Turner Morrison and Co., Ltd vs Commissioner of Income-Tax, West Bengal

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 41 of 1952

Decision Date: 16 January 1953

Coram: Mehr Chand Mahajan, Vivian Bose, Natwarlal H. Bhagwati, Das

In the matter titled Turner Morrison & Co., Ltd. versus Commissioner of Income-Tax, West Bengal, the Supreme Court of India delivered its judgment on 16 January 1953. The petition was presented by Turner Morrison & Co., Ltd. and the respondent was the Commissioner of Income-Tax for West Bengal. The decision was rendered by a bench that included Justices Mehr Chand Mahajan, Vivian Bose, Natwarlal H. Bhagwati, and additional judges whose names appeared in the reporting records. The case was reported in the 1953 Annual Indian Reports (AIR 140) and the 1953 Supreme Court Cases (SCC 520), and it has been cited in numerous subsequent reports spanning the years 1954 to 1968. The statutory framework relied upon by the Court comprised sections 4(1)(a), 4(1)(c), 42 and 43 of the Indian Income-Tax Act of 1922. The central question addressed by the Court was whether a non-resident company that sold goods manufactured abroad, through a person effecting sales in India, was to be treated as an agent of the non-resident and consequently whether the profits received in India were assessable under section 4(1)(a) or under section 42, and what the scope of liability of an agent under section 43 would be.

The factual backdrop involved the Port Said Salt Association Ltd., a company incorporated in the United Kingdom, which conducted its business operations from Egypt and maintained its headquarters there. The Association manufactured salt in Egypt and consigned a portion of the product to Turner Morrison & Co., Ltd., the assessee, for sale within India. Turner Morrison & Co. carried out the Indian sales through brokers, sold the salt at prices that had been approved by the Association, collected the sale proceeds and, in each transaction, retained a commission of two and one-half percent. After deducting the commission and other expenses, the remaining balance was transmitted to the Association in Egypt. On these facts, the assessee was deemed to be an agent of the Association under section 43 of the Income-Tax Act and was assessed to income-tax either under section 4(1)(a) or alternatively under section 4(1)(c) for the income derived by the Association from the Indian sale of salt. The High Court of Calcutta held that the income in question was chargeable to income-tax under section 4(1)(a) as income received in India, and not under section 42. It articulated three principal reasons: first, because the assessee was entrusted with the sale of goods consigned to it, the handling of cargoes, the issuance of delivery orders and the collection of proceeds, it functioned as an agent of the Association rather than as a simple post office, citing Pondicherry Railway Co. v. Commissioner of Income-Tax (1931). Second, the goods were neither imported nor sold on the assessee’s own account but on behalf of the Association, so the income received was on behalf of the principal, distinguishing the case from Ex parte White. Third, the assessee was authorized not only to sell the goods but also to collect the purchase price, meaning the income was received by the assessee as an agent, a principle supported by the authority in Butwick v. Grant.

In point (iv) the Court observed that even though the assessors acted as agents and were entitled to retain from the sale proceeds the expenses they incurred and the commission earned, this right did not alter the character of the sale proceeds. The proceeds remained the property of the principals, not the agents. The Court referred to the decisions in Colquhoun v. Brooks (2 Tax Cas. 490) and Saiyid Ali Imam v. King Emperor ([1925] I.L.R. 4 Pat. 210) to support this principle.

In point (v) the Court explained that when agents received the gross sale proceeds in India, they automatically acquired any dormant profits and gains contained in those proceeds. If, after taking accounts, there were identifiable income, profits, or gains, the portion of those amounts that could be attributed to the sale proceeds received by the agents in India was considered to have been received by the agents at the moment the gross sale proceeds entered India. Consequently, section 4 (1) (a) of the Income-tax Act became immediately applicable, and the income, profits, and gains thus received became chargeable to tax under section 4 (1) (a) read with section 3. The Court relied on Grainger & Son v. William Lane Gough (L.R. [1896] A.C. 325) for this reasoning.

