Smt. Indermani Jatia vs Commissioner Of Income-Tax, U.P.

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

Court: supreme-court

Case Number: Civil Appeals Nos. 278 and 279 of 1956

Decision Date: 3 October 1958

Coram: P.B. Gajendragadkar, A.K. Sarkar

In this matter the petitioner, Smt Indermani Jatia, challenged the assessment made by the Commissioner of Income-Tax for the Uttar Pradesh jurisdiction. The judgment was delivered on the third day of October in the year one thousand nine hundred fifty-eight. The decision was rendered by a bench consisting of P B Gajendragadkar, A K Sarkar and T L Venkatarama Sarkar. The case is reported in the 1959 volume of the All India Reporter at page eighty-two and also appears in the 1959 Supplement to the Supreme Court Reports at page forty-five. The citation also includes the reference R 1971 SC2396 (12). The statutory provision under consideration is section four paragraph one sub-paragraph a of the Indian Income-Tax Act of one thousand nine hundred twenty-two.

The petitioner was ordinarily resident in British India but conducted business operations at Khurja and Aligarh within the same country and also at Chistian, a town situated in the Indian State of Bahawalpur. For the purpose of managing the enterprise a single set of central accounts was maintained at Khurja. These accounts were kept according to the mercantile system of bookkeeping, a method in which a credit entry is recorded in respect of an amount as soon as the amount becomes legally due, irrespective of whether the amount has actually been received in cash. In the books the petitioner recorded all income received from every source, and the interest account specifically displayed credit entries for amounts that were received as interest on capital that had been invested in the shop situated at Chistian. The petitioner admitted that, as a creditor, he possessed the right to enforce the payment of interest in British India and that the liability of the Chistian shop was extinguished to the extent of the interest that had been paid by that shop to the head office. The Income-Tax authorities, however, treated those interest amounts as part of the petitioner’s taxable income in India and consequently levied tax on them. The petitioner argued that the entries showing receipt of interest were merely accounting entries and that the authorities had erred by treating those entries as if the amounts had actually been received in cash.

The Court held that the entries recorded in the books of account supplied sufficient basis to infer that the petitioner had in fact received the amounts designated as interest. When an assessee maintains accounts on the mercantile basis, a credit entry in the interest account is construed as income or profit that has been received by the assessee or that the assessee has treated as received for tax purposes. The Court therefore affirmed that such entries justify the inclusion of the amounts in the assessable income. The Court endorsed the authority of Commissioner of Income-Tax v A T K P L S P Subramaniam Chettiar, reported in the 1927 volume of the Indian Law Reports, Madras series, page seven hundred sixty-five, as well as the decisions of Gresham Life Assurance Society Ltd. v Bishop (1902) A C 287, Keshav Mills Ltd. v Commissioner of Income-Tax, Bombay ([1953] S C R 950), and Sunder Das v The Collector of Gujrat (1922) I L R 3 Lah. 349. The petitioner also raised a novel argument that a universal rule precludes any person from trading with himself, and consequently the interest alleged to have been received from his own shop at Chistian could not constitute income. In support of this argument the petitioner cited Dublin Corporation v M’Adam (1887) 2 Tax Cas. 387, Ostime v Pontypridd and Rhondda Joint Water Board (1944) 28 Tax Cas. 261, and Caylisle and Silloth Golf Club v Smith (1913) 6 Tax Cas. 198, as well as New York Life Insurance Company v Styles (1889) 14 App. Cas. 381, Sir Kikabhai Premchand v Commissioner of Income-Tax (Central), Bombay ([1954] S C R 219) and Ram Lal Bechairam v Commissioner of Income-Tax (1946) A I R 3. The respondent countered that the principle invoked by the petitioner was not an inflexible universal rule and that a point first raised at the appellate stage should not be permitted. The Court referred to Sharkey v Wernher (1956) A C 58 and concluded that the new point could not be entertained because allowing it would reopen the entire inquiry concerning the remittances from Chistian to Khurja and the rates at which tax was to be levied on the petitioner. The Court emphasized that if the petitioner intended to rely on that principle, it should have been raised at the earlier stage of the proceedings.

