TMI Blog1957 (5) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... and purchases in India. Both Ahmed Koya and Yusuf Sagar were agents for several other non-resident traders, but we need not concern ourselves with the others in these proceedings. It should be convenient to refer to Abdul Azeez Dawood Marzook and Dawood Alfulaij as non-resident principals and to Ahmed Koya and Yusuf Sagar as the petitioners in the rest of this judgment. Both on the sale and purchase transactions in India carried on by petitioners on behalf of the non-resident principals, the petitioners charged commissions. The same account showed the net financial position, after taking into account both sets of trading operations, on which depended the quantum of remittances from or to the non-resident principals. The petitioners were assessed to income-tax on the commissions they earned, but the profits earned by the non-resident principals as a result of their trading operations in India were not at first assessed to income-tax. Proceedings were taken by the Income-tax Officer in 1950 under section 43 of the Income-tax Act, and after an enquiry Ahmed Koya was held to be the statutory agent of Abdul Azeez Dawood Marzook, and Yusuf Sagar was held to be the statutory agent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sposed of. The rule laid down by a Division Bench of this court in Bangalore Woollen Cotton and Silk Mills Co. Ltd. v. Commissioner of Income-tax, Madras [1950] 18 I.T.R. 423, in which the earlier case law was reviewed, should apply. The question is answered in the affirmative and against the petitioners. Before we answer the second question, we have to determine whether it was the non-resident principals or the petitioners that were assessed to tax for the relevant assessment years. The Tribunal recorded that it was the petitioners and not their non-resident principals that were the assessees. The correctness of that finding was challenged by the petitioners. We shall take one set of proceedings as typical of the rest. In respect of the assessment for 1949-50 the notice under section 34 was issued to Mr. Arab Abdul Azeez Dawood Marzook by agent, Haji P.I. Ahmed Koya, Commission Agent, Beach Road, Calicut . Ahmed Koya received that notice and lodged a return, which he signed Abdul Azeez Dawood Marzook by Haji P.I. Ahmed Koya . The return showed that Abdul Azeez Dawood Marzook had no income to be assessed to tax. Ahmed Koya claimed further that there was no business connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and the Department must only look to the non-resident for the assessment and the collection of revenue. The Tribunal further stated: The objection is unfounded and, in any case, it cannot be allowed to prevail. Section 42, no doubt, says that the income of the non-resident shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case, such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax. The two processes are not mutually exclusive but are complementary and intended to obviate all chances of leakage of revenue and to facilitate collection. It is significant that the notices and the assessments in the case on hand bear the names of both the non-resident and the resident agent. It is, therefore, necessary to look for the substance and reality of the matter and not merely at the form. The Income-tax Officer, as already observed, had taken all the necessary steps by issuing a notice under section 43, and had determined Haji P.I. Ahmed Koya as the statutory agent of the non-resident. The notice under sections 34 and 22(2) was served only on the resident agent. The return was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. Factually, however, the assessments were in the names of the non-resident principals. How that would effect the recovery of the tax assessed may be left out of consideration for the present. That did not affect the validity of the assessment itself. Subject to the findings we have recorded above, we answer the second question in the negative and against the petitioners. The first of the questions referred under section 66(1) of the Act raises the issue of the constitutional validity of section 42(1). In the course of his arguments the learned counsel for the petitioners challenged also the constitutional validity of section 43. The latter question did not arise on the order of the Tribunal. It was not the subject matter of the question referred to this court under section 66(1) of the Act. The constitutional validity of section 43 was not challenged either expressly or even impliedly in the affidavit filed in the writ petitions. In Turner Morrison and Co. Ltd. v. Commissioner of Income-tax [1953] 23 I.T.R. 152, at 162-63 their Lordships of the Supreme Court examined the scope of section 42 and section 43 and concluded: The portion of section 43 which refers to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of any of these other factors. The relevant portion of section 42(1), the constitutional validity of which we have to consider runs: All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories........shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax. We shall set out the provisos later when we have to deal with their scope. In Turner Morrison and Co. Ltd. v. Commissioner of Income-tax [1953] 23 I.T.R. 152 at 161 their Lordships of the Supreme Court observed: Section 42 only speaks of deemed income. The whole object of that section is to make certain income, profits and gains to be deemed to arise in India so as to bring them to charge. The receipt of the income profits and gains being one of the tests of liability, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income-tax, Madras [1953] 23 I.T.R. 101. That test the non-resident principals satisfied in this case. When the existence of such a business connection is established, the scheme that underlies section 42(1) postulates an identity of interests, on which is based identity of liability, as between the non-resident principal and his agent resident in the taxable territories. Section 42(1) provides that the income of the non-resident principal could be assessed either in his name or in that of his agent. He need not necessarily be a statutory agent who satisfied the requirements of section 43. Whoever is assessed, the basis of the taxation is the same, and the extent of tax liability should be the same. It should also be remembered that in whosoever name the assessment is completed, the principal is not exonerated. Even if the assessment is completed in the name of