Bipin Lal Kuthiala vs Commissioner Of Income-Tax, Punjab

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 4 May 1956

Coram: Das

In this case, the Supreme Court noted that the matter before it arose from an appeal filed by Bipin Lal Kuthiala against the Commissioner of Income-Tax, Punjab. Special leave to appeal had been granted on 18 May 1954. The appeal challenged the decision of the High Court of Punjab dated 25 June 1953, which had been rendered in an application made under section 66(2) of the Indian Income-Tax Act, 1922. The High Court had dismissed the appellant’s application on the ground that the order of the Income-Tax Appellate Tribunal dated 4 November 1949 did not raise any question of law. The Court then set out the factual background. The appellant was a resident of Simla and worked as a forest contractor. In the financial year 1942-43 he had obtained a lease of certain forest lands located in the former Indian State of Jubbal for the purpose of exploiting the timber. The activities of felling trees and extracting timber continued in the subsequent years up to 1945-46. The appellant did not prepare separate profit-and-loss statements for each of the four years; instead he prepared a single consolidated balance-sheet and profit-and-loss account covering the entire four-year period. In the income-tax returns that he filed, the income derived from the forest business was computed by applying a net rate of ten per cent to the sales realized in each of the relevant years. The returns therefore reflected the aggregated income from all four years rather than a year-by-year breakdown, and the ten per cent rate was applied uniformly to the total sales reported for each year.

During the assessment proceedings for the assessment year 1943-44 the authorities discovered that the appellant, although ordinarily resident in British India, had in the accounting year 1942-43 sold a single lot of timber in Jubbal to a buyer identified as Sukh Dial Jagat Ram, a firm engaged in business at Abdullapore in the Ambala district. The consideration for the sale was Rs 1,91,000. The Income-Tax Officer, in his assessment order dated 2 February 1948, held that the sale of timber for that amount generated a profit of Rs 20,967 for the appellant in the accounting year 1942-43. Because none of the sale proceeds had actually been received during that accounting year, the officer allowed only the statutory exemption of Rs 4,500 and used the remaining amount solely for the purpose of fixing the applicable tax rate. The officer also determined the profits arising from timber sales in the three subsequent accounting years—1943-44, 1944-45 and 1945-46—in accordance with the same method. The appellant then appealed this assessment to the Appellate Assistant Commissioner. The commissioner permitted certain expenses that the Income-Tax Officer had originally disallowed, which led to a reduction in the total income attributable to the forest business. Consequently, the profit for the 1942-43 year was lowered from Rs 19,767, and the profits for the following three years were proportionately reduced. The appellant further appealed to the Income-Tax Appellate Tribunal, where the Tribunal further reduced the profits by allowing an additional sum.

The assessment officer allowed an additional deduction of Rs. 5,000, which reduced the profit for the accounting year 1942-43 to Rs. 18,758. During the assessment for the year 1944-45 it was discovered that the total purchase price of Rs. 1,91,000 received for timber sold in 1942-43 was received in three separate ways. First, Rs. 1,25,000 was taken in cash within Jubbal State. Second, Rs. 29,000 was taken in cash by the appellant after the money arrived in British India. Third, Rs. 3,000 was paid in cash in British India to a contractor named Sita Ram, who was a creditor of the appellant. The Income-tax Officer concluded that the amounts of Rs. 29,000 and Rs. 3,000, together amounting to Rs. 32,000, which were received in the accounting year 1943-44, represented the whole of the profit that had arisen to the appellant from the timber sale of Rs. 1,91,000 in 1942-43. Accordingly, the officer held that this profit was assessable under section 4(1)(b)(iii) as income, profits and gains that accrued or arose to the appellant outside British India before the beginning of the previous year (i.e., in the accounting year 1942-43) and were subsequently brought into or received in British India during the accounting year 1943-44, and it was taxed on that basis.

