Aggarwal Chamber vs Ganpat Rai Hira Lal

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 79 of 1954

Decision Date: 11 November 1957

Coram: J.L. Kapur, Bhuvneshwar P. Sinha

In the matter titled The Aggarwal Chamber Of versus M/s Ganpat Rai Hira Lal, the Supreme Court rendered its judgment on 11 November 1957. The opinion was authored by Justice J. L. Kapur and delivered by a bench consisting of Justice J. L. Kapur, Justice Bhuvneshwar P. Sinha, and Justice Bhuvneshwar P. Sinha. The case is reported in the 1958 volume of the All India Reporter at page 269 and also appears in the 1958 Supreme Court Reports at page 938. The dispute concerned the application of the Income‑Tax Act (XI of 1922), specifically sections 40(2) and 42(1), to the assessment of an agent who had made payments on behalf of a non‑resident principal. The appellant, The Aggarwal Chamber Of, and the respondent, M/s Ganpat Rai Hira Lal, were engaged in business in the former Patiala State and were both considered non‑residents of British India. Acting as a commission agent for the respondent, the appellant entered into a series of forward transactions with a firm of commission agents located in Hapur. The profits generated from these transactions amounted to Rs 29,275‑2‑6, and the Hapur firm subsequently paid income‑tax of Rs 9,314‑13‑4 on those profits. In 1943 the appellant was ordered to be wound up, and the respondent was placed on the list of contributories. The Official Liquidator then applied to the liquidation judge for a payment order that incorporated the amount of income‑tax paid by the Hapur firm on behalf of the respondent. The principal issue raised for the respondent was that it claimed to have had no taxable income in the year under consideration and therefore asserted that it should not be liable for the income‑tax paid by the Hapur firm.

The Court held that the liquidator was entitled to recover from the respondent the amount of income‑tax that the Hapur firm had paid, regardless of whether the respondent’s worldwide income was subject to tax. Under the prevailing law, the Hapur firm functioned as an agent of the respondent for the agency business entrusted to it, and consequently it qualified as an assessee under sections 40(2) and 42(1) of the Income‑Tax Act, making it liable for tax on the profits derived from the respondent’s transactions at Hapur. The agent was therefore permitted to retain an estimated amount of tax payable on the respondent’s profits. Because the Hapur firm had correctly paid tax on those profits, the respondent could not challenge the liability on the ground that its total worldwide income was non‑taxable and that it was entitled to retain its profits without any deduction. Such a contention, the Court observed, would have needed to be raised by the non‑resident assessee at the time of its own assessment. In the relationship between the parties, the tax paid by the agent must be taken into account irrespective of the ultimate result of the assessment of the non‑resident. Accordingly, the appeal, designated as Civil Appeal No. 79 of 1954 and arising from the judgment and order dated 10 March 1953 of the former Pepsu High Court, was dismissed, confirming that the respondent remained liable for the tax amount that had been paid by its agent.

