TMI Blog1925 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. Steels involves transactions both in Britis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-cake is exported to Europe. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14,163 0 0 (c) Profit on Cotton and Produce in London ... 6,816 18 8 (d) Profit on Insuarance in London ... 2,507 16 9 (e) Loudon Commission a/c I. B. P ... 3,667 8 11 (f) Sales Commission, etc. a/c Attock Oil Company Limited 8,354 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of converting or working up and of putting the produce on board a ship, there is an item of Milling Hire charged to London for cost of converting paddy into rice which leaves a margin of profit in the Burma Accounts. It will be readily understood that when mills are employed in milling both for shipment to Europe and for local sales, it is not possible to determine the exact cost of conversion of each lot of rice milled for Europe and a fixed charge is, therefore, adopted. In our experience of the rice milling industry, the milling hire thus charged is greater than can generally be obtained by selling rice in the local market. Conversely, it is our experience that we can generally buy rice in the local market as cheaply as or at a lower price than the cost to produce the same quality in our own mills inclusive of the above-mentioned milling hire. On these grounds we claim that the price at which we transfer rice to our London accounts is at least as high as could be obtained by selling in Rangoon. Any profit secured over and above this price is, therefore, in our opinion, due to the operations of our London house who finance shipments and sell the rice in the various markets to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2,149 19 10 (b) Agency commission on Fire, Riot and Civil Commotion covers taken out in London on rice stored in Europe ... 357 16 11 Total ... 2,507 16 9 The item London Commission Account Indo-Burma Petroleum Co., Ltd., 3,667-8-11 is made up as follows : s. d. (a) Commissions earned by Oil Department, London, on sales of wax, etc., in the United Kingdom for account of Indo-Burma Petroleum Company Limited ... 1,055 16 6 (b) Commission earned by Steels' Export Department in London on Stores, etc., purchased and shipped from the United Kingdom to Burma for account of the Indo-Burma Petroleum Company, Limited ... 2,608 12 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. For all the three departments of Messrs. Steels' business that are concerned it is assumed that of the total profits 80 per cent. arises from transactions in produce which was submitted to some process of conversion or working up in British India and that 20 per cent. arises from transactions in produce which was exported from British India by Messrs. Steels in the same form as when purchased by them in British India. This 80:20 proportion is purely arbitrary. If as a result of the decision of the Honourable Judges in the present reference it is necessary to differentiate between the profits of the two classes of business, the exact figures will have to be worked out later on. According to this arrangement we have the following sub-division of some of the items enumerated in paragraph 8 above: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 right of preemption before any shares were offered to the public. The Articles of Association also contain provisions that, while certain conditions should continue, Messrs. Steels had the right to nominate, out of a directorate of three, one Director and Mess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-Burma Petroleum Company, Limited, and consisting of 1,058-16-6 being commission earned by the Oil Department, London, on sales of wax, etc., in the United Kingdom for account of the Indo-Burma Petroleum Company, Limited, and 2,608-12-5 being commission, earned by Steels Export Department in London on stores, etc., purchased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). It consequently manufactures and, so, carries on business within the Province. Any income, profits, or gains arising from such business seems to be chargeable under Ss. 4 (1) and 6 of the Act of 1922. For the assessee it is contended that no income, profit or gain accrues or arises in respect of the bulk of its rice, timber and cotton business, because these goods are shipped to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 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 consideration the previous stages as well. The main battle-ground, however, in this case has been over the provisions of S. 42 (1). For the assessee it is contended that the section is not a charging section at all, but merely a machinery section, that is, in the words of Lord Sterndale, a section which provides a method of carrying out the charge imposed by some other se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, through or from any business connexion or property in British India is deemed to be such income, and is, therefore, chargeable under Ss. 4 (1) and 6. This is the view taken by a Bench of the Calcutta High Court in re Rogers Pyatt Shellac Company v. Secretary of State 52 Cal. 1= A. I. R. 1925 Cal. 34 (F. B.), and we find ourselves in general agreement with the judgment of Mr. Jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch 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 arriving at the net profits earned. But, if the Head Office in London and the various branches controlled by the Head Office in Rangoon happen to be one and the same firm, it does not, in our opinion affect the question. And in arriving at the amount of profits liable to Indian income-tax, the Commissioner of Income-tax, in our opinion, should allow a reasonable commission agent's commission on the sale and realiz ..... X X X X Extracts X X X X X X X X Extracts X X X X
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