Commissioner of Income-Tax/Excess Profits Tax, Bombay City vs Messrs. Bhogilal Laherchand

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 160 of 1950

Decision Date: 18 December 1953

Coram: Mehr Chand Mahajan, Ghulam Hasan, B. Jagannadhadas

In this case the Court recorded that the matter concerned an appeal filed by the Commissioner of Income-Tax and Excess Profits Tax for Bombay City against Messrs Bhogilal Laherchand, which also included Batliboi & Co., Bombay. The judgment was delivered on 18 December 1953 by a Bench of the Supreme Court of India presided over by Justice Mehr Chand Mahajan, with Justices Ghulam Hasan and B. Jagannadhadas sitting. The parties were identified as the Commissioner of Income-Tax/Excess Profits Tax, Bombay City as the petitioner and Messrs Bhogilal Laherchand as the respondent. The citation for the decision was reported in the 1954 All India Reporter at page 155 and in the 1953 Supreme Court Reports at page 444. The case involved the application of section 42(1) of the Indian Income-Tax Act of 1922, which deals with the scope of income accruing or arising in British India. The headnote summarised the factual backdrop: a Hindu undivided family was engaged in business operations across Bombay, Madras and the Mysore State, and for income-tax purposes it was treated as a single assessee. The relevant accounting year for the assessment was the period from 10 October 1941 to 8 November 1942. During this period the Mysore branch purchased goods from both the Bombay head office and the Madras branch, the total value of the purchases being a little over two lakh rupees. The Income-Tax Officer, after examining the accounts, estimated that the purchases made by the Mysore branch, which were deemed to be in British India, amounted to three lakh rupees and that the profit earned on the sale of those goods in Mysore was seventy-five thousand rupees. Pursuant to the provisions of section 42, the Officer applied the rule that one half of the profit, that is, thirty-seven thousand five hundred rupees, was to be considered as accruing or arising in British India because of the business connection of the non-resident branch situated there. The Court held that, on the facts and circumstances presented, the Income-Tax Officer was correct in invoking section 42(1) of the Act and in deeming the sum of thirty-seven thousand five hundred rupees to have accrued in British India, thereby justifying its inclusion in the assessment of the assessee. The judgment further clarified that subsections (1) and (3) of section 42 are applicable to both resident and non-resident cases. The Court referred to earlier authorities such as Commissioner of Income-Tax v. Western India Life Insurance Co. (1945 13 ITR 405), Sutlej Cotton Mills Ltd. v. Commissioner of Income-Tax, West Bengal (AIR 1950 Cal 551), Commissioner of Income-Tax, Madras v. Parasuram Jethanand (AIR 1950 Mad 631), and Commissioner of Income-Tax, Bombay v. Ahmedbhai Umarbhai & Co. (SCR 1950 335) in support of its reasoning. The appeal originated as Civil Appeal No. 160 of 1950, challenging the judgment and decree dated 30 March 1951 of the High Court of Judicature at Bombay, which had been delivered by Chief Justice Chagla and Justice Tendolkar in Income-Tax Reference No. 34 of 1950. Counsel for the appellant was the Solicitor-General for India, assisted by another lawyer, while counsel for the respondent appeared in support of the assessee. The judgment was pronounced on 18 December 1953, and the opinion was authored by Justice Mahajan.