In Letters Patent Appeal No 493 of Samvat 2005, which arose from the judgment and order dated 18 January 1949 of the High Court in E AS Nos 78‑96 of Samvat 2001, counsel for the appellants was Naunit Lal and counsel for the respondents was Mohan Behari Lal. The judgment was delivered on 11 November 1957 by Justice Kapur. This appeal was taken on a certificate under Article 133(1)(c) of the Constitution from the judgment and order of the Division Bench of the former Pepsu High Court pronounced on 10 March 1953, which had modified the order of the Liquidation Judge. The facts have been fully recited in the judgments of the lower courts, and a brief recital will be sufficient for the purpose of this judgment. The appellant company had been incorporated in 1934 under the Companies Act of the erstwhile Patiala State and carried on the business of a commission agency dealing in forward transactions involving various grains and other commodities. The respondent, the firm Ganpat Rai Hira Lal of Narnaul, was a shareholder of the appellant and also entered into several forward sale and purchase transactions of grain and other commodities with the appellant. Acting as a commission agent for the respondent and its other constituents, the appellant entered into several forward delivery transactions at Hapur with Firm Pyarelal Musaddi Lai, which carried on commission agency business at Hapur and will hereinafter be referred to as the Hapur firm. The total profits from the transactions entered into by the appellant with the Hapur firm amounted to Rs 48,250, on which the Hapur firm paid income‑tax of Rs 14,730‑8. The profits attributable to the transactions entered into on behalf of the respondent amounted to Rs 29,275‑2‑6, and the proportionate income‑tax claimed to have been paid on those profits was Rs 9,314‑13‑4. On 20 May 1943 the appellant was ordered to be wound up and Udmi Ram Aggarwal, a pleader of the old Patiala High Court, was appointed as its liquidator. The list of contributories was settled on 21 October 1943 and the respondent was placed on that list; although this matter was challenged in the appeal before the High Court, it is no longer in dispute between the parties. The Official Liquidator, on 18 March 1944, applied under section 186 of the Patiala Companies Act for a payment order of Rs 12,204‑12‑3 against the respondent and, in support of that claim, filed copies of the respondent’s account in the books of the appellant showing how the amount was due from the respondent. That amount included Rs 9,476‑13‑0, representing 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 which the appellant had entered into forward transactions had no right to demand any income‑tax from the appellant.

In the proceedings, it was contended that the appellant, which acted merely as a commission agent, had not earned any profit and therefore was entitled only to the commission. The respondent further argued that, because the aggregate of the transactions between it and the appellant resulted in a loss, the respondent was not liable to pay any income‑tax and that it possessed no taxable income for the year in dispute or for any other year. On 23 May 1944, the respondent filed an application asserting that the Hapur firm, which acted as agents of the appellant at Hapur, had retained an amount of Rs 14,730‑8‑0 in trust under section 42 of the Income Tax Act. The respondent prayed that the Official Liquidator should be ordered to approach the income‑tax authorities for a refund of the amount retained and paid by the Hapur firm, since, according to the respondent, no tax was actually due on the transactions entered into by the appellant with the Hapur firm and consequently none was payable by the respondent. After both parties had produced evidence, the learned Liquidation Judge issued a payment order on 18 January 1949 directing a payment of Rs 8,191‑0‑9. This sum comprised Rs 6,867‑9‑6, which represented the proportionate amount of income‑tax attributable to the profits accruing from the respondent’s transactions. The respondent appealed this order before the Division Bench, raising two points of contention. The first point was that the respondent could not be placed on the list of contributories. The second point was that the respondent should not be held liable for the amount retained for the payment of income‑tax out of the profits derived from the transactions that the appellant had entered into on the respondent’s behalf with the Hapur firm and that were subsequently paid by the appellant. The court rejected the first contention, holding that the respondent had been correctly included on the list of contributories. It also affirmed the second contention, following the precedent set in Panna Lal Mohan Singh v Aggarwal Chamber of the Judicial Committee of the Ijlas‑khas of Patiala, and concluded that the Official Liquidator of the appellant was not entitled to claim the income‑tax amount paid by the Hapur firm. The Judicial Committee had observed that before fixing a contributory’s liability it must be shown that his income was assessable, and that the contributory’s entire income, including other transactions carried on in India, should be considered for assessing income‑tax liability. Subsequently, the appellant applied for a certificate of appeal under Article 133(1)(c). The certificate was granted, and the terms of the grant raised two questions: first, whether a decision rendered by a single judge of the Judicial Committee could be regarded as a decision of the Committee itself; and second, whether the principle laid down by the learned judge regarding the liability of the Aggarwal Chamber should apply in the present case.

