1962 (1) TMI 7 - SC - Income Tax

Whether the aforesaid sum of ₹ 26,255-0-0 and ₹ 11,272-0-0 being selling commission credited to the aforesaid non-resident company s account in the books of the assessee are chargeable in the hands of the assessee under section 4(1)(a) for the assessment years 1949-50 and 1950-51 ? Whether the amounts in the two account years can be said to be received by the Japanese company in the taxable territories? Held that - Clauses (a) and (c) of section 4(1) can be read disjunctively, and clause (a), which provides for receipt of income, profits and gains in the taxable territories cannot be subjected to the limitation that the income must also accrue or arise in the taxable territories. To make clause (a) depend on clause (c) is to make the accrual the test, while clause (a) only considers receipt in the taxable territories sufficient. The clauses are capable of being read independently though, sometimes, they may operate together. The amount must be held, on the terms of the agreement, to have been received by the Japanese company, and this attracts the application of section 4(1)(a). Indeed, the Japanese company did dispose of a part of those amounts by instructing the assessee firm that they be applied in a particular way. In our opinion, the High Court was right in answering the question against the assessee. Appeal dismissed.

Summary

Issues:
1. Tax liability on commission paid to a non-resident agent.
2. Interpretation of sections 4(1)(a) and 4(1)(c) of the Income Tax Act.
3. Determination of statutory agency in relation to income tax liability.
4. Application of section 42 and section 43 in the context of business connections with non-residents.

Analysis:
1. The case involved the tax liability of an Indian firm for commission paid to a non-resident agent for exporting mica to Japan. The firm was treated as a statutory agent by the Income-tax authorities, leading to tax assessments on the commission amounts.

2. The interpretation of sections 4(1)(a) and 4(1)(c) of the Income Tax Act was crucial. The appellant argued that the commission amounts, though received in India, did not accrue or arise in the taxable territories. However, the High Court held that actual or deemed receipt of income in the taxable territories attracts tax under section 4(1)(a) regardless of where the income accrued or arose.

3. The determination of statutory agency was significant in this case. The firm was deemed a statutory agent due to its business connection with the non-resident Japanese company. The court referred to previous judgments to establish the vicarious liability of the agent for tax on income derived from business connections in the taxable territories.

4. The application of section 42 and section 43 was central to understanding the tax liability in cases involving non-resident entities. Section 42 deems income from business connections in the taxable territories as accruing within the territories, while section 43 defines who can be deemed as an agent for tax purposes based on business connections with non-residents.

In conclusion, the Supreme Court dismissed the appeals, upholding the tax liability of the Indian firm for the commission paid to the non-resident agent. The court emphasized the application of section 4(1)(a) for income received in the taxable territories, regardless of where it accrued, and affirmed the firm's status as a statutory agent based on its business connection with the non-resident company.