the resident agent it is still the principal's liability that is enforced in the hands of the agent; and that is done after giving the agent an opportunity in the assessment proceeding to arrive at a just assessment. Under the Act and in particular under section 42, a non-resident who has business connection w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew to the ultimate collection of the tax assessed. That would really be the determining factor in the choice he has to make under the enabling provisions of section 42. As we have already pointed out, in whosesoever name the assessment is completed, the principal's is not exonerated at all of his ultimate liability. It is still the principal's liability that is enforced in the hands of the agent, and the agent in that case is given full opportunity to participate in the assessment proceedings. There could be little scope for any arbitrariness or caprice in the choice for which section 42(1) provides. The contention that section 42(1) offended the principle of equal protection of laws guaranteed by article 14 of the Constitution was based on the assumption, that it was an apparently arbitrary choice that was left to the Income-tax Officer, unguided by any statutory directions given in section 42 itself to guide that choice. It is true that section 42(1) itself does not in express terms lay down under what circumstances the Income- tax Officer could elect to order an assessment in the name of the agent of a non-resident principal. That, however, may not be the concluding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal validity of section 42(1) if it is to be tested with reference to article 14. The learned Advocate-General pointed out that the question whether section 42(1) offends article 14 did not arise on the order of the Tribunal, before which the attack was rested only on article 19(1)(g). Even in paragraph 13 of the affidavit in W.P. No. 602 of 1953, where article 14 was invoked, the plea was: Further the whole scheme of the Income-tax Act, under which the Income-tax Officer represents the Government or Prosecution, while at the same time is a judge or the assessing authority, is opposed to article 14 of the Constitution of India; and the assessments themselves are illegal and proceedings for recovery on foot of such assessments are equally illegal. No attempt was made before us to sustain that plea. Despite the lack of specific pleadings, we permitted discussion on the question, whether section 42(1) did contravene article 14 of the Constitution. We are of opinion that section 42(1) does not violate the fundamental right guaranteed by article 14. The next question is does section 42(1) detract from the fundamental right guaranteed by article 19(1)(g) to each of the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered that we are dealing only with an agent through whom the non-resident principal has continuous business connection with the taxable territories. The petitioners themselves furnish typical instances of what such continuous business connection imports. Though no sum was at any time specifically earmarked for the payment of the tax that was or was likely to be imposed, the petitioners continuously came into possession of the assets of their non-resident principals. There was a continuous stream of goods and remittances both ways. Judged even by this feature alone of the position an agent of a non-resident principal fills, the imposition of the vicarious liability on the agent to pay the tax imposed on the income of the non-resident principal cannot be viewed as an unreasonable restriction on the right of the agent to carry on his business. Besides, we have to consider the special safeguards provided by the provisos to section 42(1). The provisos to section 42(1) run: Provided that where the person entitled to the income, profits or gains is not resident in the taxable territories, the income-tax so chargeable may be recovered by deduction under any of the provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was not in a position to know whether a given transaction or a set of transactions in a given period resulted in profits or loss. That the principal alone was in a position to know. How then was the agent to withhold anything due to the principal towards payment of a possible levy of tax? That question is easily answered when we remember that the business connection imports continuity of transactions. In the case of the petitioners and their non-resident principals, there was such continuity. They came into possession periodically of funds or other assets of their non-resident principals. The learned counsel pointed out that, if it was a case of an assessment under section 34, the position of an agent might be even worse. He may not have any assets in his hands, especially if his principal had closed down his business in India before proceedings were taken under section 34. Even taking such exceptional cases into account, the provisos, in our opinion, afford ample safeguards. It is rather futile to contend that under normal circumstances the agent is not in a position to know if the transactions in India of his non-resident principal will lead to profits or not. The agent will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fected the constitutional validity of section 42(1) of the Act. Nor, in our opinion, does it require us to go into the constitutional validity of section 43. As we recorded earlier, we limited ourselves to an examination only of the constitutional validity of section 42(1). Before the Tribunal the petitioners challenged the legislative competence of the Indian Legislature to enact section 42(1). That ground was not reiterated before us. It was only the constitutional validity of section 42(1) in relation to articles 14 and 19(1)(g) that was argued before us; and we have recorded our findings that section 42(1) does not contravene either of these articles. We answer the first of the questions referred in R.C. No. 15 of 1954 in the negative and against the petitioners. As the assessees have failed, they will pay the costs in R.C. No. 15 of 1954. Counsel's fee ₹ 250. The disposal of R.C. No. 15 of 1954 should suffice to dismiss W.P. Nos. 601 and 602 of 1953. The learned Advocate-General pointed out some special features in the case of Ahmed Koya, the petitioner in W.P. No. 602 of 1953. In paragraph 11 of his affidavit the petitioner averred: I submit that I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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