The Court observed that a commercial firm could not recover from its clients the proportional share of income‑tax it had paid unless it was shown that the clients’ total income was assessable to income‑tax. On that basis the petition was allowed and a certificate was granted. The Court noted that the first issue raised elsewhere had not been presented before it, and therefore it was unnecessary to examine that matter. The only question for determination was whether the respondent was liable for the income‑tax that had been paid by the Hapur firm on the transactions entered into by the appellant with the Hapur firm on behalf of the respondent. The Court found that the High Court had made no finding that the respondent had entered into any forward transactions in British India or at Hapur with any firm other than the Hapur firm, and that this issue had not been raised before it. Moreover, there was no finding of the respondent’s total world income and no material on record from which such income could be ascertained. The appellant was a non‑resident company and the respondent was a non‑resident residing at Narnaul in the former Indian State of Patiala. The appellant had entered into forward transactions on behalf of the respondent at Hapur, generating a considerable profit. The High Court had found that the Hapur firm had paid Rs 6,867‑9‑0 as income‑tax on the profits earned from those transactions on behalf of the respondent. The respondent contested its liability on the ground that tax could be imposed only on his total earnings for the assessment year and that, as evident from his books, he had sustained heavy losses in his Narnaul business, making his total income unassessable. The learned Liquidation Judge held the respondent liable for the tax amount by applying section 69 of the Contract Act. On appeal, the Division Bench disallowed that liability, ruling that the respondent’s “total earnings” had not been shown to be taxable under the Act. Neither the Liquidation Judge nor the Division Bench had examined the relevant provisions of the Income‑Tax Act, not even section 42, which the respondent had cited in his application of 23 May 1944, nor had they determined the legal relationship between the Hapur firm and the respondent. The agency relationship of the Hapur firm was not seriously contested before this Court and was not repudiated. The lower courts had proceeded on the basis that the Hapur firm acted as the respondent’s agent for the forward‑transaction business. The respondent had accepted the transactions and the profit accruing therefrom and was disputing only the amount of income‑tax deducted, retained, and paid on those profits.

In this case the Court observed that the Hapur firm acted as an agent of the respondent for the portion of the business that had been entrusted to it, and that a contract relationship arose between the principal and the substitute in accordance with Section 194 of the Contract Act, as explained in the decision of De Bussche v Alt. The Court then turned to the provisions of the Income‑Tax Act that were applicable in the assessment year 1942‑43, which it referred to simply as “the Act.” It noted that the term “total earnings” used by the High Court was not defined in the Act, which instead employed the expressions “total income” and “total world income” in sub‑section 15 of section 2. The definition of “total income” comprised (i) the whole amount of income, profits and gains described in section 4(1) and (ii) the computation of that amount in the manner prescribed by the Act. “Total world income,” on the other hand, included all income, profits and gains wherever they arose, except those to which section 4(3) expressly excluded the Act’s application. Consequently, for a respondent who was a “non‑resident,” “total income” consisted of income, profits and gains received or accrued in British India or deemed to be received or accrued there. The Court examined Section 17, relied upon by the respondent’s counsel, which dealt with taxable income for certain special cases, including non‑residents. Section 17 provided that a British subject or a subject of a State in India or Burma, or a native of a Tribal Area, who was not resident in British India, would have a tax liability on his total income equal to the proportion of tax that would have been payable on his total world income, calculated in the same ratio that his total income bore to his total world income. The Court clarified that Section 17 did not govern the duties of persons required by the Act to deduct income‑tax from payments made to non‑residents, nor did it address the consequences of failing to make such deductions. It pointed out that the very next chapter, Chapter IV, dealt with deductions that the Act mandated with respect to various heads of income. In particular, Section 18 provided for deduction at source, and sub‑section 3A of that section stated: “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.”

In the legislation, a provision required any person who paid interest in British India that was not classified as “interest on securities,” or who paid any other sum that was chargeable under the Act, to deduct income‑tax at the maximum rate at the time the payment was made, unless the payer himself was liable to pay tax on that amount in the capacity of an agent. The proviso to this sub‑section allowed the payer to make the payment without deduction if the Income Tax Officer issued a certificate authorising such treatment. Under section 18(7) of the Act, a person who performed the deduction was obligated to forward the deducted amounts to the Income Tax authorities. If the person failed to deduct the tax, the statute deemed that person to become an assessee liable for the tax.

