TMI Blog1951 (9) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... reinafter called the India company), under Section 43 of the Act. The India company as well as the California company are incorporated in the Bahama Islands. The California company holds 100% of the shares of the India company either directly or through its nominees. The California company was supplying oil to the India company during the relevant accounting years. The California company was not at any time a producing company, but functioned as a distributing company for the Bahrein Petroleum company and other associated producing companies. The California company discontinued supplying oil to the India company as from 1st January, 1947. The California company also made payments of staff leave salaries when drawn in the United States of America and arranged for the purchase of equipments, etc. from the United States of America, on behalf of the India company. The India company deals in petroleum products making purchases from California company and selling these products in India. The India company paid dividends to the California company in New York. The dividends though declared and paid in New York were paid out of the profits of the company earned from its business earned on i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any in British India? (5) If the answer to question No. 3 is in the negative, whether the India company can be assessed in respect of the dividend income as agents of the California company? 7. The parties agree to the statement of the facts. The Departmental Representative contends that question No. 3 is redundant in view of questions Nos. 1 and 2 referred by the Tribunal. He next contends that questions Nos. 4 and 5 do not arise out of the Tribunal's order. He says that only two contentions were raised by the assessee before the Tribunal, (i) that Explanation 3 to Section 4 was ultra vires and (ii) that the India company was not liable to be appointed an agent of the California company under Section 43 of the Act. An additional ground taken for the first time before the Tribunal was that the dividend income did not fall within the ambit of Section 42; and he contended at the time of the hearing of the appeal that the assessee's additional ground of appeal based on the provisions of Section 42 did not fall to be considered inasmuch as the income was chargeable to tax under Section 4(1)(c) read with Explanation 3 of the Act and the department did not resort to the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. There is a special provision with regard to dividends and that provision is to be found in Explanation 3 which provides that a dividend paid without British India shall be deemed to be income accruing and arising in British India to the extent to which it has been paid out of profits subjected to income-tax in British India. Therefore by reason of this explanation if dividends are pain out of profits which have been subjected to income-tax in British India, they are put in the same class as profits which accrue or arise, or are deemed to accrue or arise within the meaning of Section 4(1)(c). So the department proceeded to tax the California company in respect of dividends received by them under this provision of the law. The contention of the department was that profits had been made by the assessee company in British India, that these profits had been subjected to tax and dividends bad been paid out of those profits to the California company, and therefore, that company was liable to tax. The first contention that has been urged before us by Sir Jamshedji is that the third Explanation to Section 4(1)(c) is ultra vires the Central Legislature. It is contended that this provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hama Islands and the situs of the share is outside British India, and, therefore, there is no territorial connection at all between the California company and British India. Sir Jamshedji says that the only territorial connection is between the assessee company and British India because the assessee company earns its profits in British India. But when we come to the dividends the mere fact that dividends are paid by the assessee company out of the profits which it has earned in British India does not constitute the necessary territorial connection between the assessee company and British India which country is taxing the assessee company. In order to decide this question one important fact has got to be borne in mind and that is that the dividend income of the California company arises out of the very profits which have been made by the assessee company in British India. The profits made by the assessee company may have changed their complexion in the sense that after they were declared as dividends they were paid to its shareholders. But both the dividends and the profits made by the assessee company arise from the same source. Therefore, the question is whether the fact that an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any and the dispute was, as in this case, as to whether the Indian Government had a right to levy income-tax and super-tax on the dividends paid to the company by the Indian companies. The High Court of Calcutta held that Explanation 3 was ultra vires the Indian Legislature. The Governor-General in Council went in appeal to the Federal Court. The Federal Court considered the competency of the Legislature to enact Explanation 3 and came to the conclusion that the legislation was intra vires. The Federal Court also held that the suit filed by the company was not maintainable by reason of Section 226 of the Government of India Act, 1935, as it related to a matter concerning revenue. Now Sir Jamshedji's contention is that inasmuch as the Federal Court held that the suit filed by the plaintiff company was bad under Section 226 of the Government of India Act, and was liable to be dismissed, any other opinion expressed by the Federal Court is obiter and not binding upon us. Spens, C.J., points out at page 272 that as the case has been fully argued before us on the merits and we have come to the conclusion that the appellant's contention must succeed even on the point as to