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TMI Blog1945 (4) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... from ginning factories in British India and from property, interest on securities and dividends. Puduvayal is in British India; Moulmein is in British Burma, which was part of British India until 31st March, 1937, while Penang, Klang and Saigon have at all times been outside British India. 3. For the assessment year 1937-38 now in question the assessee returned an income of ₹ 21,118 from all sources. After calling for accounts and documents and examining those that were produced, the Income-tax Officer determined the assessee's total income at ₹ 2,11,793, which included a sum of ₹ 2,03,823 under the head "Business". The Appellate Assistant Commissioner reduced the figures by ₹ 18,234 on appeal, the reduction being entirely in the income from business. The details of the assessment are as follows:- As determined by the Income-tax Officer. As ordered by the Appellate Assistant Commissioner. Rs. Rs. (1) Remittances of profits from Klang and Penang business to British India 1,22,177 1,18,118 (2) Remittances of profits from Moulmein to head quarters in British India 13,247 13,247 (3) Headquarters income (Puduvayal) by estimate 60,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-1-37) By draft on Chartered Bank " 11,000 $ 118,000 (b) FROM PENANG TO MOULMEIN: Dhatu: 30th Vaikasi: (12-6-36) By draft on Rangoon Mercantile Bank (Rs. 20,000 at 155 1/8 exchange) $ 12,893 27th Avani: (11-9-36) By draft on Rangoon Mercantile Bank (Rs. 10,000 at 155 exchange) " 6,441 4th Purattasi: (19-9-36) By draft on Rangoon Mercantile Bank (Rs. 1,25,000 at 1551/8 exchange) " 80,580 $ 99,914 = ₹ 1,55,000 (c) FROM MOULMEIN TO PUDUVAYAL: Dhatu: OLD ACCOUNT. 4th Chithrai: (16-4-36) By draft on Madura Imperial Bank ₹ 10,000 OLD ACCOUNT. 31st Chithrai: (13-5-36) Amount realised at headquarters on decree debt " 490 C.O ₹ 10,490 NEW ACCOUNT. 12th Ani: (26-6-36) By draft on Madura Imperial Bank " 20,000 13th Purattasi: (28-9-36) By telegraphic transfer through S.R.M. CT. M. Madras " 1,25,000 26th Purattasi: (11-10-36) By amount realised at headquarterson decree debt " 500 17th Panguni: (30-3-37) By telegraphic transfer through Madura Imperial Bank " 20,000 ₹ 1,75,990 The Income-tax Officer held, and the Appellate Assistant Commissioner confirmed, that the available profits of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws no light whatever on the character of the remittance now in question. No other correspondence between the various business centres has been produced. The accounts produced consist of (i) original ledgers of the Moulmein business from Sidharthi (1919-20) to Angirasa (1932-33) and compiled ledgers from Srimukha (1933-34) to Dhathu (1936-37) without any day books except a day book for Krodhana (1925-26); (ii) original ledgers for Klang and Penang businesses from (1919-20) onwards without any day books; and (iii) headquarters (Puduvayal ledger for Yuva (1935-36) and the day book for Easwara (1937-38), it being the assessee's case that the accounts of earlier years do not exist for headquarters. The assessee himself has not appeared to explain the entries but has sent a representative or employee. The representative too who appeared with the old ledgers was not concerned in the preparation of these ledgers and was naturally not in a position to throw any light. He also said that even the assessee could throw no further light as he was not personally concerned with the business in the relevant years and as the entries were made in the time of the assessee's late father. I have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow adjusted towards Moulmein Books Penang Folio Dr. Cr. Rs. Rs. B. F. 1,20,238 10,500 the losses in Penang and Klang (Rs. 30,172-5-9 plus ₹ 30,246-10-3) ... ... 60,419 Interest debits for Rudhrothkari (1923-24) to Bhava (1934-35). ... 70,243 ... 3rd Avani, Yuva (19-8-35) Amount received from RM. PL. R. through headquarters ... ... 775 Interest for 1935-36 ... 3,929 ... Net debit balance at the beginning of Dhathu (1939-37) ... 1,22,716 ₹ 1,94,410 1,94,410 Debit balance at the beginning of the "previous year" (Dhathu-1936-37) ... 1,22,716 5th Ani, Dhathu (18-6-36). Received by cheque from Rangoon Mercantile Bank ... ... 20,000 1st Purattasi (16-6-36) Dhathu; Received ... ... 10,000 15th Purattasi (30-9-36), Dhathu: Adjustment entry writing back the credit of ₹ 60,419 on 9th (24-11-25) and 17th (2-12-25) Karthigai of Krodhana ... 60,419 ... 15th Purattasi (30-9-36) Dhathu. Through Mercantile Bank ... ... 1,25,000 30th Panguni (12-4-37) Dhathu; Interest ... 2,134 ... Dr. Balance carried forward to Eswara (1937-38) ... ... 