The appellant appealed this finding, but the Appellate Assistant Commissioner affirmed the officer’s decision. The appellant further appealed to the Income-tax Appellate Tribunal, which also upheld the earlier view and dismissed the appeal. The Tribunal, agreeing with the tax authorities, observed that the two payments received in British India had been made by the purchaser following the appellant’s instructions and were therefore equivalent to constructive remittances of those sums from Jubbal State to British India. In the absence of any evidence presented by the appellant to contradict this, the Tribunal held that the amounts must be treated as remittances of profit. Dissatisfied with the Tribunal’s order, the appellant filed an application under section 66(1) of the Indian Income-tax Act, 1922, seeking to have the Tribunal state a case and refer several questions of law to the High Court. The appellant asked whether, given the facts, there was material to find that the appellant had instructed a debtor in Jubbal State to settle part of his debt by paying Rs. 32,000 in British India instead of making a direct remittance; whether the receipt of Rs. 32,000 was correctly characterized as a constructive remittance from Jubbal State; whether the entire profit of the accounting year 1942-43 had been remitted in that sum; and whether any evidence supported the Tribunal’s finding that the Rs. 32,000 received in British India represented the whole of the profit earned in the earlier year.

In the case, the appellant had earlier asked question (v) about whether there was material to conclude that the sum of Rs 32,000 received in British India was “income” and therefore taxable. However, the appellant later withdrew question (v), and the Appellate Tribunal by its order dated 7 August 1950 dismissed the application with respect to the remaining questions. Following that dismissal, the appellant filed an application before the High Court of Punjab invoking section 66(2) of the Indian Income-tax Act, 1922. The appellant prayed that the Income-tax Appellate Tribunal be ordered to state the case and to refer four specific questions of law to it. The first question sought to determine whether, based on the material, the assessee had chosen, instead of a direct remittance, to direct a debtor in Jubbal State to settle part of his indebtedness by paying Rs 32,000 in British India. The second question asked whether the receipt of Rs 32,000 could correctly be characterized as a constructive remittance from Jubbal State to British India. The third question concerned whether it was correct to hold that the assessee had remitted the entire profits of the account year 1942-43 in the amount of Rs 32,000. The fourth question inquired whether there was any evidence to support the Appellate Tribunal’s finding that the sale proceeds of Rs 32,000 received in British India represented the whole profit earned or accrued in Jubbal State during the account year 1942-43. The High Court then issued a rule requiring the respondent to show cause why the application should not be granted. By an order dated 25 June 1953, the High Court dismissed the application and awarded costs against the appellant. When leave to appeal was refused, the appellant obtained special leave to appeal before this Court. Counsel appearing for the appellant argued that the Tribunal’s decision was based on an oversight of the fact that at the times when the two sums were received in British India, no profit had been realized. Counsel explained that the timber had been sold in the accounting year 1942-43, but no payment was received in that year. In the subsequent year 1943-44, a total of Rs 1,57,000 was received, which was still far below the total outlay incurred. The contention was that profit should be measured as the excess of receipts over the total expenditure incurred in the business, and therefore profit could not be said to exist until the entire outlay had been recovered. Consequently, at the dates of receipt of the two sums in British India, the appellant had not recovered the full outlay, no profit had been earned, and hence no profit could have been remitted to British India. The Court expressed its inability to accept this line of reasoning, observing that profit necessarily accrues or arises at the point of sale, which in this case occurred in 1942-43.

The Court observed that the sale of timber which gave rise to the dispute took place in the accounting year 1942-43. Whatever profit was generated by that sale necessarily accrued or arose in the same year. The profit on the timber sale for the year 1942-43 has been determined to be Rs. 18,758. That determination is final and the appellant is not permitted to challenge it. Because this profit has been ascertained, the Court applied the legal presumption identified in the authorities referred to in the judgment under appeal, namely that any remittance of money from a foreign business to British India is presumed to represent profit unless the appellant can demonstrate contrary facts. Counsel for the appellant did not seriously dispute the correctness of those authorities but raised two separate questions. First, counsel contended that at the time the amounts were received in British India the total outlay on the timber had not yet been fully recovered and therefore the profit had not been realised; consequently the presumption of profit should not arise. Counsel relied on the decision in Commissioner of Income-Tax, Burma v. Bhagwandas Bagla to support this position. The Court found no merit in that contention. It was possible that the appellant was aware that his business was solvent and anticipated full recovery of the outlay, and that he therefore remitted the portion of profit that he expected would eventually be earned. The facts, as they unfolded, fully support this view. The appellant cannot deny that a profit did exist, although that profit was less than the amount he remitted. It was open to the appellant to produce evidence showing that he was winding up his business, reducing his establishment, or that he did not need as much capital to be invested and was therefore remitting capital that had become unnecessary for the Jubbal business. He failed to adduce any such evidence. As a result, the appellant did not discharge the burden of proof that was placed on him, and the Income-Tax Appellate Tribunal was rightly justified in concluding that the sum of Rs. 32,000 included the profit earned on the timber sale of Rs. 1,91,000 in the accounting year 1942-43. The factual scenario relied upon by counsel was different. In the cited case the assessee had shipped timber abroad for sale, and his agent recovered the sale proceeds and remitted them to the assessee. Those proceeds represented a return of the initial outlay, and, as Roberts, C.J. explained on page 50, no profit could be said to have arisen until the entire outlay was recovered. Accordingly, that decision could not be applied to the present facts. The second question raised by counsel was that there was no remittance by the appellant from Jubbal to British India. It may be recalled that a sum of Rs. 3,000 was paid by the purchaser to a creditor of the appellant. This circumstance clearly indicates that the purchaser acted under the direction of the appellant to pay the amount to the appellant’s creditor in British India, thereby constituting a constructive remittance of money from Jubbal to the appellant’s British-India office.

