year presently before it, and the appellant remained free to demonstrate, in future assessment years, by proper evidence that the seat of control and management of the family affairs was entirely outside British India. Judge Mukherjea agreed with the reasoning and conclusion of Judge Fazl Ali, and Judge Chandrasekhara Aiyar likewise concurred with the judgment of Judge Fazl Ali. The appeal was dismissed. The appellant was represented by an agent and the respondent was represented by an agent.