1957 (11) TMI 1 - SC - Income Tax

Whether the respondent is liable for income-tax, which has been paid by the Hapur firm on the transactions, which were entered into by the appellant with the Hapur firm for and on behalf of the respondent ? Held that - In our opinion the Judicial Committee of Ijlas-i-khas was in error in holding that before fixing the liability of a contributory to tax paid by an agent in British India for and on behalf of the non-resident contributory, his liability to pay tax on his entire income , really total world income, had to be established. Therefore the finding of the High Court that the liquidator cannot claim from the respondent the amount of tax paid by the Hapur firm on transactions entered into by the appellant for and on behalf of the respondent unless it was shown that his total world income was taxable is unsustainable. As between the parties the tax paid by the agent had to be taken into account irrespective of the ultimate result of the assessment on the non-resident. In the result this appeal is allowed and the judgment and order of the Division Bench of the Pepsu High Court set aside and the order of the learned liquidation judge restored

Issues Involved:
1. Whether the respondent could be settled on the list of contributories.
2. Whether the respondent was liable for the amount retained for payment of income-tax on the profits of forward transactions entered into on its behalf by the appellant with the Hapur firm.

Issue-wise Detailed Analysis:

1. Settlement on the List of Contributories:
The respondent challenged being placed on the list of contributories. The official liquidator had settled the list on 21st October 1943, including the respondent. The High Court negated the respondent's contention, affirming that the respondent was correctly settled on the list of contributories. This matter was no longer in controversy between the parties by the time it reached the Supreme Court.

2. Liability for Payment of Income-Tax:
The primary issue was whether the respondent was liable for the income-tax paid by the Hapur firm on the profits from forward transactions conducted on the respondent's behalf. The liquidation judge initially ordered the respondent to pay Rs. 8,191-0-9, which included Rs. 6,867-9-6 as the proportionate income-tax on the profits. The Division Bench of the Pepsu High Court, however, disallowed this item, holding that it had not been shown that the "total earnings" of the respondent were taxable under the Act.

The Supreme Court examined the relevant provisions of the Income-tax Act. It clarified that the term "total earnings" used by the High Court was not found in the Income-tax Act, which uses "total income" and "total world income." For a non-resident like the respondent, "total income" would include income, profits, and gains received or accrued in British India.

Relevant Provisions of the Income-tax Act:
- Section 17: Deals with the determination of tax payable by non-residents, but does not affect the obligations of persons required to deduct income-tax from sums payable to non-residents.
- Section 18(3A): Mandates deduction of income-tax at the source for payments to non-residents.
- Section 40(2): Allows for tax to be levied on agents of non-residents.
- Section 42(1): Deems income accruing from business connections in British India as taxable, either in the name of the non-resident or their agent.

The Supreme Court held that the Hapur firm, acting as an agent, was liable to pay income-tax on the profits made on the respondent's transactions. The agent was entitled to retain the estimated amount of income-tax from the profits. The respondent's challenge based on the non-taxability of its total world income was irrelevant to the agent's obligation under the Act.

Judicial Committee's Error:
The Supreme Court found that the Judicial Committee of Ijlas-i-khas erred in requiring proof of the respondent's liability on its "entire income" before fixing the contributory's tax liability. The correct approach was to consider the tax paid by the agent irrespective of the ultimate assessment of the non-resident's total world income.

Conclusion:
The appeal was allowed, setting aside the judgment and order of the Division Bench of the Pepsu High Court. The order of the learned liquidation judge was restored. Each party was ordered to bear its own costs in the Supreme Court and the courts below.

Appeal allowed.

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