the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her of these two factors are present then the legislation is a competent legislation. A question is again posed by the learned Chief Justice at p. 276: The company can declare dividends only when it has earned profits; the real question therefore is where has the money out of which the dividends are declared been earned? Sir Jamshedji has quarelled with an observation made by the learned Chief Justice on the same page following upon the statement I have quoted above, viz., How exactly this question is to be answered when the dividend has passed through more than one company will depend upon the circumstances of each case. No such difficulty arises here. Sir Jamshedji says that when you construe a section it must be construed objectively and not with reference to the particular facts that arise for the court's determination in the case; a definite construction must be put upon the section itself and the section according to that interpretation must be applied to all cases that come up before the Court for adjudication. It must be borne in mind that what was urged before the Federal Court, and what is being urged before us, is that the Indian Legislature was not competent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to tax in British India. The reason might be considerations of high policy which might have influenced the Legislature in exempting from tax dividends paid by non-Indian companies to shareholders outside British India. But, this amendment does not help us in any way to construe Explanation 3 as it stood before the amendment. It is pointed out by Sir Jamshedji that the judgment of the Federal Court has been impaired both by the decision of the Privy Council in Wallace Bros.' case, and that of the Supreme Court in A.H. Wadia v. Commissioner of Income-tax [1949] 17 I.T.R. 63. Now neither of these two cases in terms deal with the validity of Explanation 3 and as I said before the approach of the Privy Council is not materially different from the approach of the Federal Court in deciding the legislative competence of the Legislature to legislate a tax on income. Turning to the Supreme Court case, that Court was dealing with the provision of Section 42 which brought within the scope of the charging section interest earned out of money lent outside, but brought into British India, and it was held by a majority of the Judges that the provisions was not ultra vires of the Indian Legis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in any way impairs the validity of Raleigh's case decided by the Federal Court. In our opinion the approach of all the three Courts, Privy Council's in Wallace Bros.' case, Federal Court's in Raleigh's case and Supreme Court's in Wadia's case, is the same and that approach is that in order to give effect to what might be called extra-territorial legislation the Court must be satisfied that there is a territorial nexus between the person who is sought to be taxed and the country which seeks to tax. In deciding whether Explanation 3 is intra vires or ultra vires, our approach, with respect, is the same as the approach of the Federal Court and we have accepted it not only because it is binding on us but also because, again with respect, we think it is the correct approach, and an approach which has been approved of both by the Privy Council and by the Supreme Court. The next question that arises is whether in respect of these dividends the assessee company is liable to be taxed. Under Section 4(1)(c) read with Explanation 3 the liability to pay tax would be upon the California company. It is only by reason of Sections 42 and 43 that the assessee compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in British India. According to him dividends may be derived from profits; but inasmuch as the Legislature has not used the expression derived but used the expression accruing or arising dividends are not within the ambit of this section. He says that profits arising or accruing to an Indian company having once arisen cannot arise again when dividends are paid to the shareholders. Now I do not see why if a shareholder receives a dividend from a company it cannot be said that the dividend arose from the profits made by the company. If the source from which his dividend emanates is the profits made by the company, then undoubtedly the dividend that he receives is an income which arises from that source. The argument really is the same as we had to consider when we were dealing with Section 4(1), Explanation 3. If I am right in what I have stated about that explanation that the profits made in India by the assessee company are the source from which the dividends arise then on the same parity of reasoning under Section 42 the assessee company would be liable as an agent in respect of the dividends which have been paid to the non-resident company, the California company, of which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide British India; the California company is registered outside British India and the mere fact that the California company is a shareholder of the Indian company does not constitute a business connection. It is unnecessary is decide this question because we have held that the case of the assessee company falls under the third head of Section 42. The questions raised by the Tribunal do not really bring out clearly the controversy between the parties, and, therefore, to the extent that it is necessary we think that the questions will have to be reframed. Question No. 1 is in order and we answer it in the negative. Question No. 2: I have already pointed out that there is no dispute between the parties at all that the assessee company was properly appointed as the agent of the California company. Therefore, in our opinion, the question does not arise and it is not necessary for us to answer it. In our opinion Question No. 4 should come before Question No. 3, We answer Question No. 4 in the affirmative, but we will reframe the question by adding the words as agents after the words assessee company in that question. Question No. 3: In the affirmative. Question No. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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