1951 (9) TMI 38 - HC - Income Tax

Summary

Issues Involved:
1. Ultra vires nature of Explanation 3 of Section 4(1)(c) of the Indian Income-tax Act, 1922.
2. Legality of appointing the India company as the agent of the California company under Section 43 of the Act.
3. Assessability of the dividend income of the California company in the hands of the India company.
4. Deeming of dividend income to accrue to the assessee company in British India under Section 42 of the Act.
5. Assessability of the India company in respect of the dividend income as agents of the California company, if the answer to question No. 3 is in the negative.

Issue-wise Detailed Analysis:

1. Ultra vires nature of Explanation 3 of Section 4(1)(c) of the Indian Income-tax Act, 1922:
The primary contention was whether Explanation 3 of Section 4(1)(c) is ultra vires the Indian Legislature. The argument centered on whether this provision falls within Entry 54 of List I, Schedule VII, of the Government of India Act, 1935. The court referenced the Privy Council's decision in *Wallace Bros. & Co. Ltd. v. Commissioner of Income-tax, Bombay City* and the Federal Court's decision in *Governor-General in Council v. Raleigh Investment Co. Ltd.* to determine the validity of Explanation 3. It was concluded that there is a sufficient territorial connection between the taxing country and the person upon whom the tax is levied, thus making Explanation 3 intra vires the Indian Legislature.

2. Legality of appointing the India company as the agent of the California company under Section 43 of the Act:
The Tribunal found that the India company was properly appointed as the statutory agent of the California company under Section 43. This appointment was necessary for the tax authorities to recover tax from a non-resident company through an entity within their jurisdiction. The court did not find any dispute regarding the appointment of the India company as the agent of the California company under Section 43.

3. Assessability of the dividend income of the California company in the hands of the India company:
The court examined whether the dividend income of the California company is assessable in the hands of the India company. It was determined that under Section 4(1)(c) read with Explanation 3, the California company would be liable to tax for dividends paid out of profits subjected to income-tax in British India. The dividends, being paid from profits earned in British India, were deemed to have a sufficient territorial nexus to be taxed.

4. Deeming of dividend income to accrue to the assessee company in British India under Section 42 of the Act:
The court analyzed whether the dividend income can be deemed to accrue to the assessee company in British India under Section 42. It was concluded that the dividends paid to the California company arise from profits made by the India company in British India, thus constituting a source of income in British India. Consequently, the income is deemed to accrue or arise in British India, making it taxable.

5. Assessability of the India company in respect of the dividend income as agents of the California company, if the answer to question No. 3 is in the negative:
Since the court answered question No. 3 in the affirmative, it found question No. 5 unnecessary to address. The liability of the India company to pay tax on dividends arises not by reason of Section 43 but by reason of Section 42, which makes the agent liable to pay tax.

Additional Question Raised:
The court also addressed whether the provisions of Section 42 concerning income, profits, and gains accruing or arising indirectly are ultra vires of the Legislature. However, it found it unnecessary to decide this question on the facts of this case, as the income in question was deemed to arise directly.

Conclusion:
- Question 1: Answered in the negative.
- Question 2: Found unnecessary to answer.
- Question 3: Answered in the affirmative.
- Question 4: Answered in the affirmative, with the addition of "as agents" after "assessee company."
- Question 5: Found unnecessary to answer.
- Additional Question 6: Raised but found unnecessary to decide.

The assessee was ordered to pay the costs of the reference. No order was made on the notice of motion, and no costs were awarded for the notice of motion. The reference was answered accordingly.