Pontypridd and Rhondda Joint Water Board, (1944) 28 Tax Cas. 261; Caylisle and Silloth Golf Club v. Smith, (1913) 6 Tax Cas. 198; New York Life Insurance Company v. Styles, (1889) 14 App. Cas. 381; Sir Kikabhai Premchand v. Commissioner of Income-tax (Central) Bombay, [1954] S.C.R. 219; and Ram Lal Bechairam v. Commissioner of Income-tax, A.I.R. (1946) All. 3 were cited. The respondent argued that the legal principle in question was not absolute or universally applicable and that the newly raised issue, being introduced for the first time on appeal, should not be permitted. Sharkey v. Wernher, (1956) A.C. 58, was also referred to. The Court held that allowing the new point would necessitate reopening the entire enquiry into the remittances from Chistian to Khurja as well as revisiting the tax rates applicable to the assessee. Consequently, the Court stated that if the assessee intended to rely on this principle, the argument should have been presented at an earlier stage of the proceedings.

The matter was before the Civil Appellate Jurisdiction as Civil Appeals Nos. 278 and 279 of 1956, appealing the judgment and order dated 14 November 1950 of the Allahabad High Court in Income-tax Miscellaneous Case No. 12 of 1950. Counsel for the appellant were A. V. Viswanatha Sastri and A. N. Kirpal, while counsel for the respondent included C. K. Daphtary, Solicitor-General of India, Rajagopala Sastri, R. H. Dhebar and D. Gupta. The judgment was delivered on 3 October 1958 by Justice Gajendragadkar. These appeals, granted by special leave, arose from assessment proceedings against the appellant’s husband, Seth Ganga Sagar Jatia, for the assessment years 1943-44 and 1944-45. Seth Ganga Sagar died on 22 September 1944, leaving his widow, Shrimati Indermani Jatia, as his representative and estate administrator. Both the appellant and her husband were residents of British India during the relevant years. The assessee’s income comprised earnings from his business, house property and dividends. After his death, the appellant continued the business at Khurja and Aligarh in India and at Chistian in the former Indian State of Bahawalpur, now part of Pakistan. Central accounts of the business were maintained at Khurja, recording all sources of income. For the 1943-44 assessment year, the interest account showed a credit of Rs. 17,132 as interest on capital invested in the shop at Chistian; for the 1944-45 year, a credit of Rs. 47,029 was recorded. The Income Tax Officer treated these two amounts as taxable income in India and accordingly proceeded to levy tax on them.

The Income Tax Officer had imposed tax on the two interest amounts that appeared in the appellant’s books. The appellant challenged the assessment orders for the years 1943-44 and 1944-45 before the Appellate Assistant Commissioner, contesting the officer’s conclusion that the two sums were chargeable to tax. The appellate authority rejected the appellant’s argument and affirmed the assessment orders. Undeterred, the appellant subsequently appealed to the Income Tax Appellate Tribunal. The tribunal adopted the same position as the tax authorities, upheld their conclusions and dismissed the appellant’s appeals. In the assessment for the year 1943-44, the appellant had further claimed that a sum of Rs 7,512 spent on litigation could be treated as an admissible expenditure. The Income Tax Officer disallowed this claim, a decision that was again confirmed by both the appellate authority and the tribunal. At the appellant’s request, the tribunal formulated two questions for the Allahabad High Court under section 66(1) of the Act: first, whether the interest amounts of Rs 17,132 for 1943-44 and Rs 47,029 for 1944-45 could be legally deemed to have been received in British India and therefore be taxable under section 4(1) of the Act; and second, whether the expenditure of Rs 7,512 incurred in a criminal proceeding qualified as an admissible expense under section 10(2)(xv) of the Act. The High Court, sitting with Chief Justice Malik C. and Justice V. Bhargava, heard the reference on 14 November 1950 and answered both questions adversely to the appellant.

