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TMI Blog1924 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out in Colquhoun v. Brooks (1889) 14 App. Cas. 493., imposes a territorial limit with regard to income chargeable to income-tax---either (2) that from which taxable income is derived must be situate in the United Kingdom, or (2) the person taxed must be resident there. The Indian Acts of 1918 and 1922, on the other hand, make the Acts applicable to all income from whatever source it is derived or arises or is# received in British India or is, under the provisions of the Act, deemed to accrue or arise or to be received in British India. In the English statute, the place of residence of the person to be taxed is the basis of assessment, whereas it is not so under the Indian Acts-It is also clear, under Section 3(2), that this Act may apply to incomes not actually accruing, arising or received in British India, apart from the question of the residence of the assessee, whereas under the English statute, such income is only assessable if the assessee is resident within the United Kingdom. The scheme of the English statute is, therefore, totally different, from that of the Indian Act, and I would refer your Lordships to the observations to this effect of Rahim C. J. in Board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not occur in that Section and it is difficult to understand bow the learned Judges of the Madras High Court (1) relied upon English decisions based on this Section in interpreting Section 3 (2) and Section 33(2) of the Indian Act of 1918. As was pointed out by Rahim C.J. (1), the expression "deemed to arise" refers to cases set out in the Act itself. There are Section 6 (2) regarding salaries, Section 10 (3) regarding professional earnings and Section 33(7) regarding business earnings. It is, therefore, clear that the Act applies to incomes dealt with by Sections 6 (2), 10 (3) and 33 (2). Stress has been laid by the Madras High Court on the fact that Section 33(2) is under Chapter IV, which is headed "special cases" and they are of opinion that this is merely a "machinery" Section and in this view, they seem to have been considerably influenced by the decision of the House of Lords in Smidth v. Greenwood [1922] 1 A. C. 417. The heading of the chapter, by itself, does not convey any indication as to whether the Sections in that chapter are "machinery" or "charging" Sections. In its plain meaning, it refers to the Sections as deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which such income is to be assessed, and Section 33 (1), in effect makes income derived through or from any business, connection in British India chargeable to the tax. 7. Questions relating to comity of nations should not be taken into consideration where the meanings of the words are plain. Section 33 (1), however, does not in any way affect the comity of nations. See the observations of Lord Herchell in Colquhoun v. Brooks (1889) 14 App. Cas. 493, 503. on a similar point, as also of Lord Macnaghten. 8. Mr. Langford James, in reply. The Company are not really carrying on business in India. They are Only purchasing through an agent. The Act of 1918 did not intend to vary the principles. Refers to the Indian Income Tax Act of 1922 and to Sulley v. Attorney-General (1860) 5 H. & N. 711; 157 E. R. 1364. Cur. adv. vult. Chatterjea, J. 9. This is a case stated by the Commissioner of Income Tax, Bengal, under the provisions of Section 66 of Act XI of 1902 and Section 51 of Act VII of 1918. 10. The Rogers Pyatt Shellac Company is incorporated in the United States of America with its head quarters in the City of New York. The Company have a branch office in Calcutta to buy gum, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Act XI of 1922 is also similar to Section 5 of Act VII of 1918, only that the word "heads" is used in, the former instead of "classes" in the latter, and the item (iv) is described as "business" instead of "income derived from business" as in Act VII of 1918. Reading Sections 4 and 6 of Act XI of 1922 (Sections 3 and 5 of Act VIT of 1918) together, all income derived from "business" (1) accruing, arising or received in British India or (2) deemed under the provisions of the Act to accrue or arise or to be received in British India is taxable income. 16. Now it is admitted that no part of the Company's income accrued, arose or was received in British India. Section 33 (1) of the Act, however, provides that, in the case of any person residing out of British India, all profits or gains accruing or arising to such person, whether directly or indirectly, through or from any business connection in British India, shall be deemed to be income accruing or arising within British India and shall be chargeable to income-tax in the name of the agent of any such person, and such agent shall be deemed, for all the purposes of this. Act, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson residing out of British India, whether directly or indirectly, through or from any business connection in British India shall be deemed to be income accruing or arising within British India. Taking the language literally, it seems that income accruing or arising to a non-resident person in certain cases, though not actually accruing or arising within British India shall be deemed to be income accruing or arising within British India, and reading Section 33 (1) together with Sections 3 and 5, such income is liable to tax. This, no doubt, would extend far beyond what is recognised in England or had been recognised in British India previous to Act VII of 1918, as the territorial limit of taxation of income derived from business. 