TMI Blog1953 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, that the answers given to the questions which were ultimately considered by the High Court were correct, and the appellant was rightly held liable for the tax on these two amounts subject to all just deductions and allowances. The appeal therefore fails and must stand dismissed - C.A. 151 OF 1951 - - - Dated:- 30-1-1953 - Judge(s) : MEHR CHAND MAHAJAN., N. H. BHAGWATI., S. R. DAS., VIVIAN BOSE JUDGMENT The Judgment of Mahajan, Das and Bhagwati, JJ., was delivered by Bhagwati, J. Bose, J., delivered a separate Judgment. BHAGWATI, J. --- This is an appeal from the judgment and order of the High Court of Judicature at Bombay upon a reference by the Income-tax Appellate Tribunal under Section 66(1) of the Indian Income-tax Act, 1922, whereby the High Court upheld the decision of the Appellate Tribunal that two amounts of Rs. 12,68,480 and Rs. 4,40,878 were the sale proceeds of goods sold by the appellant to merchants in British India, were received in British India and were liable to income-tax in British India. The appellant is a Company registered in the Baroda State as it then was prior to its merger with India. It manufactures textile goods in Petlad in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from the mills premises to the station) on the merchants in favour of recognised banks and shroffs in British India, by sending the same to those banks or shroffs with the railway receipts duly endorsed in favour of the merchants and by instructing the banks or shroffs to recover the amounts including the costs of transmitting the same to them. The amounts of these sales bills were debited by the company to the accounts of the respective merchants and credited to the sales account and the sums recovered by the banks or shroffs from the merchants in British India against the delivery of the relative railway receipts were on receipt of the same by the company credited to the accounts of the respective merchants in their books of account. As regards item (c), the company received Rs. 6,71,735 from the merchants by cheques and hundies drawn on banks and shroffs in British India in favour of the company. These cheques and hundies were negotiated by the company in Petlad and sent back for credit to its accounts with those banks and shroffs. The said cheques and hundies were cashed in British India and the sale proceeds remitted by the banks and shroffs to the company. The amounts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any portion of its income in British India ?" The High Court held that Rs. 12,68,480 were received in British India and included the profits and gains of the business of the assessee company. It held that Rs. 4,40,878 also were received in British India and the company was liable in respect of that amount. In regard to the item for Rs. 6,71,735 the High Court found that the facts stated by the Tribunal were not sufficient to enable it to reach a decision and therefore directed that the Tribunal should submit a supplementary statement of case setting out the several aspects set out in the judgment. The High Court refrained the question in regard to the two items of Rs. 12,68,480 and Rs. 4,40,878 in the manner following :--- "(1) Whether the sums of Rs. 12,68,480 and Rs. 4,40,878 were sale proceeds of the goods sold by the assessee to merchants in British India or were debts due by the said merchants ? (2) Whether if they were sale proceeds, they were received in British India ?" and answered them by stating that they were sale proceeds and they were received in British India. There was also a third question which was comprised in the reference and that question was fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The receipt of these amounts thus fell within Section 4(1)(a) of the Act and the profits or gains of this business thus were received in British India by or on behalf of the company. The company however sought exemption from liability to tax on the grounds (a) that the accounts of the company were kept on the mercantile or book profit basis under which the accrual of profit as shown in the account was the criterion of taxability and Section 4(1)(a) had no application at all ; (b) that it was obligatory on the authorities under Section 13 of the Act to accept that system of maintaining accounts except under the proviso to that section and that the method of computation there was made the very basis of chargeability and Section 10 read with Section 13 operated to save these amounts from chargeability and (c) that the amounts having been treated as received when credit entries were made in the books of account and chargeability having crystallised on the date when the income accrued or was treated as received there was no further scope for a charge when the amounts were subsequently actually received and the subsequent handling of the amounts by the company and the receipt thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts was whether under the mercantile system, profits which were credited in the books could be taxed even though they had in fact not been received and the conclusion reached by the courts was that these profits credited in the books of account were earned and could be charged as having accrued or arisen within British India even though they were in fact not received. In non these cases were the courts concerned with a non-resident claiming have received profits or gains outside British India under mercantile system of accounting and claiming exemption from liability to tax under Section 4(1)(a) in respect of profits actually receive British India. It follows from the above that the mercantile system of accounting treats profits or gains as arising or accruing at the date of the transaction notwithstanding the fact that they are not received or deemed to be received and under that system, book profits are assessed liable to tax. If an assessee therefore regularly adopts the mercantile system of accounting he would be liable to tax on the profits thus credited by him in his books of account subject to all deductions for bad debts as provided in Section 10(2)(xi). Section 4(1)(a) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting adopted by him. The vendor could not say that he is under no further obligation to the purchaser and that the purchaser must pay the price of the goods debited to him as a debt arising out of the book entry. The count in any action filed by the vendor against the purchaser would be a count for the price of goods sold and delivered and would not be a count on an assumpsit or for recovery of a debt due by the debtor to him. It is clear that under these circumstances there is no receipt of the moneys at all, either actual or constructive, in cash or in kind, by actual payment or by adjustment or settlement of accounts. There is also no scope for the argument that even though these sums may not be said to be either actually or constructively received they should be "deemed to be received". The expression "deemed to be received" only means deemed by the provisions of the Act to be received. The phrase statutory receipt might be conveniently employed to cover income which is "deemed to be received", and instances of such statutory receipts are to be found in the provisions of the Act, e. g., Section 18(4), Section 58E, Section 58J(3), Section 7(2), Section 16(1)(c) and Sections 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or