In point (vi) the Court held that where income, profits, and gains are actually received in India, section 4 (1) (a) applies directly and it is no longer necessary for the revenue to invoke the fictional basis created by section 42. Accordingly, the assessors were properly assessed under section 4 (1) (a) rather than under section 4 (1) (c). The Court emphasized that section 4 (1) (a) applies to all categories of assessors, including non-residents, and cited the authorities Hira Mills v. Income-tax Officer, Cawnpore ([1946] 14 I.T.R. 417), Burugu Nagayya v. Commissioner of Income-tax, Madras ([1949] 17 I.T.R. 194) and Pondicherry Railway Co. v. Commissioner of Income-tax, Madras ([1931] I.L.R. 54 Mad. 691) in support of this view.

In point (vii) the Court clarified that merely treating assessors as agents under section 43 of the Act does not obligate the revenue authorities to assess under section 42. An appointment as an agent under section 43 operates for all purposes of the Act, not solely for the purposes of section 42. The Court referred to Imperial Tobacco Co. of India Ltd. v. Secretary of State for India ([1922] I.L.R. 49 Cal. 721), Commissioner of Income-tax, Bombay v. Metro Goldwyn Mayer (India) Ltd. ([1939] 7 I.T.R. 176) and Caltex Ltd. v. Commissioner of Income-tax, Bombay City ([1952] 21 I.T.R. 278) to illustrate this principle. The judgment of the Calcutta High Court was affirmed. The appellate matter arose as Civil Appeal No. 41 of 1952, filed against a judgment and decree dated 25 July 1950 of the High Court of Judicature at Calcutta (Sen and Chunder JJ.) exercising special jurisdiction in Income-tax Reference No. 31 of 1949. Counsel for the appellant was S. Mitra assisted by S. N. Mukherjee, while the respondent was represented by C. K. Daphtary, Solicitor-General for India, assisted by P. A. Mehta. The judgment was delivered by Justice Das on 16 January 1953. The appeal stemmed from six references made by the Calcutta Bench of the Income-tax Appellate Tribunal under section 66(1) of the Indian Income-tax Act.

In this case the Court recorded that the reference under section 66(1) of the Indian Income-tax Act concerned six separate matters. Two of those matters related to income-tax assessment years 1943-44 and 1944-45, while the remaining four matters concerned excess-profits tax for the chargeable accounting periods that ended on 31 December of the years 1940, 1941, 1942 and 1943 respectively. The factual background set out in the statements of the case was as follows. Messrs. Port Said Salt Association Ltd, hereinafter called “the Association”, was a company incorporated and having its registered office in the United Kingdom. Although the Association was incorporated abroad, it carried on its business in Egypt and maintained its head office in Alexandria, where it held the annual general meetings of its shareholders. Because the Association was not resident in the United Kingdom, it did not pay British income-tax on its profits, and for the purposes of assessment under the Indian Income-tax Act the Association was treated as a non-resident.

The Association engaged in the manufacture of salt in Egypt under certain concessions, and the salt produced was sold in any country where a suitable market existed. Part of the salt manufactured by the Association was consigned to Messrs. Turner Morrison and Company Ltd for sale in India. All shipping operations, including the chartering of steamers, loading of cargoes and procurement of insurance, were carried out in Egypt by the Association, which then forwarded the relevant documents to Turner Morrison and Company Ltd. Turner Morrison and Company Ltd sold the salt in India through brokers, obtaining the best price that was at least equal to the price approved by the Association. The company received a commission of two and a half per cent on most of the sales, although in some cases a lower commission of one and one-quarter per cent was paid.

Turner Morrison and Company Ltd also handled the cargoes when they arrived at Calcutta and incurred all necessary disbursements in connection with that handling. The sale proceeds were collected by Turner Morrison and Company Ltd and deposited in an account maintained in the name of the company with the Hongkong and Shanghai Banking Corporation. After deducting its expenses, including the commission, the balance was remitted by the company to the Association in Egypt.

Based on these facts, the Income-tax Officer regarded Turner Morrison and Company Ltd as agents of the Association under section 43 of the Indian Income-tax Act and assessed the company to income-tax for the two assessment years mentioned above under section 4(1)(a), or alternatively under the first part of section 4(1)(c). The Officer also assessed the company to excess-profits tax for the four chargeable accounting periods previously noted. Turner Morrison and Company Ltd, referred to in the judgment as “the Agents”, appealed against the assessment orders to the Appellate Assistant Commissioner, who dismissed the appeals. The Agents then took a further appeal to the Income-tax Appellate Tribunal, contending that the assessment made under section 4(1)(a) was improper and that the assessment should instead have been made under section 42 of the Act.

