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TMI Blog1925 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... d the assessment are set forth in the following paragraphs. Messrs. Steel Brothers and Company, Limited, are a limited company registered in London under the English Companies Act. The headquarters of the business is in London. The company claims to be, and it is admitted that it is a non-resident of British India. In addition to their business activities in the United Kingdom and in British India, Messrs. Steels carry on business in Siam. Part of their income is also derived from investments in the United Kingdom. Income from both these sources, viz, business carried on outside of British India and investments in the United Kingdom, do not come under the scope of the Income-tax Act and are not concerned in the present reference. Part of Messrs. Steels' income also is derived from business wholly carried on within British India. As a type of this class of business we may take, for instance, the purchase of paddy in Burma, the milling of it in Burma and the sale of the resulting rice in Bombay. Income from this class of business is admittedly liable to Indian income tax and it also is not concerned in the present reference. The third class of business carried on by Messrs. Ste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and also of their export trade. As regards rice Messrs. Steels purchase paddy in Burma which is milled in their mills in Burma. Of the three resulting products, white rice, broken rice, and bran, all three, may be exported. But it does not follow that if one of the products resulting from the milling of a particular parcel of paddy is exported that the other products will also be exported. They may be sold locally. The three products, white rice, broken rice and bran from a particular parcel of paddy may all be sold in India or they may all be exported; or any of the intermediate permutations and combinations between export and local sale may take place. In the department of Cotton and Produce the principal commodities dealt in are cotton and groundnuts. As regards cotton raw cotton (kappas) is purchased and ginned in Messrs. Steels' mills, there sulting product being cleaned cotton and cotton seed. The cleaned cotton is baled. Some of it is exported to Europe, some of Japan, and some of it is sold in India. Part of the cotton seed is pressed, the resulting products being cotton-seed oil and cotton seed oil-cake. The cotton-seed oil is sold locally. The cotton-seed oil-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,354 13 2 (g) London Commission on Stores shipped ... ... 7,199 0 0 It is necessary to examine these items seriatim. It will also be necessary to subdivide some of the items into different categories from the point of view of liability to income-tax. As regards the two items: £ s. d. (a) Profit on Burma Rice in London ... … 68,218 14 11 (b) Profit on Timber in London ... 14,163 0 0 the following draft of the present paragraph was made by me after interviews with Messrs. Steels' representative and was submitted by me to Messrs. Steel Brothers for their remarks: The first two items : £ s. d. (a) Profit on Burma Rice in London ... 68,218 14 11 (b) Profit on Timber in London ... 14,163 0 0 appear to be entirely homogenous for the purposes of the present reference. The two sums in question represent the profits accruing to Messrs, Steels' respectively out of their transactions in Burma rice and in Burma timber sold outside of British India. Messrs. Steel Brothers' method of accounting for this class of business is such that all the profits are shown as accruing in London or at any rate in the London books. For s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... differently. Steels' method of accounting for this department of their business is different to that followed in the case of rice and timber. Formerly up till 1920 the Cotton and Produce department of Messrs. Steels' business was carried on through the medium of a limited company, the Jamal's Cotton and Produce Company, Limited, in which Messrs. Steels held half the shares and of which Messrs. Steels were Managing Agents. This company is now defunct and its business has been taken over by Messrs. Steels and is run by one of their departments. But the former method of accounting as between Steels, London, and this department of the business in Burma has persisted. This is that Messrs. Steels, London, in consideration for the work done at the London end, charge Messrs. Steels, Rangoon, a commission of 2 & 1/2 per cent. of the sale proceeds received for cotton and produce sold by the London Managers out of British India. In the case of this item the actual profit accruing is shown as accruing in the Rangoon books, and is shown as a Rangoon profit. (It is assumed for the purposes of the present reference that the whole of this sum of £ 6,816-18-8 is of the nature ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the produce exported by Messrs. Steels in all the three departments of their business concerned consists of produce converted or worked up by them in Burma. But, again in all the three branches of their business, part of the produce exported was purchased by Steels in Burma in the same form in which it was exported. It is possible that it will be necessary to differentiate for the purposes of the present reference between each of the two classes of business. In their books Messrs. Steels do not maintain separate accounts for the two classes of business. The extraction of figures showing separately the profit from the two classes of business would involve considerable labour. In the present case the contention of Government is that the whole of the profits concerned from both classes of business are liable to Indian income-tax. Messrs. Steels contention is that no portion of the profits concerned is liable to income-tax. It is possible that ultimately it will not be necessary to extract the figures in question. Accordingly, in order to save trouble, I have decided with the consent of Messrs. Steels to adopt for the purposes of the present reference an arbitrarily fixed figure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s necessary to examine the relations between Messrs. Steels and (a) the Indo-Burma Petroleum Company, Limited; (b) the Attock Oil Company, Limited; and (c) the Burma Company, Limited. The Indo-Burma Petroleum Company, Limited, was originally founded by Messrs. Steel Brothers and Messrs. A. S. Jamal Brothers, each of whom held half of the issued shares. The original authorized capital of the Company was ₹ 1,00,00,000 of which ₹ 93,38,000 was issued almost immediately. The issued shares were held equally between Messrs. Steels and Messrs. Jamals up till the end of 1921 when Messrs. Jamals fell behind. In the last annual statement filed with the Registrar of Joint-stock Companies of a total of 1,55,950 shares issued, 92,975 shares were held by Messrs. Steel Brothers direct. The original Articles of Association contain provisions ensuring that in the event of new shares being issued half of every such issue should be offered to Messrs. Steel Brothers and Company, Limited, and half to Messrs. A. S. Jamal Brothers and Company, and in the event of either of these two parties not exercising its option of taking up its full quota of shares that the other