1946 (3) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of "control and management" under sub-section 4-A(b) of the Income-tax Act.
2. Determination of whether the control and management of the assessee firm were situated wholly outside British India.
3. Evaluation of the Tribunal's findings and the evidentiary support for those findings.

Detailed Analysis:

1. Interpretation of "Control and Management" under Sub-section 4-A(b) of the Income-tax Act:
The primary issue was the interpretation of sub-section 4-A(b) of the Income-tax Act, which deals with the residence of a Hindu undivided family, firm, or other association of persons. The court clarified that the control and management mentioned must be de facto (actual) control and management and not de jure (legal) control and management. The court emphasized that control and management must be effected through human minds, and in cases involving multiple persons, it can be challenging to ascertain where control and management are situated, especially when the section requires it to be "wholly without British India."

2. Determination of Whether the Control and Management of the Assessee Firm Were Situated Wholly Outside British India:
The court examined the facts to determine if the control and management of the assessee firm were wholly outside British India. The assessee firm carried on its business in South Africa, and affidavits from the partners and a business associate indicated that the control and management were solely in South Africa. The affidavits stated:
- Rao Bahadur Naik, the founder, did not control or manage the firm's affairs after returning to India.
- The South African partners never received instructions from Naik regarding the firm's management.
- A business associate confirmed that Naik never interfered in the firm's matters.

These affidavits remained unchallenged, and the court noted that the burden of proof under Section 106 of the Evidence Act was discharged by the assessee.

3. Evaluation of the Tribunal's Findings and the Evidentiary Support for Those Findings:
The Tribunal had concluded that Rao Bahadur Naik exercised some control over the firm's management during the relevant accounting period, thus making the firm resident in British India. However, the court found this conclusion contrary to the evidence. The court noted:
- There was no factual evidence supporting the Tribunal's conclusion that Naik exercised control.
- The Tribunal's inference that Naik left detailed instructions with the managers was not based on any material or evidence.
- The Tribunal's assertion that Naik was continuously informed that his instructions were being carried out was unsupported by evidence.
- The Tribunal's reference to a power of attorney was speculative and lacked evidentiary basis.

The court emphasized that the acts, not the powers, of control and management were relevant. The evidence showed that the control and management were wholly outside British India, and the Tribunal's findings were based on incorrect interpretations and unsupported inferences.

Conclusion:
The court answered the reference in the negative, concluding that the assessee firm's control and management were situated wholly outside British India. Consequently, the Commissioner was ordered to pay the costs of the hearing.