Following the High Court’s decision, the appellant applied under section 66A of the Act for leave to appeal to this Court, but the High Court dismissed the application on 23 April 1954. The appellant then sought and obtained special leave to appeal on 10 December 1954, which brought the matter before this Court. Counsel for the appellant, Mr Viswanatha Sastri, did not contest the correctness of the High Court’s view on the second question concerning the Rs 7,512 expenditure, acknowledging that the tax authorities’ finding on that point was a factual determination that could not be effectively challenged given the record. However, he argued that the High Court’s answer to the first question was erroneous in law. The High Court had held that the two interest amounts recorded in the appellant’s books were taxable under section 4(1) because they must be deemed to have been received in British India. Mr Sastri maintained that the phrase “deemed to be received” should be interpreted as meaning “deemed by the relevant provisions of the Act to be received”. He further pointed out that it was undisputed that income, even if not actually received by the assessee, could be treated as received under the statutory provisions of the Act.

The Court observed that when income is said to be “deemed to be received” under the relevant provisions of the Income-Tax Act, the deemed receipt is a form of constructive receipt that may be described as a statutory receipt under the Act. It illustrated this concept by noting that tax deducted at source and the annual accretion to an employee who participates in a recognised firm are examples of amounts that are deemed to be received under sections 18(4) and 58(e) of the Act respectively. The appellant advanced the argument that no specific provision of the Act exists that would permit the two amounts of interest in question to be properly deemed to have been received by her. The Court pointed out that the judgment of the High Court did not mention any such provision, and that the income-tax authorities likewise failed to cite any provision on which to base a deemed-receipt finding. In the Court’s view, this argument is technically correct. However, the Court also acknowledged that the present proceedings reveal a degree of confusion on the part of the appellant as to how her case was presented at every stage, how the income-tax authorities recorded their findings, the way the tribunal framed the issue, and the answer rendered by the High Court. In substance and in law, the department’s approach was not to tax the two amounts because they were deemed to have been received by the appellant during the relevant years, but because they were actually received by her or treated by her as having been received. In other words, the department’s case under section 4(1)(a) was that the interest amounts formed part of the appellant’s income, and that such income was either received or treated as received by her. On this basis, counsel for the appellant argued that the inference of receipt drawn from the appellant’s books of account was not valid and should be rejected. He did not dispute that the books were maintained on a mercantile basis. The appellant’s counsel, however, had conceded before the tribunal that the appellant, as a creditor, possessed the right to enforce payment of interest in British India and that the liability of the Christian shop had been extinguished to the extent of the interest paid by that shop to the head office. Those concessions clearly demonstrated that the sum advanced by the appellant’s head office in British India to the shop at Christian was liable to attract interest and that the credit entries for the two amounts had been recorded in accordance with the mercantile method of accounting. The Court explained that the mercantile system of accounting differs markedly from the cash system. Under the cash system, only actual cash receipts and actual cash payments are recorded as credits and debits. By contrast, under the mercantile system, a credit entry is made as soon as an amount becomes legally due, even before any actual receipt, and an expense is debited as soon as a legal liability arises, irrespective of when the cash outflow occurs.

When accounts are maintained on a mercantile basis, profits or gains are recorded as credit entries even though the amounts have not yet been realised in cash. Such entries merely reflect an accrual of the profit at the relevant time. The same principle applies to debit entries, which are recorded as soon as a legal liability arises, irrespective of actual cash outflow. This understanding was not contested by the counsel appearing for the respondent. However, the counsel argued that entries showing the receipt of interest were still only book entries and should not be taken as proof that the interest had actually been received. To support this position, the counsel referred to a decision of the House of Lords in Gresham Life Assurance Society Ltd. v. Bishop (Surveyor of Taxes).1 In that case a life-assurance society operated both domestically and abroad, with its head office in London. The head office prepared accounts and balance-sheets, determined profits and paid dividends. Interest on the society’s foreign securities was received abroad by agents and a portion of it was applied abroad for the society’s purposes. Nevertheless, the entire interest on the foreign securities was included in the balance-sheets used to assess profit. The House of Lords held that including the interest in the balance-sheet did not constitute a receipt in the United Kingdom, and consequently income-tax was not chargeable on the portion of interest that had not been remitted to the United Kingdom.