18. On behalf of the Company we have been referred to certain English cases and a case in the Madras High Court: The Board of Revenue v. The Madras Export Company (1922) I. L. R. 46 Mad. 360. 19. In Sulley v. Attorney-General (1860) 5 H. & N. 711; 157 E. R. 1364., an American "firm carried on a business in New York which consisted in the resale there of goods purchased on their account in England. One of the partners, who resided in Nottingham, tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re "nevertheless insufficient to constitute an exercise "of his trade within the meaning of schedule D. In "illustration of that view, I may refer to Sulley v. "Attorney-General (1865) 5 H. &. N. 711; 157 E. R. 1364., which was decided in the "Exchequer Chamber by no less than six very eminent "Judges". 22. The statute under which the above cases were decided are the Income Tax Act, 1853, and the Income Tax Act, 1842. Chapter 34, Section 2, schedule D of Act 1853 imposes a duty "for and in respect of the annual "profits or gains arising or accruing to any person "whatever, whether a subject of Her Majesty or not, "although non-resident within the United Kingdom "from...any trade..rcised "within the United Kingdom," and Chapter 35, Section 41 of the Income Tax Act of 1842 provides "Any" person not resident in the United Kingdom whether a subject of Her Majesty or not shall be chargeable in the name of...any factor, agent or receiver, having the receipt of any profits or gains arising as herein mentioned...." 23. It will be seen that under the English Acts, it is essential that the profits should a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be so "chargeable under Section 41 of the Income Tax Act, "1812, as amended by this Section in the name of the "branch factor, agent, receiver or manager." Rowlatt J. 26. observed "The scope of this Section is not very clear, but I am not prepared to hold that its effect is to bring into taxation profits made by non-residents from a trade not exercised in the United Kingdom. To make an extension in the scheme of taxation of their magnitude and importance the Court is entitled to look for words of clear and "direct enactments In the Court of appeal [1921] 3 K. B. 583, 591., Lord Sterndate M. B. observed: Section 31 is only for the purpose of extending the operations of Section 41 of the Income Tax Act, 1842. That Section is not a charging section and only relates to the method of charging persons who are made chargeable under schedule D. The duties mentioned in that section are the duties charged by schedule D. It has been called only a machinery section, i.e., a Section which provides a method of carrying out the charge imposed by schedule D. I think this is its effect, and the expression 'machinery' has no doubt often been used, and is conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and indirect reference that must be found in the "Section under consideration." 27. The charging provisions of the English Income Tax Acts are to be found in the schedules, and schedule D of the English Act of 1842 (5 & 6 Vict. c. 35, which is similar to that of the English Act of 1918) provides that tax under that schedule shall be charged in respect of (a) the annual profits or gains arising or accruing; (i) to any person residing in Great Britain from any kind of property whatever, whether situate in Great Britain or elsewhere; and (ii) to any person residing in Great Britain from any profession, trade, employment, or vocation. Whether the same shall be respectively carried on in Great Britain or elsewhere; and (iii) to any person whatever whether a subject of Her Majesty or not, although not resident within Great Britain, from any property whatever in Great Britain or from any profession, trade, employment or vocation exercised within Great Britain. 28. Section 41 of the same Act provided as follows: "And be it enacted, that the trustee, guardian, tutor, "curator or committee of any person, being an infant "or married woman, lunatic, idiot or ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r or manager. 30. As pointed oat by Lord Sterndale M. R. in Smidth & Co. v. Greenwood [1921] 3 K. B. 583, 591., the duties mentioned in Section 31 (of the English. Finance Act, 1915) are the duties charged under schedule D (of the Income Tax Act of 1812) and the Sub-section (1) of Section 31 "does nothing more than extend the method provided by Section II of carrying out the charge imposed by schedule D, and it would be very strange if another Sub-section of the same Section [Sub-section (2)] imposed "an entirely new charge not within the schedule at all 4...such, a thing, if intended, should be carried out with the greatest Clearness, and that if a reasonable meaning can be given to the Sub-section without producing that effect, such a meaning should be given." It appears from the last part of schedule D of the Income Tax Act of 1812 that the profits or gains of a non-resident must arise from trade, etc., exercised within the United Kingdom and, as Lord Sterndale M. R. says, it merely points out or, so to speak, sums up the effect of Section 11 of the Act of 1842 as extended by Section 31 of the Act of 1915 still keeping within the limit of the charge of schedule D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As stated above it comes under Chapter IY headed "liability in special cases". It is to be observed that Sections 31 and 32 dealing (with certain special cases (such as guardians of persons under disability, trustees, agents, or court of wards, etc.) merely lay down that the tax is to be levied upon and recoverable from certain persons, while Section 33 (1) provides that with regard to nonresident persons, income in certain cases shall be deemed to be income accruing or arising within British India. The provision would perhaps more appropriately come in after Section 4 (2) of the Act XI of 1922. which deals with the converse case. "Profits and gains of a business accruing or arising without British India to a person resident in British India shall be deemed to be profits and gains of the year in which they are received or brought into British India notwithstanding the fact that they did not so accrue or arise in that year provided that they are so received or brought in within three years of the end of the year in which they accrued or arose". 