1958 (4) TMI 1 - SC - Income Tax

Whether the appellant assessee is resident in the taxable territories within the meaning of section 4A(b) of the Income-tax Act? Held that - Once it is shown that control and management in the affairs of the firm was exercised by the partners residing in India it would not be relevant to enquire whether the control and management thus exercised amounted to a substantial part of the control and management of the affairs of the firm. The exercise of the control and management even in part in the taxable territories would be enough to fix the appellant with the character of a resident within section 4A(b). We must accordingly hold that the High Court of Madras was justified in holding that the appellant is a firm resident in the taxable territories. Appeal dismissed.

Issues Involved:
1. Whether the appellant assessee is resident in the taxable territories within the meaning of section 4A(b) of the Income-tax Act.
2. Whether the control and management of the appellant's affairs resided wholly in Ceylon or partially in India.
3. Validity and effectiveness of control and management under section 12 of the Partnership Act.

Issue-wise Detailed Analysis:

1. Whether the appellant assessee is resident in the taxable territories within the meaning of section 4A(b) of the Income-tax Act:

The key question raised in this appeal is whether the appellant assessee is resident in the taxable territories within the meaning of section 4A(b) of the Income-tax Act. The appellant is a registered firm owning a tea estate in Ceylon, managed by a superintendent who resides in Ceylon. The Income-tax Officer, Tiruchirapalli Circle, assessed the appellant's income from Ceylon, rejecting the appellant's claim that it was not resident in British India. The Appellate Assistant Commissioner and the High Court of Madras upheld this decision. The High Court directed the Tribunal to refer the question of the appellant's residency under section 4A(b) to it, and it was answered in the affirmative. The Supreme Court had to decide if the appellant was a firm resident in the taxable territories under section 4A(b).

2. Whether the control and management of the appellant's affairs resided wholly in Ceylon or partially in India:

Section 4A(b) of the Income-tax Act states that a firm is resident in the taxable territories unless the control and management of its affairs are situated wholly outside the taxable territories. The presumption is that the firm is resident in the taxable territories if the partners are residents of the country. This presumption can be rebutted by showing that the control and management are wholly outside the taxable territories. The evidence showed that the superintendent managed the estate and looked after its day-to-day operations in Ceylon. However, correspondence between the superintendent and the partners in India indicated that the partners exercised control and management from India. Letters from partners provided directions on various matters, including budgeting, construction, salary adjustments, and tea purchases. This evidence showed that the control and management were not wholly situated in Ceylon but were exercised in part by the partners in India.

3. Validity and effectiveness of control and management under section 12 of the Partnership Act:

Mr. Kolah argued that the control and management under section 4A(b) must be valid and effective in law, and under section 12 of the Partnership Act, only the majority of partners could give effective directions. The court rejected this argument, stating that every partner has the right to take part in the conduct of the business under section 12(a), and it is only when differences arise that decisions are made by the majority. The evidence showed no disagreement among the partners regarding the directions given by Andiappa Pillai, who held the maximum shares and usually gave instructions. There was no protest or disagreement from other partners, and the directions were considered valid and effective.

Conclusion:

The Supreme Court concluded that the control and management of the appellant's affairs were exercised in part by the partners residing in India. Therefore, the appellant was a firm resident in the taxable territories under section 4A(b) of the Income-tax Act. The appeal was dismissed with costs.

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