The “Fourth Case” referred to in Schedule I, which was relevant to the present dispute, concerned sums “which have been or will be received in Great Britain during the year for which the duty is payable.” Under this provision the place where the receipt occurs is crucial. As Lord Lindley observed, “what has been done, and all that has been done, is that the Gresham Company, in making up its account with a view to ascertain what profits it could divide in a particular year, entered on its asset side the sum of pound 43,483/- as money received during the year. This was obviously right; for the object was not to ascertain the profit made in any particular country but the profit made by the company on all its transactions all over the world.” No evidence was produced to show that the summed amount had ever been treated as remitted to the United Kingdom, and therefore no inference could be drawn that, in a commercial sense, the money had been received in the United Kingdom as distinct from other countries. The decision therefore hinged on the special features of accounting practice normally employed in preparing corporate balance-sheets, demonstrating that an entry in a balance-sheet does not amount to a receipt of money at the location where the balance-sheet is compiled. In our view, there is no proper analogy between a corporate balance-sheet and the private books of account maintained by the appellant under the mercantile system.

The Court observed that the principle articulated by the House of Lords in the Gresham Life Assurance Society Ltd. case, reported in (1902) A. C. 287, had been effectively incorporated into explanation (1) to section 4(1) of the Income-Tax Act. The Court explained that this principle was intended to apply to balance-sheets of companies and not to the private books of account that are kept under the mercantile system for an individual’s own business activities. Consequently, the Court rejected the contention that a statutory rule designed for corporate balance-sheets could be extended to private mercantile accounts. Counsel for the appellant, Mr. Sastri, also referred the Court to the decision of Keshav Mills Ltd. v. Commissioner Income-Tax, Bombay, reported in (2) [1953] S.C.R. 950. In that case a non-resident company manufactured textile goods in Petlad, which lay outside British India, and exported the goods ex-mills. The firm R. & Co. guaranteed the sale price of those goods when they were sold to purchasers in Ahmedabad, a location within British India. The assessee, following the mercantile system of accounting, debited R. & Co. with the price of the goods sold and credited the sales account of the bills. R. & Co. subsequently collected the bill amounts from the purchasers on behalf of the assessee, credited the proceeds to the assessee’s bank accounts in Ahmedabad, and disbursed payments to the assessee’s creditors within British India. During the accounting year in question the assessee thereby accrued Rs 12,68,418, and it also received an additional Rs 4,40,878 from sales to purchasers located in British India. The pivotal question before the Court was whether these two sums constituted sale proceeds that were received in British India and therefore taxable as assessable income of the assessee in British India. The Court held that the amounts were not actually received by the assessee at the time the entries were recorded in the Petlad books; instead they merely accrued to the assessee there. The sums were first received by R. & Co. and by the banks through which the railway receipts were negotiated, and those receipts were deemed to have been received in British India on behalf of the assessee. Accordingly, the amounts were subject to tax under section 4(1)(a) of the Act as income received in British India. The Court stated that this decision could not be applied to assist the present appellant, who is a resident of British India. The argument that credit entries made in the appellant’s private books should not be treated as income received cannot be supported by the Keshav Mills decision or by any observation of Bhagwati J. in the majority judgment of that case. The appellant’s counsel also relied on a judgment of the Full Bench of the Punjab High Court, which was noted but not elaborated upon in the present discussion.