33. Section 3 of the Act VII of 1918 which comes under Chapter I headed "taxable income" expressly lays down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of income" which alone, according to Section 5, are chargeable to income-tax. Section 6 of Act XI of 1922 uses the word "heads" instead of "classes". The former expression seems to have been substituted to make it more comprehensive, we think the same-thing was meant by the two expressions "business" and "business connection" and for this reason. Even if Section 33(2) be taken as a "machinery" Section, as contended on behalf of the Company, the agent cannot be charged with income-tax, nor can the agent be deemed the assessee in respect of the income-tax, unless the principal is chargeable. The principal is chargeable with tax upon income from "business" and unless the expression "business connection" in Section 33 (2) was used in the same sense as "business" in Section 5, the principal cannot be charged and a fortiori the agent cannot be charged with the tax. The Section accordingly even as a machinery Section would be useless. The English Finance Act (No. 2) of 1915, Section 31 (2) uses the words "through or from any branch, factorship, "agency, receivership or management" and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment just now delivered by my learned brother Chatterjea J. and I entirely agree in the conclusions he has arrived at. In view, however, of the importance of the questions involved I desire to make some further observations. 43. Before dealing with the cases decided under the English statutes to which our attention has been drawn, I propose first of all to deal with the relevant provisions of the Indian Acts. For this purpose, it is not very material to advert to the provisions of Act II of 1886 or the enactments which preceded the same or the subsequent amendments incorporated into the said Act by Act V of 1916 and Act XI of 1903. A perusal of the several enactments makes it clear that the Income Tax Act of 1918 (Act VII of 1918) effected a radical change in the scheme and scope of operation of this branch of law. The Act of 1918 professes to be a consolidating and amending statute; on any point specifically dealt with in the Act the law is to be ascertained by interpreting the language used in the statute in its natural meaning, uninfluenced by considerations derived from the previous state of the law: Administrator-General of Bengal v. Premlal Mullick (1895) I. L. R. 22 Calc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... British India that is liable to tax; by a fiction some kinds of income which accrues or arises to a person not resident in British India is deemed to accrue or arise in British India (ignoring the aspect that it accrues or arises to a person outside British India) for the purpose of realising the same from an agent resident in British India. All these kinds of income, however, are such as may be said to have accrued or arisen at different places in British India by reason of its having been the direct or indirect result of some business connection there or outside British India where the ultimate transactions producing the profits or gains took place, but under the Act they are deemed to have accrued or arisen in British India so as to be taxable under the Act and recoverable by making some person in British India responsible for its payment. To appreciate correctly the exact significance of these Sections a detailed examination of some of the provisions of the Act is necessary. 47. First of all, turning to Section 3 (1) of the Act, we find the word "income" used there. Now what is income? The term is nowhere defined in the Act. The definitions of "agricultural inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the words are used in contradistinction to the word "receive" and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate. 48. One other matter need be referred to in connection with the Section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called "income." In order to determine whether it is taxable under the Act, the place it has accrued or has arisen or has been received has got to be ascertained. The Section l ignores the person and only takes into account the place where the income accrues, arises or is received. Income may accrue at one place, arise at another and be received at a third. Again it may accrue or arise in respect of or out of something situated at one place but accrue or arise to a person at a different place. 49. To apply the provisions of Sections 3 (2) and 5 aforesaid to concrete cases, six different classes of cases will have to be taken into account, viz., where the income accrues in British India, where it is deemed to accrue in British Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or arises in British India nor is deemed by the Act to accrue or arise in British India) has been made chargeable. Both these cases, however, are cases where the imposition may be justified by the consideration that in one the income has accrued to a person who is ordinarily a resident of British India and in the other it has accrued or arisen to a British subject or a servant of His Majesty and has been paid out of the British Indian Exchequer and has so accrued or arisen in British India. 