For the purpose of the present appeal the fact that the business was taken over on 17 March 1942 was held to be immaterial, and the case was proceeded on the premise that a single assessee had been carrying on business from 10 October 1941 to 8 November 1942, which constituted the relevant accounting year. The assessee’s accounts showed that during this period the Mysore branch had purchased goods from the Bombay head office and from the Madras branch amounting to a total value of Rs 2,45,455. The Income-Tax Officer, however, assessed the value of those purchases in British India at Rs 3,00,000 and estimated the profit arising from the sale of the goods in Mysore at Rs 75,000. Invoking section 42 of the Income-Tax Act, the Officer deemed that half of that profit, i.e. Rs 37,000, accrued or arose in British India because of the business connection of the branch, which was characterised as a non-resident entity, with British India. The assessee, being a resident of India, contested the application of section 42 on the ground that the provision was intended to apply only to non-resident cases. The Income-Tax Tribunal, following the decision of the Bombay High Court in Commissioner of Income-Tax v. Western India Life Insurance Co. Ltd., accepted that contention and ruled that none of the Mysore profit could be taxed in British India. At the request of the Commissioner of Income-Tax/Excess Profits Tax, Bombay City, three questions were referred to the High Court under section 66(1); the first question asked whether, under the circumstances of the case, the profits from the sale of goods in the Mysore State could be deemed to accrue or arise in British India pursuant to section 42(1) of the Indian Income-Tax Act. The High Court answered this question in the negative, re-phrasing it as whether, on the facts and circumstances, the Income-Tax Officer was correct in applying section 42(1) and in deeming Rs 37,500 of profit to have accrued in British India and consequently including that portion in the assessment. The present appeal arises from a certificate granted by the High Court and is limited to the single issue of whether section 42(1) of the Indian Income-Tax Act is applicable to a resident assessee or whether its scope is confined solely to non-resident assessees. It was unanimously agreed that if section 42 does not apply to a resident, the entire Mysore profit of Rs 75,000 cannot be included in the assessment for the year 1943-44. Conversely, if a resident falls within the provision’s ambit, then Rs 37,000—or any part thereof—would be liable to assessment for that year. Section 42(1) of the Act reads: “All income, profits or gains accruing or arising, whether directly…”

In this provision the section declares that any income, profit or gain that accrues or arises, whether directly or indirectly, through any business connection situated in the taxable territories, or that is obtained through or from money lent at interest and brought into the taxable territories either in cash or in kind, or that results from the sale, exchange or transfer of a capital asset located in the taxable territories, shall be subject to income-tax. The tax may be imposed either in the name of the person who is entitled to the income or in the name of that person’s agent, and when the tax is imposed on the agent the agent is to be treated, for every purpose of the Act, as the assessee responsible for the tax. The provision further provides that if the person who is entitled to the income, profit or gain is not resident in the taxable territories, the tax that is chargeable may be recovered by deduction under any of the provisions of section 18, and any arrears of tax may also be recovered in accordance with the Act from any assets of the non-resident person that are, or may at any time become, situated within the taxable territories. The provision also states that any such agent, or any person who fears that he may be assessed as an agent, may retain from any money payable by him to the non-resident person an amount equal to his estimated liability under this sub-section. If there is a dispute between the non-resident person and the agent or the person as to the amount to be retained, the agent or person may obtain from the Income-tax Officer a certificate stating the amount to be retained pending the final settlement of the liability; that certificate shall serve as his warrant for retaining the amount. Furthermore, the amount that may be recovered from the agent or person at the time of final settlement shall not exceed the amount specified in the certificate, except to the extent that the agent or person may at that time have in his possession additional assets of the non-resident person. Sub-section (2) provides that where a person who is not resident or not ordinarily resident in the taxable territories carries on business with a resident person, and the Income-tax Officer is of the opinion that because of the close connection between the two parties the business is arranged in such a way that the resident person receives either no profit or a profit less than the ordinary profit that would be expected from that business, then the profits derived therefrom, or those that may reasonably be deemed to have been derived, shall be chargeable to income-tax in the name of the resident person, who shall be treated, for all purposes of the Act, as the assessee with respect to such tax. Sub-section (3) deals with a business whose operations are not wholly carried out in the taxable territories and provides that the profits and gains of such a business, which are deemed under this section to accrue or arise in the taxable territories, shall be limited to those profits and gains that can be reasonably attributed to the portion of the operations that are carried out within the taxable territories.

The provision specified that only such profits and gains which could be reasonably attributed to the portion of the operations carried out in the taxable territories would be taken into account. Before the amendment enacted in 1939, the opening words of the section were expressed as follows: “42(1). In the case of any person residing out of British India, all profits or gains accruing or arising to such person, whether directly or indirectly, through or from any business connection or property in British India, shall be deemed to be income accruing or arising within British India, and shall be chargeable to income-tax in the name of the agent of any such person, and such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax.” The remainder of the section was substantially worded in the same manner.

Although the body of subsection (1) was altered in 1939 by deleting the phrase “residing out of British India,” the marginal note attached to the section continued to refer to “non-resident.” The persistence of that marginal note created a conflict among judicial decisions as to whether the section, despite the change in its language, still applied exclusively to cases involving non-residents. To resolve this uncertainty, Act XXII of 1947 was passed, which amended the marginal note to read: “Income deemed to accrue or arise within British India.” This amendment clarified that the provision was no longer restricted to non-resident persons.