In the decision of Sunder Das v. The Collector of Gujrat (2), the Court examined a situation in which the assessee had earned and actually received income while residing in British Baluchistan, a province that was exempt from the operation of the Act except for salaries. The assessee later transferred that same income into Punjab. The Court held that the income was not liable to income-tax because it had not been received in Punjab within the meaning of section 3, sub-section (1) of the Income-Tax Act. In other words, the judgment explained that the same income could not be said to have been received in two different territories for tax purposes. The Court, however, emphasised that this principle applied only to the question of double receipt of income in separate locales. Consequently, the reasoning in Sunder Das did not have any bearing on the present matter, where the issue was whether credit entries made in the appellant’s books could be treated as income received in British India.

The Full Bench of the Madras High Court, in Commissioner of Income-tax, Madras v. A. T. K.P.L.S.P. Subramaniam Chettiyar (3), reached a conclusion that supported the tax department’s contention. In that case the Court considered an assessee who carried on a business in Rangoon through an agent and who was also a chief partner in a money-lending venture based in Penang. A cash sum of Rs. 78,768 and odd was transferred from the Rangoon operation to the Penang business under the assessee’s directions. The Rangoon books recorded an amount of Rs. 12,174 as interest on the money received from Penang. The assessee was assessed under section 4, sub-section (1) of the Act on the basis that this interest was income accruing, arising or received in British India. The assessee admitted that his books were maintained on the mercantile method of accounting. He attempted to argue that the interest entries should be treated on a cash basis, despite having used the mercantile basis for other entries. The Court rejected this argument, observing that the assessee’s own mercantile accounts defeated his claim that the interest was income arising outside British India and not received there. The Court held that, once the mercantile method of accounting was adopted, the assessment must be made on that basis alone, and that a credit entry in the interest account constituted income or profit received for tax purposes. This ruling demonstrated that a credit entry cannot be disregarded merely because the actual cash had not entered British India, provided the books reflect the entry on a mercantile basis.

The appellant maintains her books of account using the mercantile method of bookkeeping. Consequently, the Court was not prepared to accept the argument advanced by counsel for the appellant, Mr. Sastri, that, notwithstanding the concessions that his client had made before the tribunal, the appellant could still contend that the entries recorded in her books did not justify the inference that she had received the sums in question as interest during the relevant period. Observing the weakness in that line of argument, Mr. Sastri then asserted that the principal objection he wished to raise before the Court concerned the fundamental validity of the conclusion reached by the income-tax authorities, an objection that he described as going to the very root of the matter. He emphasized that this aspect of the case was the point he intended to press most vigorously. Mr. Sastri argued that the view adopted by the Madras High Court in the case of Subramaniam Chettiyar (1) and the conclusion reached by the income-tax authorities in the present matter were both predicated on the mistaken assumption that a person can trade with himself. He maintained that there exists a universally applicable rule that no person can engage in trade with himself and derive profit from such self-dealing; therefore, irrespective of whatever effect the other entries in the appellant’s interest account might have, the entries concerning the interest alleged to have been received from the appellant’s own shop at Chistian, in law, could not be said to represent any income received by the appellant. Mr. Sastri asked how the appellant could be her own creditor and how she could receive interest on an advance she allegedly made to her own shop at Chistian. He conceded that this question had not been raised by the appellant at any stage of the proceedings, but he submitted that it was a pure question of law and that he should be permitted to argue it before the Court. He further referred to the early observation of Palles C. B. in the 1887 decision Dublin Corporation v. M’Adam (Surveyor of Taxes) (2), where the judge stated that “no man, in my opinion, makes, in what is its true sense or meaning, taxable profit by dealing with himself.” In that case, a city corporation had been authorised by its Water Works Act to supply water beyond the municipal boundaries, and any income arising from that activity had to be placed in a consolidated account of the corporation for all purposes of the Act. The Court held that the excess of receipts over expenditure in respect of the extra-municipal water supply constituted profits chargeable to income tax, distinguishing this from the supply of water within the municipal limits, where only the excess of receipts over expenditure in the latter context gave rise to taxable profits. The argument that income derived from rate-payers residing within the limits of Dublin Municipality should be taken into account was thereby rejected.