The Tribunal examined the material facts and concluded that the assessment of the agents was correctly made under section 4(1)(a) of the Income-tax Act. In addition, the Tribunal found that the alternative argument advanced by the Income-tax authorities—that the assessment could also be made under the first part of section 4(1)(c)—was well founded. Accordingly, the Tribunal held that section 42 of the Act had no relevance to the present case. On this basis the Tribunal affirmed the findings of the Income-tax Officer and the Appellate Assistant Commissioner and dismissed the agents’ appeals. The agents then filed an application under section 66(1) of the Act, seeking a reference of specific legal questions to the High Court. The Tribunal referred three questions: (1) whether, given the facts, the Tribunal was correct in holding that the income, profits and gains derived from the sale of salt in British India are assessable to tax as income, profits and gains received or deemed to be received under section 4(1)(a), and if that answer were negative, (2) whether the Tribunal was right in accepting the Department’s contention that the income accrued, arose or is deemed to accrue or arise in India and is assessable under section 4(1)(c), and (3) whether the Tribunal was correct in rejecting the assessee’s claim that the income, profits and gains from the sale of salt in British India are taxable only under section 42. The reference was placed before a bench of the Calcutta High Court comprising Justices Sen and Chunder.

Justice Sen and Justice Chunder delivered the Court’s answers to the three questions. Regarding question (1), they answered in the affirmative for income-tax purposes, holding that the income, profits and gains are indeed assessable under section 4(1)(a); however, they clarified that excess profits tax could not be imposed on that basis. Concerning question (2), the Court observed that the Tribunal had erred in accepting the Department’s view that the income accrued or arose in India for income-tax purposes. The Court noted that the Tribunal had not actually held that the income should be deemed to accrue or arise in India, and therefore the portion of the question asserting such a holding was factually inaccurate. The Court further held that, for the purposes of excess profits tax, the income, profits and gains must be deemed to have arisen or accrued in India, and that section 42(3) of the Income-tax Act applies to the levy of excess profits tax by virtue of section 21 of the Excess Profits Tax Act. Finally, on question (3), the Court affirmed that the Tribunal was correct in rejecting the argument that the income, profits and gains are chargeable to tax solely under section 42; the Court explained that the same income also falls within the scope of section 4(1)(a) as income received in India on behalf of the assessee company, and therefore is taxable under both provisions.

It was observed that the agents had succeeded in their arguments insofar as the assessment of excess profits tax was concerned, but the rulings of the High Court contradicted them with respect to the assessment of income-tax for both assessment years. Following those rulings, the agents filed two separate applications before the High Court under section 66A, seeking leave to appeal to this Court against the income-tax assessments for each of the two years. The High Court examined the applications, determined that both matters were suitable for appeal to this Court, granted leave to appeal, and ordered that the two appeals be heard together as a single consolidated proceeding. The Commissioner of Income-tax, West Bengal, did not file any appeal against the portion of the High Court’s judgment that dealt with the questions relating to the assessment of excess profits tax. Consequently, the present appeal is confined exclusively to the answers rendered by the High Court to the questions that pertain to the assessments of income-tax.

The principal contention advanced in support of this appeal was presented by counsel for the appellant, who argued that no income, profits or gains were received in India by or on behalf of the Association. He attempted to substantiate this position on a number of grounds, though the reasons he advanced were not entirely consistent with one another and, in some respects, appeared to be mutually contradictory. Relying upon the authorities in Narasammal v. The Secretary of State for India(1) and Pondicherry Railway Company Ltd. v. Commissioner of Income-tax, Madras(2), the counsel contended that the agents did not “receive” any income, profits or gains in India because, in his description, the agents were merely “an animated Post Office”. The Court was compelled to reject this line of reasoning as untenable, drawing upon the same principles that the Privy Council employed to dismiss a comparable argument in the Pondicherry Railway Company Ltd.(2) case. In the language of Ford Macmillan, the functions performed by the agents went far beyond the simple mechanical task of forwarding the monies they collected to the Association in Egypt. The agents were entrusted with substantial responsibilities on behalf of the Association, including the sale of goods consigned to them, the handling of cargoes, the issuance of delivery orders, the collection of sale proceeds, and the subsequent remittance of those proceeds after deducting their own expenses and commission. The depiction of the agents as “an animated Post Office” could not plausibly be applied to parties performing such a comprehensive range of commercial activities. After this rejection, the counsel altered his argument, asserting that even if income, profits or gains had been received in India, such receipt was not on behalf of the Association. He maintained that, although described as agents, the parties were in fact neither agents in fact nor in law, and he relied upon the well-known authority Ex parte White(3). A careful reading of that precedent, the Court noted, would clearly demonstrate the inapplicability of the agents’ status as true agents in the present circumstances.