The modifications introduced to section 42 in 1939 had far-reaching consequences for the entire structure of section 4 of the Act. Prior to 1939, section 4 imposed income-tax on all income, profits, or gains from any source that either accrued, arose, or was received in British India, or that were deemed under the Act to accrue, arise, or be received in British India. It further provided that income, profits, and gains which accrued or arose outside British India but were received in or brought into British India by a person resident in British India would be deemed to have accrued or arisen in British India and would be treated as income of the year in which they were received, regardless of the fact that they had not actually accrued or arisen in that year.

The 1939 amendment therefore expanded the definition of total income for any preceding year of any person. It stipulated that total income included all income, profits, and gains from whatever source, which (a) were received or were deemed to be received in British India in that year by or on behalf of the person; or (b) if the person was resident in British India during that year, (i) income that accrued, arose, or was deemed to accrue or arise in British India during that year; or (ii) income that accrued or arose outside British India during that year; or (c) if the person was not resident in British India during such

The amendment to the statute provided that any income which accrued, arose, or was deemed to have accrued or arisen in British India during the preceding year and was attributable to a resident became liable to tax, while income that accrued or arose outside British India during that same year was excluded from the charge. The expression “deemed” was introduced to capture income that had not actually accrued but was, for taxation purposes, treated as if it had. This notion operates through several concepts of statutory fiction: income that in reality does not accrue at all may be treated as accruing; the fiction may also pertain to the location where the income is deemed to arise, the person to whom it is deemed to belong, or the year in which it is considered taxable. Section 42(1) of the Act defines the parameters of income that is deemed to accrue within the taxable territories, and only by applying this definition can one identify the class of income described as “deemed to accrue to a resident within taxable territories” under section 4(1)(b). During the legislative process, the words “In the case of any person residing out of British India” were removed from section 42(1), indicating that the legislature intended the provision to apply to any individual who possessed income that, in its primary sense, originated in British India even if, technically, the income arose abroad, without regard to whether that individual was resident, ordinarily resident, or not ordinarily resident. Subsequent legislation, namely section 8 of Act XXIII of 1941, inserted clause (c) into section 14 of the Act, but stipulated that the amendment would not take effect until the fiscal year ending 31 March 1943. After this amendment, section 14 read: “The tax shall not be payable by an assessee in respect of any income, profits or gains accruing or arising to him within a Part B State, unless such income, profits or gains are received or deemed to be received in or are brought into the taxable territories in the previous year by or on behalf of the assessee, or are assessable under section 12-B or section 42.” In light of these statutory modifications to sections 4, 14 and 42, the Court concluded that the purpose of reformulating section 41(1) in broad language was to render the definition of “deemed income” applicable to every class of taxpayer. The wording of the sub-section was deliberately expansive and contains no limitation to residents only. Whenever the legislature wished to restrict the operation of any part of the provision to non-residents, it expressly inserted such a limitation. Accordingly, while sub-section (2) and the latter part of sub-section (1) specifically address non-resident situations, sub-sections (1) and (3) are framed so that they encompass both residents and non-residents.

A bench of the Bombay High Court, in the case Commissioner of Income-tax v. Western India Life Insurance Co. (1), held that even after the amendment of 1939 the statutory provision in question applied solely to non-residents. The court placed reliance, among other matters, on the fact that the marginal note attached to the section, which indicated that the provision was intended for non-residents alone, had not been removed. To answer this criticism and to dispel any lingering doubt, the legislature subsequently altered the marginal note by means of Act XXII of 1947. The court observed that any alternative interpretation of the section would create an inconsistency, because income from a Part B State that failed to fall within section 42 would not be assessable in the hands of a resident, yet it would be assessable in the hands of a non-resident. This would run counter to the overall policy of the Income-tax Act, which seeks to bring the worldwide income of residents within its scope while exempting income accruing within Part B States unless such income is received, brought into taxable territory, or attracted by section 42. The court therefore deemed it unnecessary to elaborate further on this point, noting that the decision in Commissioner of Income-tax v. Western India Life Insurance Co. (1) had been dissented from and, for good reasons, set aside in later authority.

