Case Note & Summary
The dispute concerned the taxability of foreign income brought into British India by a resident assessee under Section 4(1)(b)(iii) of the Income-tax Act, 1922. The assessee, resident in British India, had accumulated profits on deposit with Bhavnagar Mills, located in Bhavnagar, a princely state outside British India. In the accounting year relevant to assessment year 1948-49, the assessee transferred Rs.50,000 of his share from these deposits to Bombay Mills, a concern in Bombay which he and his brother also controlled. The Income-tax Officer assessed this remittance as income brought into taxable territory under Section 4(1)(b)(iii). The Tribunal initially upheld the assessment, but the Bombay High Court on a reference under Section 60(2) held that the transaction merely substituted one debtor for another and did not amount to receipt of money by the assessee himself in Bombay, and answered the question in favour of the assessee. The Commissioner appealed to the Supreme Court by special leave. During the first hearing, the Supreme Court referred the case back to the Tribunal for additional findings on how the cheque was brought from Bhavnagar to Bombay and the exact agreement between the parties. The Tribunal found that the assessee drew a cheque on the Bhavnagar Mills' Bank of India account in Bombay in favour of self, handed it to Bombay Mills in Bombay for credit to the benami names of himself and his brother, and later instructed Bhavnagar Mills to debit his and his brother's joint account. The Supreme Court held that for a resident assessee, income already received outside taxable territories and subsequently brought into or received in taxable territories was chargeable under Section 4(1)(b)(iii). The majority, per Wanchoo and Gajendragadkar JJ., held that unlike Section 4(1)(a), clause (b)(iii) did not require the receipt in taxable territory to be the first receipt. Sarkar J., concurring, held that income could be received only once, but the assessee clearly brought the income into Bombay, and it was immaterial in what shape it was brought. The Court distinguished Keshav Mills Ltd. v. Commissioner of Income-tax, which dealt with clause (a), and applied Board of Revenue v. Ripon Press and Sundar Das v. Collector of Gujrat. The Supreme Court reversed the High Court and answered the reference in the affirmative, holding the assessee liable to tax on Rs.50,000.
Headnote
A) Income Tax - Taxability of Foreign Income Brought into Taxable Territory - Section 4(1)(b)(iii), Income-tax Act, 1922 - Income already received outside taxable territories and later brought into or received in taxable territories by a resident is chargeable to tax even if first receipt occurred outside; receipt in taxable territory under clause (b)(iii) need not be first receipt. Court distinguished Clause (a), which requires first receipt, and held that assessee's transfer of deposits from Bhavnagar Mills to Bombay Mills through cheque drawn in Bombay constituted bringing income into taxable territory. Held assessee liable (Paras not mentioned).
B) Income Tax - Meaning of "Brought into" and "Received" - Section 4(1)(b)(iii), Income-tax Act, 1922 - Per Sarkar J., income could be received only once, so it was not "received" in Bombay, but it was "brought into" Bombay; it is immaterial in what shape income was received outside and in what shape it was brought in. Cheque drawn in favour of self and credited to Bombay Mills in benami names was sufficient to establish bringing into taxable territory. Held liability under "brought into" limb (Paras not mentioned).
C) Income Tax - Remittance Through Benamidars and Sister Concerns - Section 4(1)(b)(iii), Income-tax Act, 1922 - The fact that amounts were credited in benami names and involved sister concerns did not negate bringing into taxable territory; assessee had full control of both mills and drew cheque in Bombay, so direct receipt in taxable territory. Held taxable notwithstanding involvement of agents or benamidars (Paras not mentioned).
Issue of Consideration
Whether under Section 4(1)(b)(iii) of the Income-tax Act, 1922, income already received outside the taxable territories and later brought into or received in the taxable territories by a resident is chargeable to tax even if the receipt in the taxable territories is not the first receipt; and whether the assessee's transaction of withdrawing deposits from Bhavnagar Mills and crediting them to Bombay Mills through a cheque drawn in Bombay constituted bringing income into Bombay.
Final Decision
Appeal allowed; the judgment of the Bombay High Court was set aside and the question referred was answered in the affirmative; the assessee was liable to tax on Rs.50,000 under Section 4(1)(b)(iii) of the Income-tax Act, 1922.
Law Points
- Foreign income already received outside taxable territory and later brought into or received in taxable territory by a resident is chargeable to tax under Section 4(1)(b)(iii) of Income-tax Act
- 1922
- For Section 4(1)(b)(iii)
- receipt in taxable territory need not be first receipt unlike Section 4(1)(a)
- 'Brought into' includes remittance through banking channels even if income was earlier received outside
- Income tax liability arises when resident assessee brings accumulated foreign income into taxable territory during previous year
Case Details
1961 LawText (SC) (02) 15
Civil Appeal No. 240 of 1955
K.N. Wanchoo, P.B. Gajendragadkar, A.K. Sarkar
1961 AIR 921, 1961 SCR (3) 731
Hardayal Hardy, D. Gupta, G.S. Pathak, S.P. Mehta, S.N. Andley, J.B. Dadachanji, Rameshwar Nath, P.L. Vohra
The Commissioner of Income-tax, Bombay
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Nature of Litigation
Income-tax reference under Section 60(2) of the Income-tax Act, 1922, concerning liability to tax on foreign income brought into taxable territory.