51. To tarn then, to the first four classes of cases, for the sake of brevity and convenience, they may be dealt with as really of two kinds---the distinction between "accruing" and "arising" being left out of account for the moment. Taking the cases of a resident and a non-resident separately in connection, with the accruing or arising of income as aforesaid, the position is this: If income accrues or arises in British India either to a resident or a non-resident it is chargeable, for, as already observed, Section 3 does not make any distinction, between residents add non-residents. In the case of a non-resident, such or so much of his income as arises or accrues to him whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itish India. This to my mind is the plain interpretation of the statute. The accrual or arising of income to a person is different to my mind from the receipt of the income by him and the overlooking of this distinction in my opinion creates a confusion and makes the interpretation difficult. 53. The argument that Section 33 (1) is only a "machinery Section" and should be treated as a "charging Section" loses all its force in the light of this interpretation. As already observed, the charging Section in the Act is Section 3. Section 33 (1) does not mean to travel beyond Sections. Its position in Chapter IV is not altogether undeserved as it really imposes a liability on the agent as a special case. The drafting of the Section, however, is not free from defects. 54. We are not concerned with the policy of the Legislature or the question whether the statutes infringe any principles regarded sacred by the comity of nations. But at the same time I do not see how the above interpretation will lead to au unreasonableness or absurdity as it would only charge to tax profits or gains which may be attributable to business connection in British India. It is obvious that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requiring attention as distinguished from, sports or pleasure and is used in the sense of an occupation continuously carried on for the purpose of profits: Smith v. Anderson (1880) 15 Ch. D. 247, 258. Molls v. Miller (1884) 27 Ch. D. 71, 88., Commissioners of-Inland Revenue v. Marine Steam Turbine Company [1920] 1 K. B. 193. A concern by reason of which one can be said to have connection with such an occupation is business connection. Act XI of 1922 emphasises the distinction between 'income' and 'profits or gains ' by introducing 'profits or gains' in Section 4 which, is the charging Section corresponding to Section 3 of Act VII of 1918, and instead of the expression "classes of income" and. "income derived from business" in Section 5 of the latter Act speaks of "heads of income profits and gains," and "business" in Section 6. In Section 42 of Act XI of 1922 we find the words "business connection or property" in the place of the words "business connection" in the corresponding Section 33 (1) of Act VII of 1918. These amendments,, cast the net wider, by including profits or gains arising or accruing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts or gains arising or accruing to any person whatever, Whether a subject of Her Majesty or not although not resident within the United Kingdom, from any property whatever in the United Kingdom or any profession, trade, employment or vocation exercised within the "United Kingdom." In the case of a non-resident therefore, question would arise as to whether the profits or gains have arisen or accrued to him from any trade exercised within the United Kingdom. In Sulley v. Attorney-General (1860) 5 H. & N. 711; 157 E. R. 1364., it was held that wherever a merchant is established, in the course of his operations his dealings must extend over various places, he buys in one place and sells in another but he has no principal place in which he may be said to trade, viz., where his profits come home to him; and that is where he exercises his trade. In the Indian statute the question where the trade is exercised does not come in at ail. In Grainger & Son v. Gough [1896] App. Cas. 325., it was held that a foreign merchant who canvasses through agents in the United Kingdom for orders for the sale of his: merchandise to customers in the United Kingdom does not exercise a trade in the U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receivership or management and shall be so chargeable under Section 41 of the Income Tax Act, 1842, as amended by this Section, in the name of the branch, factor, agent, receiver or manager". In Smidth & Co. v. Greenwood [1922] 1 A. C. 417., the House of Lords affirmed the decision of Rowlatt J. in Smidth & Co. v. Greenwood [1920] 3 K. B. 275. and of the Court of Appeal [1921] 3 K. B. 583. In that case it was held by the Court of Appeal that the Sub-section was not a charging Sub-section but that it merely summed up the effect of Section 41 of the Act of 1842 as extended by Sub-section (7) of Section 31 of the Act of 1915, still keeping within the limits of schedule D, and it was observed that to hold otherwise would be to hold that such an important alteration has been made in the basis of taxation as the abolition of the condition of exercise of trade within the United Kingdom before a person not there resident can be taxed. "To take the latter course," Lord Sterndale observed, "would be to violate the well-known canon of construction of taxing Acts that no one is to be taxed except by express words". The Indian law does not proceed upon the basis of such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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