The argument that the income received from rate-payers residing within the limits of Dublin should be taken into account was rejected on two grounds. First, the authorities cited – the 1927 Madras law report (I.L.R. 50 Mad. 765) and the 1887 decision (2 T.C. 387) – held that the corporation could not be regarded as a body separate from the inhabitants of Dublin. It was further observed that the rates imposed on the citizens were intended only to meet the expenses of the water supply and nothing more, and that there was no intention that the corporation should, in any sense, make a profit from those rate-payers. Viscount Simon summed up this principle succinctly in Ostime (H. M. Inspector of Taxes) v. Pontypridd and Rhondda Joint Water Board (1) when he stated that “if the undertaker is a rating authority and the subsidy is the proceeds of rates imposed by it or comes from a fund belonging to the authority, the identity of the source with the recipient prevents any question of profits arising.” In the earlier case of The Carlisle and Silloth Golf Club v. Smith (Surveyor of Taxes) (2), Buckley L.J. referred to the same rule and observed that a man cannot make a profit or a loss out of himself, a reasoning that was also the basis of the decision in New York Life Insurance Company v. Styles (Surveyor of Taxes) (3). Mr. Sastri reinforced the proposition by relying on the decision of this Court in Sir Kikabhai Premchand v. Commissioner of Income-Tax (Central), Bombay (4).

In that case the assessee was engaged in the business of bullion and shares and maintained his accounts on a mercantile basis. He determined his profit by valuing stock at the beginning and at the close of each year at cost price. During the accounting year he withdrew certain silver bars and shares from the business and settled them in trusts, yet in the business accounts he continued to value those items at cost price at the year-end. The majority held that the assessee was entitled to retain the cost-price valuation and was not required to credit the business with the market price of the assets at the date of withdrawal for the purpose of computing assessable profit. Justice Bhagwati dissented, arguing that the business should be credited with the market value of the assets at the time they were withdrawn, irrespective of the valuation method used for stock on hand at year-end. Mr. Sastri also cited observations of Justice Bose, who authored the majority opinion, noting that “disregarding technicalities it is impossible to get away from the fact that the business was owned and run by the assessee himself. In such circumstances it would be unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then, by means of a fictional sale, introduce a fictional profit which in truth and in fact is non-existent.”

In the judgment, the Court observed that it would be unrealistic and artificial to separate a business from its owner and to treat them as if they were distinct entities conducting transactions with one another, thereby creating a fictitious sale that would generate a profit which, in reality, does not exist. Counsel for the petitioner, Mr Sastri, argued that the decision of the Allahabad High Court in Ram Lal Bechairam v. Commissioner of Income-tax (1) upheld this same principle. The Solicitor-General, however, submitted that the rule relied upon by Mr Sastri can no longer be regarded as inflexible or universally applicable, and he pointed to a recent decision of the House of Lords in Sharkey (Inspector of Taxes) v. Wernher (2) as evidence that the principle has been suitably relaxed. In the Sharkey case, Lady Zia operated a stud farm, an activity expressly classified as husbandry and therefore taxable under Schedule D, while she also maintained a separate racing-stable enterprise that was considered a recreational activity and therefore not subject to tax. The horses bred on the stud farm were subsequently transferred to the racing stables. When five horses were transferred during the relevant year of assessment, the House of Lords, with Lord Oaksey dissenting, held that “where a person carrying on a trade disposes of part of his stock in trade not by way of sale in the course of trade but for his own use, enjoyment, or recreation, he must bring into his trading account for income-tax purposes the market value of that stock in trade at the time of such disposition, and that, accordingly, the amount to be credited to the stud farm accounts on the transfer of the horses was their market value and not the (1) A.I.R. 1946 All. 8. (2) (1956) A.C. 58. cost of breeding them.” The Court noted that this ruling was predicated on the notional assumption that the transfer of the five horses from the assessee’s stud farm to her racing stables constituted a commercial transaction, and the Solicitor-General argued that this circumstance clearly demonstrates an exception to the general rule prohibiting a person from trading with himself. In his speech, Viscount Simonds further observed that “if there are commodities which are the subject of a man’s trade but may also be the subject of his use and enjoyment, I do not know how his account as a trader can properly be made up so as to ascertain his annual profits and gains unless his trading account is credited with a receipt in respect of those goods which he has diverted to his own use and enjoyment.” He then referred to the legislative change that rendered a farmer liable to tax under Schedule D instead of Schedule B, specifically citing section 10 of the Finance Act 1941, and remarked that “these provisions emphasize the artificial dichotomy which the scheme of income-tax law in many….”

