1953 (12) TMI 2 - SC - Income Tax

Whether Section 42(1) of the Indian Income-tax Act has application to the case of a resident assessee or whether its scope is limited to non-resident assessee alone? Held that - The answer returned by the High Court of Bombay to the question referred to it was wrong. We therefore allow this appeal with costs and answer this question referred to the High Court in the affirmative.

Summary

Issues Involved:
1. Applicability of Section 42(1) of the Indian Income-tax Act, 1922, to resident assessees.
2. Interpretation of legislative amendments to Section 42(1) and their impact on residents and non-residents.
3. Inclusion of profits from the Mysore State in the assessment of a resident assessee.

Issue-wise Detailed Analysis:

1. Applicability of Section 42(1) of the Indian Income-tax Act, 1922, to Resident Assessees:
The primary issue in this case was whether Section 42(1) of the Indian Income-tax Act, 1922, applied to resident assessees or was limited to non-residents. The High Court of Bombay had answered this question in the negative, suggesting that the section applied only to non-residents. However, the Supreme Court disagreed with this interpretation. The Court noted that the language of Section 42(1) was drafted in the widest terms and did not explicitly limit its applicability to non-residents. The section states: "All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories... shall be deemed to be income accruing or arising within the taxable territories." The Court emphasized that the deletion of the words "any person residing out of British India" from the section in 1939 indicated an intention to include residents within its ambit.

2. Interpretation of Legislative Amendments to Section 42(1) and Their Impact on Residents and Non-residents:
The Court examined the legislative history and amendments to Section 42(1). Before 1939, the section explicitly applied to persons residing out of British India. The 1939 amendment removed these words, broadening the scope of the section. The marginal note to the section, which initially referred to "non-residents," was also amended in 1947 to read "Income deemed to accrue or arise within British India." The Court found that these changes were consequential to the recasting of Section 4 of the Act, which aimed to include all income accruing or arising in British India within the chargeability net, irrespective of the residence status of the assessee. The Court concluded that the legislative intent was to make Section 42(1) applicable to both residents and non-residents.

3. Inclusion of Profits from the Mysore State in the Assessment of a Resident Assessee:
The Court addressed the specific case of the assessee, a Hindu undivided family carrying on business in multiple locations, including Bombay, Madras, and Mysore. The Income-tax Officer had estimated the profits from the Mysore branch and included a portion of these profits in the assessment under Section 42(1), deeming them to accrue in British India due to the business connection. The High Court had ruled that Section 42(1) could not be invoked for a resident assessee, thereby excluding the Mysore profits from the assessment. The Supreme Court, however, held that the section did apply to residents and that the profits deemed to accrue in British India could be included in the assessment. The Court emphasized that any other interpretation would create an anomaly, as it would exempt Part B State income for residents but assess it for non-residents, contrary to the policy of the Act.

Conclusion:
The Supreme Court concluded that Section 42(1) of the Indian Income-tax Act, 1922, applies to both residents and non-residents. The Court allowed the appeal, setting aside the High Court's judgment and answering the referred question in the affirmative. The profits from the Mysore State were deemed to accrue in British India and were includable in the assessment of the resident assessee for the year 1943-44. The appeal was allowed with costs.