Commissioner Of Income-Tax, Madras vs C.G. Krishnaswami Naidu

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

Court: supreme-court

Case Number: Not extracted

Decision Date: 25 November, 1963

Coram: A.K. Sarkar, J.C. Shah, M. Hidayatullah

In this case the Supreme Court reported a judgment dated 25 November 1963, with the bench comprising Justices A K Sarkar, J C Shah and M Hidayatullah, and the opinion was authored by Justice Sarkar. The respondent, who was the assessee, had entered into financing agreements with an individual named Krishna Ayyar. Under those agreements a sum of Rs 1,24,004 became due and receivable by the assessee in the accounting year that ended on 31 January 1946, which was the previous year for the assessment year 1946‑47. The financing agreements related to certain construction works that Krishna Ayyar was to carry out under contracts with the Government of India in various locations within the Indian State of Mysore as it existed at that time. The assessee, who ordinarily resided in British India, asserted in his assessment for the year 1946‑47 that the income in question had accrued and arisen to him in the State of Mysore but had not been remitted into British India. Accordingly, he claimed that the income was exempt from income tax under section 14(2)(c) of the Income‑Tax Act as it then stood. The taxation authorities and the Income Tax Tribunal rejected that claim, holding that the income had accrued in British India and therefore was not exempt. At the request of the assessee, the Appellate Tribunal referred the specific question to the High Court of Madras under section 66(1) of the Income‑Tax Act, asking whether the commission of Rs 1,24,004 referred to in the earlier paragraph constituted income that accrued or arose to the assessee in British India within the meaning of section 4(1)(b)(i) of the Act. The High Court answered the question in the negative, finding that the right to receive the income had accrued to the assessee in the State of Mysore and not in British India. The present appeal therefore challenged that High Court judgment. The relevant portion of section 4(1) of the Act was quoted, which provides that the total income of any previous year of any person includes all income, profits and gains from whatever source derived, and, where such person is resident in British India during the year, includes income that either (i) accrues or arises to him in British India during the year, or (ii) accrues or arises to him outside British India during the year. The Court observed that, because the assessee was a resident of British India, any income accruing to him outside British India would, subject to the other provisions of the Act, be included in his total income and thus be taxable under section 3. Consequently, the specific issue framed by the parties was limited to whether the income had arisen in British India, a question the Court deemed essentially moot because section 4(1)(b)(ii) already provided that income accruing outside British India could still attract tax liability.

In this case the Court observed that, although the income did not accrue in British India, the assessee could still be liable for it. The essential issue, which both sides agreed upon, was whether the income originated in the Indian State of Mysore as it existed at the relevant time, and that reason was why the assessee had claimed exemption under section 14(2)(c) of the Act as it then stood. That provision reads: “The tax shall not be payable by an assessee … (c) in respect of any income, profits or gains accruing or arising to him within an Indian State unless such income, profits or gains are received or deemed to be received in or brought into British India in the previous year by or on behalf of the assessee ….” Under this provision the assessee would be entitled to exemption if the income was found to have arisen in Mysore. The High Court, it appears, held that the income did arise there, but that matter was not the question that had been referred to it, and the High Court had no authority to decide a question that was not placed before it. At the hearing before this Court the parties recognised that a misunderstanding of the true question had created difficulty. Accordingly, they agreed that this Court should set aside the High Court’s judgment, frame two specific questions, and remit the matter to the High Court for determination of those questions. The questions were: (1) whether the whole or any part of the assessee’s income of Rs 1,24,004 mentioned in paragraph 7 of the Tribunal’s statement of case accrued or arose to the assessee in the State of Mysore (as it existed before 1950) and therefore is exempt from tax for assessment year 1946‑47 under section 14(2)(c) of the Indian Income‑Tax Act, 1922; and (2) if only part of such income accrued or arose in Mysore, what is the amount of that part. The Court agreed that this was the proper course in the circumstances and, by the parties’ consent, set aside the High Court’s judgment and remitted the case to that Court to decide the aforesaid questions. No order as to costs was made because both parties were at fault for not framing the question correctly. The appeal was allowed and the case was remanded.