Chapter V of the Act dealt with “Liability in Special Cases,” which included agents. Section 40(2) addressed the situation of trustees or agents of a person who was not resident in British India and who was not a minor, lunatic, or idiot (the Act thereafter referred to such a person as a “beneficiary”). The section stipulated that when a trustee or agent was entitled to receive, or was in receipt of, on behalf of the beneficiary any income, profit, or gain chargeable under the Act, the tax that might otherwise have been levied directly on the beneficiary could instead be levied upon and recovered from the trustee or agent. The tax would be imposed in the same manner and to the same amount as if it were being levied directly on the beneficiary, and all provisions of the Act would apply accordingly. Thus, this enabling provision allowed the tax arising from a non‑resident to be collected from the agent in the same way it could have been collected from the non‑resident himself.

Section 42(1) of the Act further provided that all income, profits, or gains that accrued or arose—whether directly or indirectly—through or from any business connection, any property, any asset or source of income, or any money lent at interest and brought into British India in cash or kind, were to be deemed as income accruing or arising within British India. When the person entitled to such income, profit, or gain was not resident in British India, the provision made such income chargeable to income‑tax either in the name of the non‑resident or in the name of his agent. In the latter case, the agent was to be deemed, for all purposes of the Act, to be the assessee with respect to that income. The second proviso to this sub‑section authorized an agent who anticipated that he might be taxed in his own capacity to retain from any money payable to the non‑resident a sum equal to the estimated liability under the sub‑section, thereby providing a mechanism for the agent to secure the amount that might be required as tax.

In the event of any disagreement between the non‑resident and the agent, a certificate could be obtained from the Income Tax Officer indicating the amount that should be retained; this shows that the Act contained a specific provision for resolving such questions. The Court cited Viscount Cave’s observation in Williams v. Singer, noting that the Income Tax Acts imposed liability not on the trustee or the beneficiary but on the person who actually received and controlled the income. The purpose of the Acts, according to that judgment, was to secure for the State a proportion of the chargeable profits, and this objective was generally achieved by taxing profits where they were found. The Court also referred to the authorities Archer Shee v. Baker, Executors of Estate of Dubash v. Commissioner of Income Tax, and held that these decisions correctly articulated the underlying principle governing deductions under sections 40, 41 and 42 of the statute. Section 48 was mentioned as dealing with refunds; consequently, if the respondent believed that he was not liable to any tax, he could apply to the Income Tax Officer for a refund.

The Court reasoned that the Hapur firm, acting as an agent, could be treated as an assessee under sections 40(2) and 42(1) for income‑tax on the profits derived from the respondent’s transactions at Hapur. Accordingly, the firm was entitled, under the proviso to section 42(1), to retain an estimated amount of income‑tax payable on the respondent’s profits; that amount was in fact deducted, retained and actually paid. The Court noted that this fact had not been contested before it. The respondent’s challenge was based on the argument that his total worldwide income was not taxable, and therefore the British Indian tax authorities could not levy tax on the profits from the Hapur transactions. The Court held that this contention ignored the provisions and liability created by sections 40(2) and 42(1) and their proviso, and it conflicted with the fundamental principle that profits are taxed where they are found. The Court pointed to the authority that the profits, in this case, were in the hands of the Hapur firm, which was in receipt and control of the income, citing the cases (I) (1920) 7 T.C. 387, 411 (H.L.), (II) (1927) II T.C. 749, 770 (H.L.) and (III) [1951] 19 I.T.R. 182, 189 (S.C.). Having lawfully and properly paid the tax under the Act, the agent at Hapur was justified in having the tax amount deducted from the profits arising from the Hapur transactions. The Court concluded that the judgment of the Judicial Committee of the Privy Council, upon which the High Court based its decision, was infirm because it ignored both the statutory provisions and the underlying principle of sections 40(2) and 42(1), as well as the agency law relating to the liability of an agent.