party should have the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing up in Messrs. Steels hands in Burma and of £ 2,832-12-0 being profits on timber purchased in Burma and exported in the same form as when purchased, liable to Indian income-tax? III. Is the whole or part of the sum of £ 6,816-18-8 (approximately) described as London profits on cotton and produce and consisting of £ 5,453-10-11 (approximately) being profits on cotton and produce which has undergone some process of conversion or working up in Messrs. Steels' hands in Burma and £ 1,363-7-9 (approximately) being profits on cotton and produce purchased in Burma and exported in the same form as when purchased liable to Indian income-tax? IV. Is the whole or part of the sum of £ 2,507-16-9 described as profits on insurance in London and consisting of £ 2,149-19-10 being brokerage and discount allowed on marine insurance taken out in London covering rice shipments from Burma and £ 357-16-11 being. Agency Commission on Fire, Riot and Civil Commotion covers taken out in London on rice stored in Europe liable to Indian income-tax? V. Is the whole or part of the sum of £ 3,667-8-11 described as "London Commission Account, Indo-Burm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... importance, and it has been very fully and ably argued before us for three days. A great many cases have been cited before us, both English and Indian, but it will be only necessary, for the reasons hereinafter given, to refer to a few of these. The assessment was made under the provisions of S. 4 (1), read with S. 42 (1) of the Indian Income-tax Act, 1922. The provisions of S. 4 (1) run as follows: Save as hereinafter provided, this Act shall apply to all income, profits or gains, as described or comprised in S. 6, from whatever source derived accruing, or arising, or received in British India, or deemed under the provisions of this Act to accrue, or arise or to be received in British India, On reference to S. 6, the only head therein applicable seems to be the 4th-"Business"-In the definition section- S. 2 (4)-Business includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The firm admittedly has various rice mills, saw-mills, cotton ginning mills and vegetable oil mills in the Province, whereby commodities or raw material are "worked up into forms suitable for use." (New Oxford Dictionary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se processes are necessary stages which terminate in money, and the income is the money resulting less the expenses attendant on all the stages. The first process seems to their Lordships clearly within sub-S. (3) and the second or manufacturing process, if not within the meaning of 'trade' in sub-S. (1), is certainly included in the words 'any other source whatever' in sub-S, (4). So far as relates to these two processes, therefore, their Lordships think that the income was earned and arising and accruing in New South Wales. As the Commissioner of Income-tax, in his opinion attached to the reference, seems to have fallen into an error on this point, it is well to remember that their Lordships did not decide that the whole of the profits to the Company were chargeable. They merely answered the first question stated in the special case in the affirmative, and that question was whether the Companies had any income in 1897 within the meaning of the Act. Applying that case to the present, it seems clear that, in determining whether any income, profits or gains arise or accrue, we must not be content to look only at the last stage of the accrual, but must take into co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question in the English Acts is whether there is a trade exercised in the United Kingdom. This, as we have seen, is not the case under the Indian Acts. We may here state that, though the Madras decision, already quoted, in Boards of Revenue v. Madras Export Co. A. I. R. 1923 Mad. 422, was under the Indian Income-tax Act of 1918, for the purposes of the question before us that Act does not differ from the Act of 1922, with which we are dealing. A significant point is that the words "or deemed under the provisions of this Act to accrue, or arise, or to be received in British India" in S. 4 (1), and the analogous words in S. 4 (2) do not appear anywhere else in the Act except in S. 42 (1). That being so, it is, in our opinion, necessary to read both sections together to arrive at the meaning of the Legislature. In other words, it is necessary to look to S. 42 (1) to find out, in the case of a non-resident, what income, profits or gains are "deemed to accrue, or arise, or to be received in British India" under the provisions of the Act; and from S. 42 (1) we find that all profits or gains accruing or arising to a non-resident, whether directly or indirectly, thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce purchased by the assessee in Burma and exported in the same form as when purchased. But a serious practical question arises as to whether all the net profits are liable to Indian income-tax. As we have already seen, their Lordships of the Privy Council did not so decide in the case of Commissioners of Taxation v. Kirk [1900] A. C. 588=69 L. J. P. C. 87=83 L. T. 4. At page 42. Mr. Justice Mukerji, in the Full Bench case of Rogers Pyatt Shellack Company v. Secretary of State for India 52 Cal. 1= A. I. R. 1925 Cal. 34 (F. B.), seems to indicate that the calculation of what part of the net profits are to be deemed to arise and accrue in India and what part at the place of disposal and realization may have to be made. No doubt, in calculating the net profits, due deductions have already been made in respect of the Home establishment; but this in, our opinion, is not sufficient. If the assessee had not had a Head Office in London and wished to ship and dispose of its produce in the English market, it could only do so, for ordinary practical purposes, by means of commission agents there, and a reasonable remuneration to such commission agents would have to be deducted before arrivin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndon, on sale of wax, etc., in the United Kingdom for account of the Indo-Burma Petroleum Company, our answer is the same as our answer to Question No. 3. With regard to Question No.6: The last two items of £ 740-0-5 and £ 1,239-19-2 are in our opinion, not liable to income-tax in Burma. The first item of £ 6,374-13-7 is described as an allowance from the Attock Oil Company, Limited, to cover administration expenses as Managing Agents as per agreement dated the 14th November 1921. So much of this sum as represents profits on management in British India is assessable to Indian income-tax. There are not sufficient data before us to answer this question with regard to this item more specifically. With regard to Question No. 7 the reference does not specify what part of the item arises from commission on stores not for sale, such as mill plant and accessories, and what, if any, arises from goods for sale, such as piece-goods. As we have already indicated, the Head Office in London are entitled to charge reasonable commission on all goods shipped to their branch in Burma. Unless the commission charged is unreasonable it is not assessable to income tax in Burma. On o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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