Remedy Sought
The Commissioner of Income-tax sought reversal of the High Court's negative answer and a ruling that the remittance of Rs.50,000 by the assessee to Bombay was taxable under Section 4(1)(b)(iii) of the Income-tax Act, 1922.
Filing Reason
The Income-tax Officer assessed the remittance as taxable income under Section 4(1)(b)(iii); the assessee challenged the assessment, and the High Court ruled in the assessee's favour; hence the Commissioner appealed by special leave.
Previous Decisions
The Tribunal initially held the remittance taxable. The Bombay High Court on reference under Section 60(2) answered the question in the negative, holding that there was only substitution of one debtor for another and no receipt of money by the assessee himself in Bombay. The Supreme Court earlier referred the case back to the Tribunal for further findings on how the cheque was brought and the agreement; the Tribunal submitted further statement; the final decision was now by the Supreme Court.
Issues
Whether under Section 4(1)(b)(iii) of the Income-tax Act, 1922, income already received outside the taxable territories and later brought into or received in the taxable territories by a resident is chargeable even if the receipt in the taxable territories is not the first receipt.
Whether the assessee's withdrawal from Bhavnagar Mills and credit to Bombay Mills through a cheque drawn in Bombay constituted bringing into or receiving income in Bombay by the assessee.
Whether clause (a) and clause (b)(iii) of Section 4(1) impose the same first receipt requirement.
Submissions/Arguments
Appellant contended that even on the High Court's basis of substitution of debtor, the money was received by the assessee himself in Bombay because the respondent became a creditor of Bombay Mills only by advancing the moneys; as soon as Bombay Mills credited the amount to the respondent, there was a notional receipt of money by the assessee and an advance to Bombay Mills.
Appellant further relied on the additional findings that the cheque was drawn in Bombay by the assessee in favour of self and handed over to Bombay Mills in Bombay, establishing that income was brought into taxable territory.
Respondent argued that there was nothing to show that the agreement for advance was not made at Bhavnagar, and no evidence how the cheque or money came from Bhavnagar to Bombay; it could have been agreed at Bhavnagar, making the notional receipt and advance in Bhavnagar, so later money brought to Bombay was Bombay Mills' own money.
Respondent also contended that income is taxable under Section 4(1)(b)(iii) only when it is brought into or received in the taxable territory by the assessee himself, and the facts showed only a substitution of debtor, not receipt by the assessee.
Ratio Decidendi
For resident assessees, income accrued outside taxable territories before the beginning of the previous year and brought into or received in taxable territories during the previous year is chargeable under Section 4(1)(b)(iii); the receipt in taxable territory need not be the first receipt, unlike Section 4(1)(a). The assessee's drawing of a cheque in Bombay and crediting it to Bombay Mills in benami names constituted bringing income into taxable territory.
Judgment Excerpts
Where a person, resident in the taxable territories, has already received, outside the taxable territories, any income etc. accruing or arising to him outside the taxable territories before the previous year brings that income into or receives that income in the taxable territories he would be chargeable to income-tax thereon.
Though for the purposes of cl. (a) of s. 4 the receipt must be the first receipt of income in the taxable territories, for the purposes of cl. (b)(iii) the receiving in the taxable territories need not be the first receipt.
It was immaterial in what shape he received the income in Bhavnagar and in what shape he brought it in Bombay.
the assessee 'brought into' Bombay that income.
Procedural History
The Income-tax Officer assessed the remittance as taxable under Section 4(1)(b)(iii). The Appellate Tribunal upheld the assessment. The assessee sought a reference to the Bombay High Court under Section 60(2) of the Income-tax Act, 1922. The High Court, by judgment and order dated September 3, 1953, in Income-tax Reference No. 15 of 1953, answered the reference in the negative, holding that there was only substitution of debtor and no receipt by the assessee in Bombay. The Commissioner appealed to the Supreme Court by special leave. During the first hearing, by order dated April 24, 1958, the Supreme Court referred the case back to the Tribunal to submit a further statement of case on how the cheque was brought and the agreement. The Tribunal submitted the further statement, after which the Supreme Court heard final arguments and delivered judgment on February 3, 1961.
Acts & Sections
- Income-tax Act, 1922 (11 of 1922): Section 4(1)(b)(iii), Section 4(1)(a), Section 3, Section 60(2)