The Court explained that once the Hapur firm had duly paid tax on the profits, the respondent could not be permitted to dispute that deduction by asserting that his worldwide income was not subject to tax and that he should receive the profits without any deduction. The Court noted that such a contention must be raised by a non‑resident assessee at the time of his own assessment and cannot be introduced later by a third party. It further observed that persons who are required under the Act to withhold tax at the moment of payment of any income, profit or gain are not affected by the final outcome of the assessee’s assessment. The statutory scheme, according to the Court, mandates that deductions be made from categories such as salaries, interest on securities and other heads of income, profits and gains, with the ultimate adjustments being made only when the assessment is completed. Whether, after the assessment, the amount of tax actually deducted turns out to be larger or smaller than the tax finally payable under the law does not alter the rights, liabilities and powers conferred on a person by section 18 or on an agent by sections 40(2) and 42(1). The Court also held that any question concerning the effect or result of invoking section 17, should appropriate proceedings be initiated, does not arise in the present appeal between the appellant and the respondent and therefore cannot be decided in these proceedings. Such a question would belong exclusively to the dispute between the respondent and the Income Tax authorities who hold the assessment. The Court then turned to two authorities that had been cited. In Commissioner of Income‑Tax v. Currimbhoy Ebrahim & Sons (1935) 3 I.T.R. 325 (P.C.), the assessee company was treated as an agent of the Nizam of Hyderabad, who had advanced a sum of fifty lakh rupees to the company. The company paid three lakh rupees as interest in the assessment year, and the Court held that the interest earned by the Nizam did not arise to him through any business connection with the company in British India or from any property situated in British India; consequently, section 42 was inapplicable. No issue of “business connection” was raised before the lower court, and the argument presented there was that the respondent was not liable for tax because the entire income was not assessable. The Court observed that the respondent could not rely on the doctrine of isolated transactions as suggested in Anglo‑French Textile Co. Ltd. v. Commissioner of Income‑Tax, Madras, nor had any such argument been advanced in the lower courts or in the respondent’s statement of case. The Court further noted that reliance was placed on Greenwood v. F. L. Smidth and Company (1922) 1 A.C. 417, a case involving a Danish firm resident in Copenhagen, which was not applicable to the facts of the present case and was decided under a different statute.

In the case of Greenwood v. F. L. Smidth and Company, the Danish firm was situated in Copenhagen. The company manufactured and dealt in machinery for cement production and exported such machinery to other countries. It maintained an office in London that was staffed by a qualified engineer. This engineer received enquiries from English purchasers concerning the types of machinery the firm could supply, forwarded the specifications of the work required to the Danish headquarters, and, when the machinery was delivered, provided the English purchaser with assistance based on his experience in erecting the equipment. The contracts between the firm and its customers were executed in Copenhagen, and the goods were shipped from Copenhagen on board a vessel flying the Danish flag. The court held that, under Schedule D of section 2 of the Income Tax Act 1853, the firm did not carry on a trade within the United Kingdom, and consequently its income was not subject to United Kingdom income tax. The present Court noted that this decision is not applicable to the present matter because the facts differ and the decision was rendered under a different statute. The authorities cited include the 1953 Supreme Court Reporter case at page 454 and the 1922 Appeal Cases report at volume 1 page 417.

The Court then expressed the view that the Judicial Committee of Ijlas‑i‑khas erred in holding that, before determining the liability of a contributory for tax paid by an agent in British India on behalf of a non‑resident contributory, it was necessary to first establish the contributory’s liability on his “entire income,” i.e., his total worldwide income. Accordingly, the High Court’s finding that the liquidator could not recover from the respondent the amount of tax paid by the Hapur firm on transactions entered into by the appellant on behalf of the respondent, unless it was shown that the respondent’s total worldwide income was taxable, was deemed unsustainable. The Court held that, between the parties, the tax paid by the agent must be taken into account regardless of the ultimate outcome of the assessment of the non‑resident’s tax liability.

Consequently, the Court allowed the appeal, set aside the judgment and order of the Division Bench of the PEPSU High Court, and restored the order of the learned liquidation judge. The Court further ordered that, in the circumstances of this case, each party shall bear its own costs in this Court and in the courts below. The appeal was thus allowed.