1. This reference is made under Section 66(1) by the Income-tax Appellate Tribunal in respect of the respondent assessee, at the instance of the Commissioner The admitted facts are that the Insurance Company, which is doing life insurance business and held to be resident in British India, has certain securities with the Midland Bank, London. The interest on these securities has been recovered but not brought into British India. The assessee claimed that under the third proviso to Section 4(1) it was entitled to an exemption of Rs. 4,500 in respect of this foreign income. The taxing authorities contended that the proviso did not apply. The Income-tax Tribunal rejected the contention of the taxing authorities. The following question is submitted for the Court's opinion:
Whether in the circumstances of the case it has been rightly held that the Western India Life Insurance Company Limited, which is a company resident in British India, is. entitled to a deduction of Rs. 4,500 under the third proviso to Section 4 of the Income-tax Act?
2. On behalf of the Commissioner it is contended before us that the scheme of Section 4 is first to divide the income in respect of a resident in British India into two parts : (1) income which accrues to him in British India; and (2) income which accrues to him without British India. The next stage is to find out whether, out of the income which is found to have accrued to him outside British India there exists any income which can be described as deemed to accrue or arise to him within British India by reason of Section 42 of the Income-tax Act. It was contended that before the amendment of the section in 1939 the opening words of Section 42 were:
In the case of any person residing out of British India....
3.It was contended that by the alteration in the structure of the section the first part of the amended Section 42 applies to residents and non-residents. Therefore, if the income in question is covered by the words of the first part of Section 42, it shall be deemed to be income accruing or arising within British India and, therefore, it will be taken out of the operation of Section 4(1)(b)(ii) of the Act. It was strongly urged that there were no words in the first part of Section 42 to show that it applied only to non-residents.
4. In my opinion this contention is unsound. Section 4(1)(b) deals with the income of a resident in British India. Sub-clause (i) deals with his income, which has accrued or arisen in British India or is deemed to accrue or arise to him in British India. Sub-clause (ii), which is an independent clause, covers all his income which has accrued or arisen to him without British India. Sub-clause (iii) deals with income which has accrued or arisen to him without British India, within a certain period, but is brought into or received in British India by him in the accounting year. Sub-section (c) is again material to be noticed. It deals with the case of a nonresident and provides that the income which has accrued or arisen or is deemed to have accrued or arisen to him in British India during such year shall be included in his assessment. It must be noticed that while the expression 'deemed to accrue or arise' is found in Section 4(1)(b)(i) and Section 4(1)(c), it does not find a place in Section 4(1)(b)(ii). It should again be noticed that while amending Section 42 the Legislature has still retained the marginal note 'Non-residents' against that section. In my opinion the division of income in respect of a resident in British India into what accrues in British India and what accrues outside British India, and then to carve out a portion from what has accrued outside British India and make it fall under Section 4(1)(b)(i) on the ground that it is deemed to have accrued to him in British India, is improper. The scheme is to find out first whether in respect of such assessees the income has accrued to him in British India; if not, in respect of an item for which he is sought to be charged, to find out whether it is deemed to accrue to him in British India, If, on the other hand, the income is shown clearly to have accrued to him without British India, the question of the item having deemed to accrue to him in British India does not arise.
5. Apart from that, in my opinion, Section 42 does not apply to this case at all. If the contention of the Commissioner was correct, the section would have been divided into two parts : the first part covering the case of a resident and a non-resident and the second part providing the machinery by which the income, which was deemed to have accrued to the non-resident assessee could be brought to assessment. By making the whole of the first paragraph as one, and connecting the two parts of that paragraph by the word 'and', the Legislature has clearly indicated that it was making provision for the assessment of a non-resident only by that paragraph. I have already pointed out that in Section 4(1)(c) taxation of that part of a non-resident's income, which is deemed to have arisen in British India, is contemplated. Again, the various expressions used in the first part of that paragraph of Section 42 appear inappropriate when considered in connection with a resident assessee. The income, in the contingencies mentioned there, ordinarily would arise or accrue in British India, and except by stretching one's imagination one cannot conceive of cases when those circumstances apply in respect of a resident in British India. Giving the words used in Section 42 their natural meaning, it seems to me that the whole of the first part of Section 42 applies to non-residents and is not intended to define the expression 'deemed to accrue or arise within British India' in respect of a person ordinarily resident in British India. If the intention of the Legislature was to define the expression 'deemed to have accrued in British India' in respect of all persons, this should have been done in the definition in Section 2 and not under Chap. v. which deals with special cases only. The very fact that Section 42 is put under this Chapter, in my opinion, negatives the contention that this expression is defined for all assessees.
6. It is not disputed that the third proviso to Section 4(1) would apply if the income is considered as falling under Section 4(1)(b)(ii), and not under Section 4(l)(b)(i). In my opinion, therefore, the view of the Tribunal was correct and the answer to the question must be in the affirmative.
7. The Commissioner to pay the costs of the reference.
8. I agree.
9. The total income of a person resident in British India includes income which accrues or arises or is deemed to accrue or arise in British India and income which accrues or arises without British India during the previous year and such total income is liable to tax. In the case of a non-resident it is only the income which accrues or arises or is deemed to accrue or arise to him in British India that is liable to tax. It was, therefore, necessary for the Legislature to define clearly what was the income of a non-resident which arose or accrued to him in British India which was liable to tax, and to my mind that is clear when one looks to the whole scheme of the Act because Section 42 comes under Chap. V of the Act which is headed 'Liability in Special Cases,' and Section 42 deals with the special cases of non-residents whose income is deemed to be income arising or accruing in British India.
10. I also think that the language used in Section 42 is extremely inapt if the Legislature intended that language to apply not only to non-residents but to residents.
11. I, therefore, agree with my learned brother Kania that the question raised in this reference should be answered as he has suggested.