1922 (10) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Liability of profits made by a resident in France through a branch or agent in British India to income-tax.
2. Interpretation of Section 33(1) of the Income-tax Act VII of 1918.
3. Application of Section 5(iv) of the Income-tax Act VII of 1918.
4. Definition and scope of "business connection" in British India.
5. Distinction between charging sections and machinery sections in the Income-tax Act.

Issue-wise Detailed Analysis:

1. Liability of profits made by a resident in France through a branch or agent in British India to income-tax:
The central question was whether profits made by a French firm with a branch in Madras, which were received and retained in France, were liable to income-tax in British India. The French firm operated through a branch in Madras, which purchased leather goods and shipped them to France, earning a commission. The court determined that the location where the profits were made and received was crucial. Since the profits were made and received in France, they were not liable to income-tax in British India.

2. Interpretation of Section 33(1) of the Income-tax Act VII of 1918:
Section 33(1) states, "In the case of any person residing out of British India all profits or gains arising to such person, whether directly or indirectly through or from any business connection in British India, shall be deemed to accrue in British India and shall be chargeable to income-tax in the name of the agent of any such person." The court held that this section is not a charging section but a machinery section, intended to provide a method for collecting income-tax from non-residents through their agents in British India. It does not impose tax on income that would not otherwise be liable to tax under the Act.

3. Application of Section 5(iv) of the Income-tax Act VII of 1918:
Section 5(iv) includes "income derived from business" as chargeable to income-tax. The court emphasized that Section 33(1) should be read in conjunction with Section 5(iv). Income derived from business must accrue or arise in British India to be taxable. Since the profits in question accrued and were received in France, they did not fall within the scope of Section 5(iv).

4. Definition and scope of "business connection" in British India:
The term "business connection" was scrutinized to determine its scope. The court noted that "business connection" in Section 33(1) should not be interpreted more broadly than "income derived from business" in Section 5(iv). The court rejected the Government's argument that any business connection in British India, regardless of where the profits were earned, would make those profits taxable in British India. The court concluded that the term "business connection" should be understood in the context of income derived from business within British India.

5. Distinction between charging sections and machinery sections in the Income-tax Act:
The court distinguished between charging sections, which impose tax, and machinery sections, which provide methods for tax collection. Section 33(1) was identified as a machinery section, not intended to expand the scope of taxable income beyond what is defined in the charging sections like Section 5(iv). This interpretation was supported by English case law, particularly Greenwood v. Swith & Co., which held that similar provisions in English law were machinery sections.

Conclusion:
The judgment concluded that the profits made by the French firm through its branch in Madras, which were received and retained in France, were not liable to income-tax in British India. Section 33(1) of the Income-tax Act VII of 1918 was interpreted as a machinery section, not a charging section, and did not extend the scope of taxable income beyond what was defined in Section 5(iv). The court emphasized the importance of clear and express language in taxing statutes and adhered to established principles of territorial taxation. The judgment was in favor of the assessee, with costs to be taxed.