The Court observed that the purchaser must have been instructed by the appellant to pay the amount to the appellant’s creditor in British India. Instead of collecting the money from the purchaser in Jubbal and then remitting it to his own office in British India, the appellant ordered his purchaser, who was indebted to him, to pay the amount directly to the appellant’s creditor in British India. For that purpose the purchaser acted as the appellant’s agent. Accordingly, the tribunal was correct in holding that, under the circumstances, the payment constituted a constructive remittance of money by the appellant from Jubbal to his British India office. The same reasoning was applied to the payment of Rs. 29,000 by the purchaser to the assessee himself in British India. The purchaser bought timber in Jubbal and floated it to the appellant’s place of business at Abdullapore in Ambala district. The price of the timber was payable in Jubbal. The purchaser made the bulk of the payment, namely Rs. 1,25,000, in Jubbal and ordinarily would also have paid the remaining Rs. 29,000 in Jubbal. Yet the purchaser paid that Rs. 29,000 to the appellant in British India. An affidavit sworn by Sukh Dial, a member of the purchaser’s firm, was filed; notably, the affidavit does not state that his firm made the two payments in British India of its own volition and without direction from the appellant. Considering the surrounding facts, the appellate tribunal and the income-tax authorities were fully justified in concluding that the purchaser made the two payments in British India under the appellant’s instructions, and that those payments amount to a constructive remittance of those sums by the appellant himself from Jubbal to British India. This conclusion brings into play the decisions that presume a remittance of money from a foreign country to British India in such circumstances to be profit. The appellant offered no evidence to rebut this presumption. The appellant further contended that the entire profit of Rs. 18,758 could not be treated as having been brought into or received in British India, and that only a proportionate part of the total profit, corresponding to the Rs. 32,000, should be regarded as included in that sum. Reliance was placed on the decision of this Court in Turner Morrison & Co. Ltd. v. Commissioner of Income-tax, West Bengal. The Court found that decision inapplicable to the present facts. As already explained, the two amounts were paid in British India at the direction of the appellant, which is equivalent to a situation where the purchaser paid the appellant in Jubbal and the appellant then remitted the money through the purchaser, acting as his agent, to himself and his creditor in British India.

The Court observed that when a profit is remitted to British India, the legal presumption is that such profit is deemed to have been included in the remittances. Accordingly, the Court held that the earlier decision cited by the parties could not be applied to the present facts because the circumstances fell within the established presumption that the profit formed part of the amounts remitted to British India. After reviewing the entire factual matrix and the surrounding circumstances of the case, the Court concluded that the matter did not present any genuine or substantial question of law arising from the order of the Appellate Tribunal. In view of this assessment, the Court found that the High Court had correctly exercised its jurisdiction in dismissing the appellant’s application filed under section 66 (2) of the India Income-tax Act, 1922. Relying on the reasons set out in the preceding discussion, the Court affirmed that the dismissal of the appeal was appropriate and ordered that the appellant bear the costs of the proceeding. Accordingly, the appeal was formally dismissed, and the decision of the lower court was upheld.