1962 (7) TMI 54 - HC - Income Tax

Summary

Issues Involved:
1. Liability to deduct tax under Section 18(3A) of the Indian Income-tax Act.
2. Nature of the payment made by the assessee to the non-resident buyers.
3. Whether the profits made by the China Mills were chargeable to tax.
4. Whether the payments were made to non-residents.

Detailed Analysis:

1. Liability to Deduct Tax under Section 18(3A) of the Indian Income-tax Act:
The primary issue was whether the assessee was liable to deduct tax on the amount of Rs. 1,40,000 paid to the non-resident buyers under Section 18(3A) of the Indian Income-tax Act. Section 18(3A) mandates that any person responsible for paying any sum chargeable under the provisions of the Act to a non-resident must deduct income-tax at the maximum rate at the time of payment. The Tribunal initially found that Section 18 had not been properly invoked, but the High Court disagreed, stating that the assessee should have deducted income-tax as required by Section 18(3A) when making the payment to the China Mills.

2. Nature of the Payment Made by the Assessee to the Non-resident Buyers:
The Tribunal concluded that the payment of Rs. 1,40,000 was in the nature of a part of the price of cotton which the assessee could not supply to the non-residents at the stipulated rates. However, the High Court found no evidence to support this conclusion. The correspondence and documents indicated that the real reason for the transaction of resale was the failure on the part of the China Mills to obtain the necessary import licence and open an irrevocable confirmed credit. The High Court thus held that the payment was not merely a part of the price of cotton but represented the profit made by the China Mills on the sale of cotton.

3. Whether the Profits Made by the China Mills were Chargeable to Tax:
The High Court examined whether the profits made by the China Mills were chargeable to tax. The assessee argued that the profit was a casual and non-recurring receipt under Section 4(3)(vii) of the Act, and thus not chargeable to tax. The High Court rejected this argument, stating that the profit arose from a business transaction. The China Mills were engaged in the manufacture of cloth and had purchased cotton as raw material for their business. The resale of the cotton, therefore, resulted in a business receipt, making the profit chargeable to tax under the Indian Income-tax Act.

4. Whether the Payments were Made to Non-residents:
The High Court also addressed the argument that the payments were made to resident entities like Volkart Bros., Chartered Bank, Kilachand Devchand & Co., and Mr. Umrigar, rather than to non-residents. The High Court referred to its earlier decision in Narsee Nagsee & Co. v. Commissioner of Income-tax, which established that payments made on behalf of non-residents to resident entities still fall under the purview of Section 18(3A). Thus, the High Court held that the payments were indeed made to non-residents, requiring the assessee to deduct tax under Section 18(3A).

Conclusion:
The High Court concluded that the assessee was liable to deduct tax on the amount of Rs. 1,40,000 paid to the non-resident buyers under Section 18(3A) of the Indian Income-tax Act. The Tribunal's findings that the payment was merely a part of the price of cotton and that the profits were casual and non-recurring were found to be unsupported by evidence. The High Court held that the profits were business receipts chargeable to tax and that the payments were made to non-residents, necessitating the deduction of tax. The court answered the question referred to it in the affirmative and directed the assessee to pay the costs of the department.