P. V. Raghava Reddi And Another vs Commissioner Of Income-Tax

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

Court: supreme-court

Case Number: Civil Appeals Nos. 325 and 326 of 1960

Decision Date: 16 January 1962

Coram: M. Hidayatullah, Bhuvneshwar P. Sinha, J.L. Kapur, J.C. Shah, J.R. Mudholkar

The case titled P. V. Raghava Reddi and Another versus the Commissioner of Income‑Tax was decided by the Supreme Court of India on 16 January 1962. The judgment was authored by Justice M. Hidayatullah and the bench comprised Justices M. Hidayatullah, Bhuvneshwar P. Sinha, J. L. Kapur, J. C. Shah and J. R. Mudholkar. The petitioner in the appeal was the firm of P. V. Raghava Reddi and another, while the respondent was the Commissioner of Income‑Tax. The primary citation for the decision is 1962 AIR 977 and 1962 SCR Suppl. (2) 596, with further citator references including D 1981 SC 148 (pages 5, 8, 11). The statutory provisions discussed in the case were sections 4(1)(a), 4(1)(c) of the Indian Income‑Tax Act, 1922 (Eleventh Act), and section 43 relating to statutory agents.

The factual background detailed that the appellant firm was engaged in the mica business and, for the purpose of negotiating orders and handling other commercial affairs, it entered into an agreement with a Japanese company that was unmistakably a non‑resident entity. Under the terms of this agreement, commissions payable to the Japanese company were received by the Indian firm during the relevant accounting years. However, because of the prevailing exchange‑control restrictions, the firm was unable to remit the commission sums to Japan. Consequently, the firm retained the commissions in a separate account, following the explicit instructions of the Japanese company, and held the funds on its behalf for future application as directed by the non‑resident company. At a later stage, portions of the retained amount were disbursed to the Japanese company either directly or through intermediary parties. The income‑tax authorities treated the Indian firm as a “statutory agent” of the Japanese company and accordingly assessed tax on the commissions received for the two assessment years. The firm’s appeal to the Commissioner was dismissed, but a subsequent appeal to the Tribunal resulted in the cancellation of the assessment. The Commissioner then sought a reference to the High Court, which ruled, in favour of the Department, on the question whether the sums of Rs 26,255‑0‑0 and Rs 11,272‑0‑0, recorded as selling commissions in the non‑resident company’s account within the books of the assessee, were chargeable to the assessee under section 4(1)(a) for the assessment years 1949‑50 and 1950‑51. The assessee obtained a certificate from the High Court and filed an appeal before the Supreme Court. The two principal issues before the Supreme Court were: (1) whether the appellant qualified as a “statutory agent” for the purposes of section 43, and (2) whether the income was deemed to have been received by the Japanese company within “the taxable territory.” The Court held that a sufficient business connection existed between the assessee and the Japanese company to deem the assessee an agent under section 43, thereby confirming the appellant’s status as a statutory agent. The Court further observed that prior to the funds being credited in the Japanese company’s name and held on its behalf, a debtor‑creditor relationship might have existed between the parties; but after

The Court observed that when the money was entered into the books of account in the name of the Japanese company, it was deemed to belong to that company because it was held for and on behalf of the company and was at the company’s disposal. Accordingly, the income was considered to have been received in the taxable territory within the meaning of section 4(1)(a) of the Indian Income‑Tax Act, 1922. The Court further held that clauses (a) and (c) of section 4(1) may be read disjunctively, and it is not necessary that the income not only be received in the taxable territories but also that it accrue or arise there. In reaching this conclusion, the Court followed the precedent set in Turner Morrison & Co. Ltd. v. Commissioner of Income‑tax, [1953] 23 I.T.R. 152. The judgment was delivered in a civil appellate jurisdiction concerning Civil Appeals Nos. 325 and 326 of 1960, which arose from the judgment and order dated 21 February 1956 of the former Andhra High Court in Referred No. 50 of 1954. Counsel for the appellants included representatives of the firm, while counsel for the respondent comprised the Additional Solicitor General of India and other appointed advocates. The decision was rendered on 16 January 1962 by Justice Hidayatullah. The appellant was identified as a firm located in Gudur, Andhra Pradesh, conducting the business of mica under the name and style of the Continental Export and Import Company. During the accounting years 1948‑49 and 1949‑50, which correspond to assessment years 1949‑50 and 1950‑51, the firm exported mica to Japan. Because Japan was under military occupation during those years, the mica could not be exported directly to Japanese buyers; instead, it was sold to a state organisation called Boeki‑Cho (Board of Trade). To negotiate orders and manage related affairs in Japan, the firm engaged San‑Ei Trading Co. Ltd., Tokyo, as its agent. The Japanese company was admitted to be a non‑resident entity. Two agreements were executed between the firm and the Japanese company: the first covered the quarter from July to September 1948, providing for a commission of four per cent on gross sale proceeds, and the second was of indefinite duration, reducing the commission to two per cent. In the relevant accounting periods, commissions due to the Japanese company amounted to Rs 26,254‑9‑1 and Rs 11,272‑8‑8 respectively. These commissions, included in the price of the exported mica, were received by the firm in India; however, Exchange Control regulations prevented immediate remittance to the Japanese company. Consequently, the agreements incorporated a clause stating that, owing to difficulties in the country, the first party would credit all such amounts to the account of the second party without remitting them until definitive instructions were received. Over the two accounting years, a total sum of Rs 13,319‑12‑4 was paid to the Japanese company, either directly or through persons to whom the firm was instructed by the Japanese company to make payment.