arisen to it and so far as the receipt thereof is concerned they were first received in British India when they were received by Messrs. Jagmohandas Ramanlal Co., or by the various banks or shroffs in British India through whom the railway receipts were negotiated. The first receipt of the moneys was therefore when they were paid as such by the merchants to Messrs. Jagmohandas Ramanlal Co., or to the various banks or shroffs as above. What were paid by the merchants to these several parties were the sale proceeds of the goods which had been sold and delivered by the company to them and they were received within the meaning of Section 4(1)(a) of the Act by these several parties on behalf of the company in British India at the time when these payments were made by the merchants to them. Mr. Kolah pressed into service the argument based on Section 13 of the Act that the mercantile system of accounting regularly adopted by the assessee was obligatory on the Income-tax authorities for computation of his income. While agreeing generally with that submission in case of residents, we doubt whether that position would be available to a non-resident, who maintains his books of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a), (b) and (c). Clause (b) deals with residents and (c) with non-residents. As (a) is general, it is legitimate to infer that it refers to both. Therefore, the words "received" and "deemed to be received" must be construed in the same sense in both cases except of course where it is otherwise provided in the Act, for sub-section (1) is made subject to the provisions of the Act. Now the words "deemed to be received" can be excluded from consideration at once because I agree that they are confined, and are intended to be confined to what I may call the deeming sections in the Act, that is to say, to cases where the deeming must be done under the express provisions of the Act. That leaves us with the word "received". I am of course only dealing with Section 4(1)(a) which deals with "receipts" and not with Section 4(1)(c) which refers to "accruals" and "arisals" and to that which is deemed to "accrue" or "arise". Now this, in my opinion, is to be contrasted with the words "accrue" and "arise" which are used in clauses (b) and (c). Though there may be overlapping in some cases, I do not think the three are intended to mean the same thing. The Privy Council thought in Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow this to my mind is of vital importance. The primary object of the Income-tax Act is to tax and not merely to ascertain an income. The computation of the income is subsidiary and is only for the purposes of ascertaining the quantum of the tax : see Commissioner of Income-tax v. Kameshwar Singh . Therefore, if the legislature chooses to lay down different methods of computation and say that the taxation shall be on the amount so computed, it is essential that these methods be adhered to. In some cases this may be to the advantage of the assessee and in others it may operate to his disadvantage. But that is immaterial. The importance lies in this. All that can be taxed in a given year are the profits and gains which are received or which arise or accrue in the "previous year", and if the Act directs that the profits are to be computed in a given case on "accruals" or "arisals" and not on actual receipts it is essential that that be done ; and it follows from that that the tax in such a case can only be on the accruals or arisals and not on the actual receipts, for clearly you cannot tax on that which you are forbidden to compute in a case where the tax can only be levied on what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her matter. It is to my mind unquestionable that they arise, in part, at any rate, out of the sale. Therefore, if the goods are sold in the taxable territories, then, to my mind, the profits, or a portion of them, arise there. As the Privy Council pointed out in Commissioner of Income-tax v. Chunilal B. Mehta, in determining where the profits arise the place of the formation of the contract is not the sole criterion, other matters, as for example acts done under the contract are also material. I am not here attempting to go behind the decision of the Supreme Court to the effect that the place of sale is not necessarily the place of the receipt of the profits. I am construing the word "arise" and not "receive." That brings me to the next question, where were the goods in the present case sold ? That is a mixed question of fact and law and must vary in each case and must, in my opinion, be answered in a commonsense way and not necessarily in the artificial manner laid down by the Sale of Goods Act to determine where and when the property passes. What are the facts here ? In the case of the Rs. 4 lakhs odd, the control over the corpus of the goods was retained by the assessee ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tical purposes that is the date ordinarily referred to, but a man cannot manipulate the amount of his tax by choosing to enter or not to enter items which ought to be entered on a particular date, as and when he pleases. Now the Rs. 4 lakhs odd represents actual receipts but that is not what is taxable when the computation is based on the mercantile system. What should be taxed, or rather taken into account for the purposes of taxation, are the figures entered in the accounting year as the sale price of the various transactions which the Rs. 4 lakhs represent. The profits which arise out of these transactions do not, on my view, escape tax because the profits accrue or arise in the taxable territories. But the figure on which the tax is to be computed is not the 4 lakhs odd which represent the actual receipts but another figure which unfortunately we have not been given. I am of course assuming that the figures were duly entered in the books at the proper time in accordance with the mercantile system of accounting. If they were not, then the Income-tax authorities have power to tax income which, for one reason or another, has escaped assessment. Turning to the Rs. 12 lakhs. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits and gains, in my opinion, arose there in the same way as in the 4 lakhs case. If Jagmohandas Company were the actual agents of the assessee as were the banks in the other case, and the payments were made in the taxable territories, then the accrual and arising was direct. If, however, they were not the agents in the strict sense of the term, then I am of opinion that Section 42 would be attracted because at the very least there would be a "business connection," provided of course the payments were made in the taxable territories. Now, here again, I am looking to what was actually done in order to determine what the rights were, for it is evident that what was done was done in pursuance of some agreement, express or implied, between the parties which agreement regulated their rights, and those rights in turn determine the place where the profits accrued or arose, or must, because of Section 42, be deemed to have accrued or arisen. In my view, the question referred by the Income-tax Appellate Tribunal in its statement of the case does not reflect the true position because it concentrates on the actual receipts. If the cash basis system of accounting was germane h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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