Lord Radcliffe examined the issue in detail and began by citing a proposition set out by Palles C. B. He noted that subsequent cases have demonstrated that this straightforward proposition actually encompasses two distinct questions: first, whether a person is permitted to trade or deal with himself, and second, whether such self-dealing can generate a taxable profit. In his view, the law now recognises that individuals may conduct trade or business with themselves, for example through mutual insurance arrangements, yet any surplus that results from those operations does not constitute profit from a trade for the purpose of income-tax. In other words, the activities of a person trading with himself are not treated as a trade that yields assessable profit.

Lord Radcliffe then referred to the decision in Watson Brothers v. Hornby (1942) 168 L.T. 109, which expressly held that, for a correct assessment of trade profits under Case I of Schedule D, a person who supplies himself in his own trade must be regarded as trading with himself on ordinary commercial terms. He observed that this 1942 ruling established a principle that has continuously affected a large number of taxpayers, and that it was not until 1955 that the case was criticised as being wrongly decided. The judge also considered the authority of Back (Inspector of Taxes) v. Daniels and quoted the observations of Mr Justice Rowlatt concerning the assessees’ admission that, in addition to their liability under Schedule B, they might also be liable to tax on a sum resembling a commission paid to themselves for selling their own potatoes in the same manner that they sold other growers’ potatoes in the London market.

The assessees in the Rowlatt case were a firm of wholesale potato merchants who carried on business in London, selling all the potatoes they grew on land in the Fen District. The effect of the decision was that a Schedule B assessment on the profits of their occupation barred any assessment under Schedule D for the profit the firm earned when it sold the potatoes wholesale in London. Although the assessees accepted liability for tax on the commission in question, Mr Justice Rowlatt found the admission unusual and remarked that “on the whole, that is the limit of their liability.” Lord Radcliffe interpreted this comment to mean that the limit required the assessees to record in the receipts of their London business a commission from themselves—a commission they never actually paid for selling their own potatoes. From the cases he examined, Lord Radcliffe concluded that they illustrate the disintegration, for tax purposes, of a profitable business that a taxpayer operates in two separate departments.