The Court noted that, according to the authorities referred to, the person to whom the goods were consigned, together with a price list, was by the course of his dealings entitled to sell the goods at any price he wished and was required to remit to the consignor only the price listed. In other words, although the parties described their relationship as an agency, the consignee in fact sold the goods on his own account and retained any amount realized in excess of the listed price as his own profit (1) [1916] I.L.R. 39 Mad. 885. (2) [1931] I.L.R. 54 Mad. 691; L.R. 58 I.A. 239. (3) L.R. 6 Ch. A. 397. The Tribunal, on facts that the learned counsel is not entitled to challenge for the purposes of these proceedings, found it clear that the goods were not imported by the Agents on their own account and that the Agents never became purchasers at any stage. The Tribunal further held that the Agents could not sell the goods at any price they liked, because they were required to sell at or above the price approved by the Association. Whenever a sale was made at a rate above the approved price, the excess was not retained or appropriated by the Agents as their own profit. Mr Mitra then argued that, even assuming the Agents had sold the goods as agents of the Association, they did not necessarily have authority to receive the payment of the price. He relied on Butwick v. Grant (1) to support the proposition that an authority to sell does not necessarily imply an authority to receive payment. Accordingly, he contended that because the Agents lacked authority to receive the price, the receipt could not be said to have been made by or on behalf of the Association. The Court observed that this argument disregarded the course-of-business finding of the Tribunal, which clearly indicated that the Agents were agents not only for selling the salt but also for collecting the sale proceeds. The third ground raised in support of the first main contention was that the entire amounts collected by the Agents were not receivable by the Association, because the Agents were entitled to a portion of the sums to cover handling charges and their own commission. Relying on Colquhoun v. Brooks (2) and Saiyid Ali Imam v. King Emperor (3), Mr Mitra asserted that the sale proceeds collected by the Agents were not so completely under the Association’s control that the Association could, by its own act, have the entire proceeds transferred to it in Egypt. The Court found this argument to be obviously fallacious. The concession that the Agents were (1) [1924] 2 K.B. 483. (2) 2 Tax Cas. 400. (3) [1925] I.L.R. 4 Pat. 210; A.I.R. 1925 Pat. 381 entitled to deduct their disbursements and commission from the sale proceeds plainly implied that the sale proceeds belonged to the Association, for

The Court observed that an agent could not deduct the dues owed by the Association from amounts that did not belong to the Association. Under Section 217 of the Indian Contract Act, an agent was entitled to retain, out of any sum received on behalf of the principal in the course of the agency business, all monies that were due to the agent for advances made, properly incurred expenses, and any remuneration payable for acting as an agent. Section 221 further granted the agent the right to retain any goods, documents or other property of the principal that the agent had received until the amount due to the agent for commission, disbursements and services relating to those items had been paid or duly accounted for. The Court emphasized that the right of retainer and lien given to an agent did not convert the amount received by the agent on behalf of the principal into something other than the principal’s property. The principal remained the full owner and retained complete control over his property even when it was in the possession of the agent, subject only to the agent’s statutory right of retainer and lien. Consequently, the Court concluded that the entire sale proceeds that the Agents had collected in the present case were received on behalf of the Association and therefore belonged to the Association, subject only to the agents’ lawful rights.

