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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 ..... as. 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 Revenue, Madras v. Ramanadhan Chetty (1919) I. L. R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dealing with other than ordinary cases, and the Sections in that chapter must be read in order to ascertain whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, shellac and other Indian products, and a factory at Wyndhamganj in the United Provinces. No sales are cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the assessee in respect of such income-tax. The contention of the Government is that although the income neither actually accrued, arose, nor was-received, in British India, such income, as laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-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, transacted the business of the firm in England which consisted of purchasing and shipping goods for exportation, but no money was received in England except from New York for purchasing the goods. The profits arose on the sale of the goods at an increased price in America. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 arise from the exercise of the trade within the United Kingdom. In the Indian Acts (VII of 1918 and XI of 1922), however, 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. There is no such provision in the English Acts, and that distinguishes the English Acts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 convenient, but I think it has also often been used in a wider sense than was intended by those who first used it, and may be fallacious, and I prefer not to use it. Section 31, Sub-section (1), I think clearly does nothing more than extend the method provided by Section 41 of carrying out the charge imposed by Schedule D; and it would be very strange if another Sub-Section of the same Section imposed an entirely new charge not within the schedule at all. I agree with Rowlatt J. that such a thing, if intended, sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 insane and having the direction, control or management of the property or concern of such, infant, married woman, lunatic, idiot or insane person, whether such infant, married woman, lunatic, idiot or insane person shall reside in Great Britain or not shall be chargeable to the said duties in like manner and to the same amount as would be charged if such infant were of full age or such married woman were sole, or such lunatic, idiot or insane person were capable of acting for himself, and any person or resident in Great Brit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. In other words the liability to tax is controlled by schedule D under which it is essential that the profits should accrue or arise from trade, etc., exercised within the United Kingdom and that the territorial limits imposed by schedule D cannot be taken to have been induced unless by clear words to that effect. It is contended, by the learned Advocate-General that the Indian Income Tax Act, VII of 1918, does not recognise the territorial limit. Under Section 3 of that Act, income in certain cases, for purposes of the Act, shall be deemed to be profits accruing or arising or to be received in British India, which indicates that income in certain cases though not actually accruing, arising, nor recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the Act shall apply not only to income accruing, arising or received in British India, but also to such income which under the provisions of this Act is deemed to accrue, arise or to be received in British India. That Section contemplates some provisions in the Act according to which income though not actually accruing or arising in British India shall be deemed to have so accrued or arisen, and if a Section in the subsequent part of the Act clearly lays down in what cases it shall be so deemed; such provisions must be taken as incorporated in Section 3 which deals with taxable income and the mere fact that such provision could have been?; more appropriately placed in some other part of the Act, cannot take away its effect, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the comprehensive expression business connection was probably used in the Indian. Act to cover all those words. Then it is pointed out that the word property in Section 43 (1) (which was not in the previous Act VII of 1918) indicates that the Section could not but be a machinery Section. It is contended that the profits of property in British India must accrue or arise in British India, and the fact that the profits of property also shall in some cases be deemed to be profits accruing or arising in British India indicates that the Section was merely intended to provide for the method in which the tax was to be realised. 36. The word property seems to have been taken from the English Act, though the expression does not appear to have been considered in the English cases cited above. It is possible to conceive of cases where a property may be situate in British India and the profits 'thereof may accrue or arise out of Bri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 788; L. R. 22 I. A. 107., Norendra Nath Sircar v. Kamalbasini Dasi (1896) I. L. R. 23 Calc. 563, 571-2; L. R. 23 I. A. 18, 26. and Ramdas Vithaldas Durbar v. Amerchand Co. (1916) I. L. R. 40 Bom. 630, (636); L. R. 43 I. A. 164. Reference to the previous state of the law would be permissible for the purpose of aiding in the construction of a new statute if any provision therein is of doubtful import: Bank of England v. Vaglidno Bros. [1891] A. C. 107, 145., Robinson v. Canadian Pacific By. Co. [1892] A. C. 481, 487., Mersey Docks v. Cameron (1864) 11 H. L. C. 443, 480. I propose, therefore, to deal with the questions which arise on this reference primarily in the light of the provisions of Act VII of 1918. The question as to what change, if any, was effected by Act XI of 1922 will be considered later. 44. Reading Section 3 (1) find Section 5 of that Act it would appear quite clearly that the Legislature expressly enacted that, save as otherwise provided by the Act, all income, that is to say, sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll, 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 income and total income as contained in Section 2 afford very little assistance in determining what is meant by income. In the absence of a statutory definition we must take its ordinary dictionary meaning--- that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount, and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. Accrues, arises and is received are three different terms. So far as receiving of income is concerned, there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word receiving itself. The words accrue and arise also are not defined in the Act. The ordinary dictionary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hore it arises in British India, where it is deemed to arise in British India, where it is received in British India and where it is deemed to be received in British India# Upon the plain meaning of the two Sections aforesaid in all. the above six classes of cases the income, provided it comes within one or other of the classes of income mentioned in Section 5 and is not otherwise saved or excepted by the Act, is chargeable to tax. Once an income is found to exist it will have to-be examined whether it has accrued or arisen or been received in British India. If so, it is chargeable. If not, the provisions of the Act will have to be looked, into to And whether there is any provision under which it is deemed to accrue or arise or to be received in British India. 