30,269 ₹ 1,85,269 1,85,269 The full significance of the credit entries of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who was the senior partner, to bring in extra money by way of additional working capital. In fact there was another account in the name of the assessee in the Klang books which opened with a credit of $ 60,098 when the business was started. Subsequently the balance in this account was mostly transferred to "O.S.V." account and later to "AL.S.V." account, two new accounts showing assessee's own money. Thus though the amount shown as capital contributed by the assessee was only $ 15,313, the actual amount put in was nearly $ 90,000. The E.M. Moulmein folio in the Klang books was maintained in those books until January 1926 and thereafter the account was transferred to the Penang books through the medium of the current account with Penang. The balance of that account was retransferred later to the Klang books in November 1930 where it remained until the account year Dhathu (1936-37) now in question. During the account year, the balance of this folio amounting to $ 54,360 has been transferred back to Penang books and merged in the Moulmein folio of Penang books. The reason for these transfers is not obvious to me. Ignoring these transfers from book to book this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credited to Klang; but 4 months later (6th Panguni Akshaya 19-3-1927) these entries were reversed both in Penang and in Klang books but in the latter, the debit was to O.S.V. folio which as already explained represents assessee's own account. On 8th Karthigai of Krodhana (23-11-1925) there appears a credit of Re. 60,419 in favour of Penang in the Moulmein books, the corresponding debit being to Rangoon P.M.A, Thavanai account; but there is no corresponding entry in the Penang books debiting Moulmein on this date. The origin and nature of "P.M.A." account is obscure and not ascertainable. The narration is to the effect that Penang has been given the credit to cover the losses sustained in Penang and Klang. It is not easy to ascertain the full significance of the various transfer entries in the accounts, some of which are mere adjustments reversing earlier credits or debits. The only relevant facts which have emerged from my examination of tin; Klang ledgers in conjunction with the Moulmein ledgers are (1) that the original remittance of $ 29,123 (which is equal to ₹ 30,000) from Moulmein to Klang in 1919 was used as share capital and working capital in the new pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Penang business on current creditors. $ 15,328.29 Net value of asset at the end of the account year. $ 1,38,680.56 8. I now come to the Penang ledgers. The business at Penang was started as a partnership also in 1919, with one A.S.A.S. Shanmughanadhapuram, with a share capital of $ 12,250 allocated between the assessee and his partner in the ratio of $ 10,500 to $ 1,750 (i.e., 6 to 1). On receipt of the remittance of $ 47,393 (which was the then equivalent of ₹ 50,000) in 1919, it was split up, as in the case of the remittance to Klang, into two parts, viz., $ 10,500 and $ 36,893. The former part was credited towards the assessee's share capital account and the latter was credited to a folio in the name of the E.M. Moulmein concern, just in the same way as in the case of the remittance to Klang. In Penang as in Klang there was another folio showing the assessee's surplus capital. The entries in the E.M. Moulmein folio in the Penang books may be summarised as follows:- PENANG BOOKS. MOULMEIN FOLIO Dr. Cr. Remittance from Moulmein in 1919, less amount credited to capital account ... ... $ 36,893 Interest to 31st Avani, Rudrothkari (up to 16-9-23). ... .. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the two subsequent ledger volumes. But the account reappeared intact in the third subsequent ledger volume (May-August 1928). It is surmised that something similar to the case of Klang has happened and that the capital was recreated out of the assets transferred to the 4th ledger. In fact there is remarkable similarity between the accounting arrangements, the manner of disposal of the initial remittances and the business conditions and the loss of initial capital at Penang and Klang during the early years of the two businesses. The share capital in both businesses was found from the initial remittances of ₹ 30,000 and ₹ 50,000 respectively, the balance of the remittances was held as working capital. In both businesses there were big book losses in the early years. In the case of Penang the assessee's share of loss was $ 30,000 against the initial remittance of $ 47,393 sent out there from Moulmein. In both places, the assessee lost his formal share capital and later on recouped his capital by making profits. All the other observations made at the end of para 7 above in respect of Klang apply mutatis mutandis to Penang as well. It only remains to add that even af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons given by the Income-tax Officer in his assessment order and the Appellate Assistant Commissioner in his appellate order (Annexures A and B). A copy of the will which is dated 27-10-34 is enclosed herewith as Annexure C. It is a registered will and no probate or succession certificate has been taken in respect of it. 13. On the facts and circumstances stated above, the following three questions are referred for favour of their Lordships' decision. (1) Are there materials on the records which show that the remittance of $ 80,500 from Penang to Moulmein on the 19th September 1936 was a remittance of capital? (2) Was the Income-tax Officer entitled in law to assess the assessee on the sum of ₹ 13,247 remitted from Moulmein to Puduvayal in the year of account 1936-37? (3) Whether in computing the assessee's profits earned in Moulmein in the year 1936-37 he was entitled to include the interest which had accrued on the deposits standing in the names of his sister Parvathi and daughter Sigappi? Commissioner's opinion.