Finally, the Court addressed the argument raised by counsel that the gross sale proceeds should not be treated as income because they were merely credit entries in the account, with various debits also recorded, and that only any remaining credit balance, if any, could be considered income, profits or gains and would be deemed received at that stage. The Court noted that the submissions were supported by citations to several authorities, including Commissioner of Taxes v. The Melbourne Trust Ltd., Russell v. Aberdeen Town and County Bank, Be Rogers Pyatt Shellac, & Co. v. Secretary of State for India, Commissioner of Income-tax, Bombay City v. Agarwal & Company Bombay, and In re Govind Ram Tansukh Rai, among others. However, the Court held that the observations in those cases had to be read in the context of the specific facts and issues decided in each case, and therefore could not be applied to the present facts. The Court also distinguished the case of Morley v. Tattersall, noting that the liability for sale proceeds continued to exist even after unclaimed balances were transferred to the partners’ account, so those proceeds could not be treated as trade receipts. Conversely, the Court indicated that the case of Grainger & Son v. William Lane Gough would demonstrate that the monies in question were...

The Court observed that monies received by an agent acting on behalf of a foreign principal could be treated as trade profits within the meaning of section 41 of the English Income Tax Act of 1842, as noted by Lord Herschell on page 337 and by Lord Morris on page 345. The passages cited in the judgment under appeal, particularly those drawn from the cases of Neilson Anderson & Company v. Collins and Taru v. Scanlan (6), made clear that net sale proceeds are to be included in gross sale proceeds. The same principle, which had been highlighted in Bangalore Woollen, Cotton & Silk Mills Co. Ltd. v. Commissioner of Income-tax, Madras (7), was found to be implicit in the Privy Council decisions in Commissioner of Income-tax, Bombay Presidency and Aden v. Chunilal B. Mehta (8) and Commissioner of Income-tax, Madras v. S. L. Mathias (9). Consequently, the Court held that there could be no doubt that when the gross sale proceeds were received by agents in India, those agents inevitably received whatever income, profits and gains were dormant, hidden or otherwise embedded in the proceeds. The Court further explained that, should an audit of accounts reveal that no profit was earned during the year, the question of receipt of income, profits and gains would not arise. However, if income, profits and gains were present, the portion attributable to the sale proceeds received by the agents in India constituted income, profits and gains at the moment the gross sale proceeds were received. In that situation, the provisions of section 4(1)(a) became applicable immediately, and the income, profits and gains thus received became chargeable to tax under section 3 of the Act. The Court found no merit in the first principal argument advanced by Mr. S. Mitra. Regarding Mr. Mitra’s second principal contention, the Court noted that, assuming receipt of income, profits and gains occurred within India, such receipts clearly arose through a business connection in India; therefore, the provisions of section 42(1) would be triggered. Accordingly, those income, profits and gains should be treated as deemed to accrue or arise in India, and their inclusion in total income should fall under section 4(1)(c) because the Association was a non-resident. Mr. Mitra further urged that the charging under section 3 must be “in accordance with and subject to the provisions of this Act,” and that section 4(1) was likewise “subject to the provisions of this Act.” According to Mr. Mitra, this reasoning immediately invoked section 42, bringing the said income, profits and gains within its scope.

The Court observed that Mr Mitra argued that because the income, profits and gains in question fell within the scope of section 42, they must be taken into account under clause 4(1)(c) of the Act, thereby rendering clause 4(1)(a) inapplicable to income accruing to a non-resident. In other words, Mr Mitra contended that clause 4(1)(a) became a dead letter for non-resident taxpayers. The Court could not accept this submission. It noted that section 42 deals only with deemed income; its purpose is to deem certain income, profits and gains to arise in India so that they become chargeable. The Court explained that when such income, profits and gains are actually received in India, the tax authorities no longer need to resort to the fiction of deemed receipt. This principle had been made clear in the decisions of Hira Mills Ltd. v. Income-Tax Officer, Cawnpore and Burugu, Nagayya and Rajanna v. Commissioner of Income-Tax, Madras, and was also implicit in the Privy Council judgment in Pondicherry Railway Company Ltd. v. Commissioner of Income-Tax, Madras.