Subsequent decisions embraced a broader view. In Sutlej Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal (2), a bench of the Calcutta High Court examined the question at length and concluded that sub-sections (1) and (3) of section 42 covered cases involving both residents and non-residents. The Madras High Court reached the same conclusion in Commissioner of Income-tax/Excess Profits Tax, Madras v. Parasuram Jethanand (1). The issue was again addressed by this Court in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co. (2), where judgments were delivered by Patanjali Sastri J. and Mukherjea J. Patanjali Sastri J. observed that the first part of sub-section (1) of section 42, which deems certain classes of income to accrue or arise in British India, is not limited to non-residents but is expressed in general terms so as to apply to both residents and non-residents. He explained that before its amendment in 1939 the subsection began with the words “in the case of any person residing out of British India,” which clearly restricted its operation to non-resident persons. After the amendment, however, the subsection was divided into two distinct parts: the first part no longer contains that restriction, while the second part commences with the words “and, where the person entitled to the income, profits and gains is not resident in British India,” thereby applying only to non-resident persons. This phrasing demonstrates that the former part applies to both

The Court noted that the opening words of the first proviso likewise indicate that the provision was not meant to apply solely to non-residents, because otherwise those words would be surplusage. A contrary view, however, had been expressed by a Division Bench of the Bombay High Court in Commissioner of Income-Tax v. Western India Life Insurance Co. Ltd. (3). In that decision the High Court referred to the alteration in the structure of subsection (1) but, in the Court’s opinion, failed to appreciate the true significance of the change. The High Court relied upon the marginal note to the whole section, which referred to “non-resident”, and the placement of the section in Chapter IV titled “Liability in special cases”, to support the view that subsection (1) applied only to non-residents.

The Court then cited the Privy Council decision in Balraj Kunwar v. Jagatpal Singh (4), stating that marginal notes in an Indian statute, as in an Act of Parliament, cannot be used for the purpose of construing the statute. It was further observed that the marginal note relied upon by the High Court had since been replaced by the words “Income deemed to accrue or arise within British India”, which clarified that the main object of subsection (1) was to define that expression, as reflected in section 12(a) of Act XXII of 1947. The Court added that the title of a chapter cannot legitimately be employed to restrict the plain terms of an enactment.

The same interpretation was expressed earlier by Mukherjea J. The Court found that nothing said by Mr. Kolah before the Court justified revisiting those earlier opinions. Mr. Kolah argued that once the world income of a resident was brought within the net of chargeability by section 4 in 1939, it became unnecessary to include such an assessee within the ambit of section 42. The Court rejected this contention as fallacious. It held that any income that arises primarily to a resident in taxable territories is chargeable under section 4(1)(b)(1), and therefore it was necessary to make section 42 applicable to that case.

The Court explained that any other considerations used in estimating a resident’s foreign income would not apply to income deemed to accrue within taxable territory. Moreover, in view of the provisions of section 14(c), resident assessees who were not for section 42(1) would not be liable to assessment on income accruing to them in Part B States, even where a business connection existed in taxable territory. Mr. Kolah was unable to provide any reasonable explanation for the deletion of the words “any person residing out of British India” from section 42(1) as it stood before 1930. The Court concluded that the only purpose of deleting those words could have been to bring residents within the ambit of the section, and there is no justification for refusing to give the plain words of the section their ordinary meaning.

The Court observed that the proper construction of the statutory provision is to give effect to the plain meaning of its words as they appear on the face of the enactment. In other words, the language of the section must be understood in the ordinary sense that the words themselves convey without resorting to any strained or artificial interpretation. Having set out the preceding reasons, the Court then expressed its view that the answer rendered by the High Court of Bombay to the first question that had been referred to it was erroneous. The Court therefore concluded that the High Court’s response could not be sustained in light of the correct construction of the provision and the factual findings presented. As a result, the Court allowed the appeal, ordered that costs be awarded to the appellant, and answered the question referred to the High Court in the affirmative. The order thus confirmed that the appeal succeeded and that the matter should proceed on the basis affirmed by the Court. Counsel for the appellant was G. H. Rajadhyaksha, while counsel for the respondent was Rajinder Narain. The direction to allow the appeal with costs and to answer the referred question affirmatively formed the operative part of the judgment.