The commission amounts were paid either directly to the Japanese Company or through other parties to whom the Japanese Company had instructed the assessee firm to make the payments. The income‑tax authorities considered the assessee firm to be the statutory agent of the Japanese Company and therefore levied tax on the two commission sums in the respective years of assessment. The assessment order of the income‑tax officer was affirmed on appeal, but the Tribunal later set aside that order. The Tribunal held that the commission income had accrued or arisen in Japan and therefore could not be said to have been received by the Japanese Company in the taxable territories, because provision 4(1)(a) was subordinate to provision 4(1)(c). In its judgment the Tribunal explained that the reference in section 4(1)(a) to income “received in India” should be read only in the context of the specific situation covered by section 4(1)(b), since sub‑section (a) provides a general cover for both sub‑sections (b) and (c). Accordingly, section 4(1)(a) could not by itself create a fresh liability for non‑residents beyond the clear limitation set out in section 4(1)(c). The Tribunal further observed that income which has already accrued abroad cannot again accrue in India, and that any later remittance of such income to India, even if received on behalf of the non‑resident, would not be chargeable under the Act. On this basis the assessment was ordered to be cancelled. The Commissioner of Income‑Tax nevertheless obtained a reference to the High Court of Madras, posing the question whether the sums of Rs 26,255‑0‑0 and Rs 11,272‑0‑0, representing selling commissions credited to the non‑resident company’s account in the assessee’s books, were chargeable to the assessee under section 4(1)(a) for the assessment years 1949‑50 and 1950‑51. The High Court answered the reference against the assessee firm. It noted that the counsel for the assessee “confessed his inability to support the decision of the Tribunal on the grounds on which it rests” and observed that the answer to the question left “no doubt or difficulty”. Although the High Court granted a certificate, the appeals were subsequently filed. The Court then expressed the view that the High Court’s answer was correct, and indicated that, under section 42, all income, profits or gains accruing or arising—whether directly or indirectly through any business connection in the taxable territories—is deemed to accrue within the taxable territories. Consequently, if the person entitled to such income is not resident, the income is chargeable to income‑tax either in the person’s own name or in the name of his agent, and in the latter case the agent is deemed, for all purposes of the Act, to be the assessee for that income.

Under the provisions of the Act, the person who is treated as the assessee becomes liable for the income tax on the income in question. The provisos to that section permit the use of section 18, whereby the tax can be recovered by way of a deduction under that provision. Additionally, the statute allows the agent, or any person who fears that he may be assessed as an agent, to retain from the amount payable to the non‑resident a sum equal to his estimated tax liability. Consequently, the provision creates a vicarious liability for the agent concerning the tax that the non‑resident is required to pay. As a protection for the agent, the law authorises him to retain from the money he must forward a sum corresponding to his own liability if he is subsequently treated as the assessee.

Section 43 defines the category of persons who may be deemed agents. It states that any person who has any business connection with a non‑resident individual, or through whom the non‑resident receives any income, profit or gain, shall be deemed to be such an agent if the Income‑Tax Officer has served a notice indicating his intention to treat that person as the agent of the non‑resident. Such persons are commonly referred to as “statutory agents.” In the case presently before the Court, there is no doubt that the assessee firm falls within the description of a statutory agent.

The Court previously examined this issue in Turner Morrison & Co. Ltd. v. Commissioner of Income‑tax (1). In that decision, the Court held that a person who is not originally an agent of a non‑resident may be appointed as an agent for the purposes of section 43, provided that a “business connection” exists between that person and the non‑resident. The Court further held that such an appointed agent bears vicarious liability for the tax on income covered by sections 40 and 42. Applying that precedent, the Court found that a business connection did exist during the relevant years, and therefore the appellant firm could be treated as an assessee for the purposes of section 42.