In this case, the respondent argued that, in view of the House of Lords decision in Sharkey v. Wernher (2), a larger bench of the Supreme Court should reconsider the view expressed by the majority in the earlier case of Anglo-French (1) (1924) 2 K.B 432, and also consider the decision in Textile Co., Ltd. v. Commissioner of Income-tax, Madras (1). The respondent further urged that the minority opinion written by Bhagwati J. seemed to be more consistent with the House of Lords authority. The Solicitor-General, however, contended that although he was ready to examine the merits of the new point raised for the first time in this appeal by Mr Sastri, special circumstances of the present proceeding should prevent Mr Sastri from being allowed to raise that point. The Court was inclined to accept the Solicitor-General’s contention and therefore chose not to decide the interesting point raised by Mr Sastri. The Court had already indicated that the appellant’s position throughout the proceedings was that the entries in question did not justify the inference that the amounts shown had been received by her as income or profit. That contention naturally raised a short and simple question about the effect of those entries, which were made in books of account that were admittedly kept on a mercantile basis of bookkeeping. It was true that the confusion created by the appellant’s contention was shared by the income-tax authorities and that this confusion persisted throughout the present proceedings until they reached this Court. Consequently, the material question framed by the tribunal and answered by the High Court did not properly disclose the real controversy between the parties. The reference to the deeming provisions of the Act, which was apparently implied in the question framed by the tribunal and answered by the High Court, was clearly out of place; nevertheless, the fact remained that the appellant never raised the contention that the two entries in the interest account could not, in law, show profits received by her because she could not trade with herself. If the appellant had intended to rely upon that principle, the point should have been urged at an earlier stage of the proceedings. Moreover, there were other factors that would introduce complications should the point raised by Mr Sastri be upheld. The business conducted by the appellant in the shop at Chistian attracted the provisions of section 14(2)(c) of the Act which was then in force; therefore, no tax was payable by the appellant in respect of the income, profits or gains accruing from that shop unless such income, profits or gains were received or deemed to be received in or brought into British India in the previous year by or on behalf of the appellant. (1) [1954] S.C.R. 523.

In the present case, the Court observed that the entries in the appellant’s books of account related either to the appellant herself or to persons acting on her behalf. Although the appellant was a resident of the taxable territories and her income, wherever received, would ordinarily be subject to tax, she was entitled to claim the benefit of the exception laid down in section 14(2)(c) of the Act. Nevertheless, the Court noted that the profits earned by the appellant from her shop at Chistian were relevant for determining the rates at which income-tax was payable and also for deciding which portion of those profits could be said to have been received or deemed to have been received within the meaning of section 14(2)(c). The Court further held that if it were determined that the entries concerning the two items of interest did not, in law, represent profits received by the appellant, then appropriate adjustments would have to be made in the account books kept at both Khurja and Chistian. The appellant had maintained her accounts on a mercantile basis for all years under consideration, and the Court considered it very unlikely that the two entries presently before it were the only ones that might be affected should the contention that the appellant could not trade with herself be accepted. It was clear to the Court that the appellant’s profits from the Chistian shop had been computed over the years by applying credit and debit entries in accordance with the mercantile system; consequently, any question regarding the amounts remitted by the appellant from Chistian to Khurja would be impacted by the necessary adjustment of all relevant entries, which would, in turn, require reopening the entire enquiry into the appellant’s tax liability. In this connection, the Court referred to the fact that for the assessment year 1943-44 the Income Tax Officer had assessed the appellant’s income at Chistian at Rs 74,982, held that Rs 51,879 of those profits had been remitted to British India, added this sum to income in British India on a remittance basis, allowed a statutory exemption of Rs 4,500, and taken the balance of Rs 18,603 as income on an accrual basis for rate-determination purposes only. Ultimately, the Officer concluded that no amount could be taxed on a remittance basis. In the supplementary assessment proceedings, the appellant proved that Rs 7,19,660 had been sent to the Chistian shop and Rs 4,17,636 had been received from it; consequently, the entire income in Bahawalpur State was taken on an accrual basis for income-tax purposes. Considering the method of bookkeeping adopted by the appellant, the Court found that, if the appellant’s present contention were accepted, the decisions concerning remittances from Chistian to Khurja as well as the rates at which tax was to be levied might have to be reopened. Hence, the Court recognized that the matter could require a fresh examination of the tax liability.

In the special circumstances of this case, the Court declined to permit counsel for the respondent, identified as Mr. Sastri, to argue that the appellant could not engage in trade with herself. The Court therefore held that the entries recorded in the accounts maintained on a mercantile basis could not be disregarded as proof that the appellant had received income. Consequently, the appeals were dismissed, and the parties were ordered to bear the costs of the proceedings. Appeals dismissed.