50. Now of the six classes of cases aforesaid the last two may be dealt with in very few words. If the income is received in British India no matter wherever it may have arisen or accrued, that is to say, if it is received by a resident in British India from sources that lie outside, it is taxable. If it is income derived from an outside source and is received outside British India by a person resident in British India, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly from any business connection in British India, is under Section 33 (1) to be deemed to accrue or arise in British India, and is so chargeable, under-the Indian Income-tax Act. It will be seen from the very nature of the cases contemplated by the Section that no income which does not represent profits or gains, not accruing or arising in point of fact within British India has been made chargeable by this Section, nor is a non-resident made liable by this Section, as he is already liable by reason of Section 3 of the Act. The profits or gains made chargeable are profits or gains which have accrued or arisen within British India. Section 33 (1), therefore, in my opinion, does not go beyond Section 3 in any respect: it really makes no income chargeable which is not chargeable under Section 3, it imposes no liability on a nonresident which is not imposed by Section 3, it merely explains what kind of income, in fact arising or accruing in British India to a person resident outside, is to be deemed as arising or accruing in British India for the purpose of the Act and provides for a method of realisation, namely, by assessing the agent and holding him liable for payment of the tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on why they should not be legitimately charged to tax. It is sufficient to say that the imposition of a tax under circumstances such as these would not in any way militate against the well-known principle that the power of taxation of any State is, of necessity, limited to persons, property or business within its territorial jurisdiction. 55. This brings us to the next question as to what is meant by business connection . By Section 4 of the Act, income derived from business is liable to tax. It has been argued that unless the income which is now sought to be charged amounts to income derived from business, it would not be chargeable under Section 3 (1), and that Section 33 (1) by enacting that profits and gains accruing or arising directly or indirectly through or from business connection with British India professes to make some thing chargeable which is not chargeable under Section 3 read with Section 5. The answer to this argument, however, is that Section 5, Clause (vi), includes income from all other sources , and by Section 11 income derived from all other sources include income and profits of every kind and from every source to which the Act applies if not include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tish India is let out or the value of the property in British India is increased and pro fits or gains accrue or arise but accrue or arise to a nonresident, Section 42 (1) will bring these profits and gains within the Act; they being deemed to have accrued or arisen within British India. Such profits or gains accrue in British India where the property is situate, though they may acquire only a tangible shape where they are actually received. A further amendment in the shape of the introduction of: a Sub-section, viz, Sub-section (2), together with ah explanation as to what is or is not to be deemed to be received into British India is also noticeable. 56. Turning now to the English statutes, in Colquhoun v. Brooks (1889) 14 App. Cas. 493, 503., Lord Herschell observed: The Income Tax Acts themselves impose a territorial limit; either that from which the taxable income is derived must be situate in the United Kingdom or the person whose income is to be taxed must be resident there. This fundamental principle of the English statutes does not appear in the Act VII of 1918 or Act XI of 1922. The question of residence does not arise, nor any territorial limits are recognised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there is a broad distinction between trading with a country and carrying on a trade within a country. Lord Watson observed that there may be transactions by or on behalf of a foreign merchant in one country so intimately connected with his business abroad that without them it Cannot be sufficiently carried on, which are nevertheless insufficient to constitute an exercise of the trade within that country within the meaning of schedule D. Lord Watson further went on to observe referring to the case of Sulley v. Attorney-General (1860) 5 H. N. 711; 157 E. R. 1364., as follows: The learned Judges recognised the principle that purchasing of stock in this country with the view of trading in it elsewhere does not of itself 41 constitute an exercise of the trade in the United Kingdom, when that department of the business from which profits or gains are directly realised is carried on in another country. These observations indicate that profits or gains may accrue or arise to a non-resident or may be realised or received by him in respect of business in a country which does not amount to exercise of trade in that country, and that such profits or gains may arise directly or indirect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the Board of Revenue v. The Madras Export Company (1922) I. L. R. 46 Mad. 360., for it seems to me that the learned Judges in that case proceeded upon the supposition that the Legislature intended no change from the earlier statutes which to a large extent were modelled on the English statutes. That there is now a substantial difference is clear, and has been recognised in the cases amongst others, of Board of Revenue v. Ramanadhan Chetty (1919) I. L. R. 43 Mad, 86., In re The Aurangabad Mills Ltd. (1921) I. L. R. 45 Bom. 1286. and In the Matter of A. John Co. (1920) I. L. R. 43 All. 139. 57. An objection has been urged that to include income which did not arise or accrue in British India to a non-resident of British India would be to make not actual but notional income chargeable. The taxability of notional income is an idea not foreign to the Act, for by Section 8 of the Act bond fide annual value of property has been made assessable as-being income which has accrued to the property, though it may not have actually arisen from it. It is notional in the sense that its quantum has to be determined by calculation, but it is real in the sense that it has been act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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