The contention raised by the appellant was that the Tribunal’s interpretation of section 4(1) represented the correct law. The Court therefore reproduced the pre‑amendment wording of section 4(1), as it stood before the Adaptation of Laws Order, 1950: “4. (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which— (a) are received or are deemed to be received in British India in such year by or on behalf of such person, or (b) if such person is resident in British India during such year— (i) accrue or arise or are deemed to accrue or arise to him in British India during such year, or (ii) accrue or arise to him without British India during such year, or (iii) having accrued or arisen to him without British India before the beginning of such year and after the 1st day of April, 1933, are brought into or received in British”.

Section 4(1) of the Income‑Tax Act, as it stood before its amendment in 1950, provided that “if such person is not resident in British India during such year, accrue or arise or are deemed to accrue or arise to him in British India during such year.” The respondents contended that this provision could not be interpreted to deem the sum in question as having been received in the taxable territories, then British India, for the relevant years of account. They argued that the Japanese Company had never actually received the money in British India and that, up to the time the amount was paid to the Japanese Company, the relationship between the assessee firm and the Japanese Company was merely that of debtor and creditor. Consequently, a mere entry in the firm’s books was not a receipt by the Japanese Company, and no provision of the Act deemed such an accounting entry to be a receipt. The respondents further submitted that the Act would expressly state when a legal fiction is to be applied, and that no such fiction was indicated in this context. In addition, they maintained that clause (a) of section 4(1) was circumscribed by clause (c), asserting that the two clauses were not interdependent. The counsel for the respondents relied on the decision in Turner Morrison’s case (1), where this Court observed that “the whole object of that section (s. 42) is to make certain income, profits and gains to be deemed to arise in India so as to bring them to charge. The receipt of income, profits and gains being one of the tests of liability, where the income, profits and gains are actually received in India it is no longer necessary for the revenue authorities to have recourse to the fiction.” The Court in that judgment further noted that “Section 4(1)(a) in terms is, unlike Section 4(1)(b) or Section 4(1)(c), not confined in its application to any particular category of assessees. Section 4(1)(a) is general and applies to a resident or a non‑resident person.” The High Court, whose judgment is under appeal, had correctly pointed out that “Actual or deemed receipt of income in the taxable territories by or on behalf of non‑residents attracts tax under section 4(1)(a) even though the income may not be chargeable under section 4(1)(c) by reason of its having accrued or arisen outside. Receipt of income within the taxable territories by itself attracts tax whether the recipient is a resident or non‑resident and whether the income accrued or arose within the taxable territories or outside. So much is plain on the language of section 4(1)(a) and (c).”

In the present opinion, the Court held that clauses (a) and (c) of section 4(1) may be read disjunctively. Clause (a), which deals with receipt of income, profits and gains in the taxable territories, cannot be subjected to a limitation that the income must also have accrued or arisen in those territories. To subordinate clause (a) to clause (c) would render “accrual” the decisive test, whereas clause (a) itself makes receipt in the taxable territories sufficient for tax liability. The Court concluded that the two clauses are capable of operating independently, although they may sometimes function together. Accordingly, the requirement of receipt in the taxable territories under clause (a) stands without needing to satisfy the accrual or arising condition of clause (c), and the language of the statute supports this independent reading.

In this case the Court observed that the provisions of section 4(1) could be applied independently, although on some occasions they might operate together. The remaining issue, which had been vigorously contested, concerned whether the sums recorded for the two assessment years could be treated as having been received by the Japanese Company within the taxable territory. The respondent argued that the monies had never been actually received; rather, the assessee firm remained a debtor for those amounts, and that unless the entry could be treated as a payment or receipt, clause (a) of section 4(1) could not be invoked. The Court held that it was unnecessary to resort to any legal fiction in order to resolve the matter. The Court examined the agreement between the parties, from which the relevant term had been quoted. The agreement stipulated that the Japanese Company wanted the assessee firm to open an account in the Japanese Company’s name in the firm’s books of account, to credit the specified amounts to that account, and to handle those amounts according to the instructions given by the Japanese Company. Until such credit was made, a debtor‑creditor relationship could exist; however, once the amounts were credited, the monies were held by the assessee firm as a deposit. At that point the monies belonged to the Japanese Company, were held for and on its behalf, and were available for its use. The Court likened the transformation of the monies from a debt to a deposit to the situation in which a bank credits an account of a company. Consequently, the Court concluded that, under the terms of the agreement, the amounts must be regarded as having been received by the Japanese Company, thereby bringing clause (a) of section 4(1) into play. The Court further noted that the Japanese Company had exercised its discretion over a portion of the amounts by directing the assessee firm to apply them in a particular manner. In the Court’s opinion, the High Court had correctly decided against the assessee. Accordingly, the appeals were dismissed with costs, including one hearing fee.