-As required by the Income-tax Act I beg to state my own opinion on each of the three questions. Question (1)-It has already been laid down by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A kind reference to the abstract of the Moulmein account in the Penang books (page 320 ante) will show that at the time of the remittance of $ 80,580 (Rs. 1,25,000) on 19-9-1936, that folio had been credited with $ 52,373 on account of interest to 16-9-1934 and $ 54,360 by transfer from Klang of which $ 40,550 represented profits. There are other accounts both in Klang and Penang showing the assessee's surplus capital and the interest credited to them. It is not denied that there were profits liable to be taxed to the extent of remittances assessed. In these circumstances, it is submitted that the answer to the first question should be in the negative. Question (2)-This question is concluded by their Lordships' decision in Valliammai Achi's case bay High Court in Rawji Dhanji's case fore be in the affirmative. If the petitioner's grievance was that the amount suffered tax both in Burma and British India, he should have applied for Double Income-tax Relief provided in the Act. Question (3)-The terms of the will (Annexure C) on which the petitioner relies, refer to an earlier act of crediting two sums of ₹ 25,000 each in the Moulmein books in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as delivered by Patanjali Sastri J.) This is a reference made by the Commissioner of Income-tax, Madras, in pursuance of an order of this Court dated the 26th April 1943 passed in O.P. No. 48 of 1943 under Section 66(3) of the Indian Income-tax Act, 1922, as it stood prior to the Amendment Act of 1939. One E.M.V. Muthappa Chettiar (hereinafter referred to as the assessee) was assessed as the manager of his undivided family for the year 1937-38 on a total income of ₹ 2,11,793 of the 'previous year' ended the 12th April 1937, including a sum of ₹ 2,03,823 as income derived from the money-lending business carried on by the assessee at various places in India, Burma and Malaya. The latter sum was reduced on appeal to ₹ 1,85,589 of which ₹ 1,18,118 was said to have been remittances to British India of profits earned in the assessee's foreign branches at Klang and Penang, and ₹ 13,247 similar remittances of profits earned at Moulmein. It was found, and the finding was not challenged in these proceedings, that the profits available for remittance at Klang and Penang were respectively ₹ 1,07,238 and ₹ 10,830 and the total remittances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion (1) the Court observed: "On the 19th September 1936 the Penang branch remitted to the Moulmein branch a sum of $ 80,500. The Income-tax authorities have regarded this remittance as one of profits and assessed the assessee accordingly. The assessee says that it is merely a return of capital and therefore is not taxable. The assessee's case is that fifteen years ago the Moulmein branch remitted to Penang ₹ 75,483-9-6 and to the Klang branch ₹ 44,754. That these sums were remitted to those places is admitted. The assessee says that the $ 80,500 represents the return of these sums ". The Court directed the Income-tax Commissioner to set forth all the evidence on the point which was placed before the Department. This reference has been made accordingly. On the first question, the Commissioner has elaborately reviewed the evidence furnished by the assessee's books of account relating to the businesses at Klang, Penang and Moulmein, and, after pointing out certain gaps in the accounts produced, he has come to the conclusion, firstly, that the sums originally sent to Klang and Penang as capital and working capital in 1919 had been wiped out by November ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the place of accrual has ceased to be part of British India in the year of assessment (vide Commissioner of Income-tax, Madras v. Valliammai Achi* ). It was said that the E.M. Firm was taxed in respect of the whole of its profits in Burma for the same year 1937-38, and that an assessment of the assessee's share of the same profits once again in British India is opposed to the rule against double taxation. This argument overlooks that the assessment in Burma was taxation by a foreign State, as Burma was separated from British India with effect from 1st April 1937 and is no answer to the claim of the Government under the Indian Income-tax Act. The assessee may be entitled to relief against double taxation under the special provisions made in that behalf but whether he is so entitled or not can make no difference. We answer the second question in the affirmative. The third question arises out of the disallowance of the assessee's claim to a deduction of two sums of ₹ 1,218-7-3 credited as interest to his sister and daughter respectively, in computing the profits of the Moulmein Firm. Two sums of ₹ 25,000/- had been credited in the name of each of these ladies and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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