The Court further explained that clause 4(1)(a) is a general provision and, unlike clauses 4(1)(b) or 4(1)(c), it is not limited to any specific class of assessee. It therefore applies both to resident and non-resident persons. The second proviso to section 4(1), although it concerns a person who is not ordinarily resident, also indicates that income, profits and gains accruing outside the taxable territory may be included in the total income if they are brought into or received in the taxable territory and become chargeable under section 3 read with section 4(1)(a). On the basis of these considerations, the Court rejected Mr Mitra’s contention.

The Court acknowledged that the construction it adopted, in agreement with the High Court, might operate harshly against non-residents. Under this view, income, profits and gains attributable to business activities performed outside India could be brought within the charge of Indian tax law as income received in India, a result that might discourage non-resident merchants from conducting business in India. Nevertheless, the Court emphasized that statutes must be interpreted according to their plain language and tenor, and that any undesirable consequences arising from such interpretation are matters for a competent authority other than the Court to address or prevent.

Finally, the Court addressed Mr Mitra’s third main argument. He contended that once Turner Morrison & Co. Ltd. were treated as agents under section 43, the provisions of section 42 were automatically attracted. To support this claim, Mr Mitra relied on several authorities, including Imperial (1946) 14 I.T.R. 417 at p. 423, the 1949 decision reported in 17 I.T.R. 194, and the 1931 judgment reported in I.L.R. 54 Mad. 69; L.R. 58 I.A. 239, as well as the case of Tobacco Company of India Ltd. v. Secretary of State for India. The Court noted these citations but, in line with its earlier reasoning, did not adopt the view that section 43 alone would automatically invoke section 42.

The Court referred to the decisions of the State for India (1), the Commissioner of Income-tax, Bombay v. Metro Goldwyn Mayer (India) Ltd. (2) and Caltex (India) Ltd. v. Commissioner of Income-tax, Bombay City (3), which held that Section 43 functions merely as a mechanism for giving effect to Section 42. The Court clarified that describing Section 43 as a mechanism for implementing Section 42 does not imply that Section 43 lacks any other purpose. Section 42, the Court explained, defines income, profits or gains that accrue or arise directly or indirectly through or from (i) any business connection in India, (ii) any property situated in India, (iii) any assets or sources of income located in India, (iv) any money lent at interest and brought into India either in cash or in kind, and (v) the sale, exchange or transfer of a capital asset in India. By operation of Section 42, all such incomes are deemed to accrue or arise within India; consequently, where the entitlement to such income, profit or gain belongs to a non-resident, the amount becomes chargeable to income-tax either in the name of the non-resident or in the name of his agent, who for all purposes of the Act is treated as the assessee for that tax. Section 43, however, refers to a person who (a) is employed by or on behalf of a non-resident, (b) has any business connection with that non-resident, or (c) receives any income, profit or gain on behalf of the non-resident. Any person falling within one of these categories may, under Section 43, be treated by the Income-tax Officer as the agent of the non-resident and is deemed, for all purposes of the Act, to be such an agent. The Court noted that the third category—where a person receives income, profit or gain on behalf of the non-resident—does not automatically bring the provisions of Section 42 into play, because the income, profit or gain received by a person treated as an agent under Section 43 may not fall within any of the categories of income, profit or gain listed in Section 42, as illustrated by the authorities (1) (1922) I.L.R. 49 Cal. 721, (2) [1939] 7 I.T.R. 176 and (3) [1952] 21 I.T.R. 278. Moreover, the language of Section 43 can also attract the provisions of Section 40, which likewise contemplates a person entitled to receive on behalf of the non-resident any income, profit or gain chargeable under the Act, and may even invoke Section 4(1)(a). In the Court’s view, there is no justification for the argument that appointing a person as a statutory agent under Section 43 merely triggers Section 42; such an appointment operates for all purposes of the Act, not solely for the purposes of Section 42.

The Court observed that, for the reasons explained in the preceding part of the judgment, the responses that had been given by the High Court to the questions posed were, insofar as they dealt with the assessment of income tax, the only issue before this Court, found to be correct. Accordingly, the Court concluded that the appeal could not succeed and ordered that the appeal be dismissed and that costs be awarded against the appellant. The judgment therefore recorded that the appeal was dismissed. The appellant was represented by an agent named P. K. Mukherji, and the respondent was represented by an agent named G. H. Rajadhyaksha.