1. The Income-tax Department is known to cast itsnet very wide in order to collect as much tax as possible. To the extent that its activities are legal and supported by the law, we have given every encouragement to the Department, but this is a striking case where there does not seem to us the slightest justification for the attempt made by the Department to collect the tax from this particular assessee.
2. The assessee is an agent of a non-resident of the Hyderabad State. The assessee admitted that he was the agent of the non-resident in respect of certain transactions effected by the non-resident principal in taxable territories and these transactions constituted a business connection between the agent and the non-resident. But what was contended by the taxing Department was that the agent was liable to pay tax in respect of all the income of the non-resident under Section 42 although the non-resident had done business through other agents in respect of which the assessee had nothing whatever to do. The assessee contended that he should be assessed in respect of those transactions only in which there was a connection between him and the non-resident as an agent but the taxing Department rejected that contention and proceeded to assess the assessee in respect of all the income earned by the non-resident in taxable territories. This contention of the Department, strangely enough, was upheld by the Tribunal, and the ground on which it has been upheld is that whatever inconvenience, hardship and injustice such a construction may cause, the language of Section 42 (1) of the Income-tax Act, is clear and explicit and it is the duty of the Tribunal to give effect to that language. It is a perfectly true that it is not for the court to strain the language of taxing statue. If the language is doubtful, or ambiguous, the Court must certainly put an interpretation upon the language which is favourable to the subject. But where the language is not capable of a meaning favourable to the assessee, however, reluctantly, the Court must give effect to the statue and leave it to the Legislature to amend the statute. But we are satisfied in this case that not only the language is not ambiguous, but it is clear and explicit and it is capable of only one interpretation and that interpretation is in favour of the assessee.
3. Turning to the Section 42 it deals with income which in fact does not accrue or arise within the taxable territories, but which by reason of provisions of that section is deemed to accrue or arise within the taxable territories. Section 42 sets out various heads in respect of which a non-resident can be charged to tax. Therefore the first thing that has got to be ascertained under Section 42 is whether a non-resident to liable to tax in respect of one or more heads mentioned in Section 42. Having determined that, the next question is whether he has an agent, and if he has an agent the taxing Department has been given the option to charge the tax either in the name of the non-resident or in the name of his agent, and if the taxing Department assesses his income in the name of his agent certain important consequences follow and those consequences are that the agent shall be deemed to be for the purposes of the Act the assessee in respect of such income-tax. In our opinion, it is clear that an order that the agent should become liable to pay tax he should be an agent qua the particular head mentioned in Section 42 in respect of which the non-resident is liable to tax; or in other words, income liable to tax under Section 42 must be connected with the agency in respect of which the assessee is the agent. Section 42 does not mean that if a particular person is an agent in respect of one head under Section 42 he would be liable to pay tax in respect of all the heads under which the non-resident may earn income which will be liable to tax under the provisions of Section 42.
4. Now, the second proviso to Section 42 throws considerable light on the interpretation of Section 42 itself. That proviso gives the right to the agent to retain, out of the moneys payable by him to his principal the non-resident, a sum equal to his estimated liability under Section 42 and he has also been given the right to secure from the Income-tax Officer a certificate stating the amount to be so retained pending final settlement of the liability and the certificate so obtained shall be his warrant for retaining that amount. Therefore the legislature realising that the agent may have no right against his principal in the event of his being called upon to pay tax and being compelled to pay the tax, gives him a special right of retainer as an agent so that to the extent of that retainer at least he would be indemnified against his principal. If the interpretation sought to be put upon Section 42 by the Department were correct, it would mean this that although a person may be the agent of the non-resident in respect of a small business where his principal may earn profits to the extent of a few thousands and the liability to tax in respect of that business may be very small, if that principal has other large businesses in respect of which the assessee has nothing whatever to do, if he has properties in the taxable territories the agent can be assessed in respect of all that income and can be made liable to pay tax although what he could retain under the second proviso might be a very small amount of the tax which the non-resident might become liable to pay. But the difficulties do not cease there because if under Section 42 a person becomes an agent, for all purposes of the Act he has got to follow and obey the machinery of assessment. He has got to make a return of the income of his principal, if called upon he has got to produce accounts and documents, and if he fails to do so he is liable to be assessed according to the best judgment assessment. It is difficult to understand how the poor agent who has done some small business on behalf of his non-resident principal and who knows nothing about the properties which his principal has or about other businesses that the principal has transacted, can possibly make a proper return of his income, and yet he might render himself liable to a best judgment assessment and to the payment of tax for which he may have no wherewithal at all.
5. Sir Nusserwanji on behalf of the Commissioner has relied on Section 43. It has often been pointed out by this Court that Section 43 is a machinery section and undoubtedly it points out who can be appointed an agent, and any person employed by or on behalf of the person residing out of the taxable territories or having any business connection with such person may be deemed to be an agent for the purposes of the Section 42. But when we have to determine what the liability of such an agent is, we do not turn to Section 43, but we must turn to be an agent for the purposes of Section 42. Undoubtedly, the assessee in this case can be deemed to be an agent for the purposes of Section 42, but the question still remains as to what his liability is as such agent and that liability must be determined on the terms of Section 42 and not on the terms of Section 43, and it is clear reading Section 42 itself and looking at the scheme of the Indian Income-tax Act that the liability of the agent under Section 42 is not in respect of all income earned by the principal under the various heads under Section 42 but his liability is restricted and limited to the income earn through his agency, income arising in respect of heads qua which he is an agent.
6. It is surprising that such an almost impossible claim was put forward by the Department. Recently, in a case reported in Abdulla Bhai Abdul Kadar v. Commissioner of Income-tax, Bombay city : 22ITR241(Bom) . We were considering the case of an agent under Section 42 and the findings were that the non-resident principal had appointed the assessee and other agents, and it was urged before the Tribunal whether the assessee agent could be taxed under Section 42 (1) on the profits made by the non-resident on the sale of goods purchased through other commission agents in British India. The Tribunal decided this question against the Department. The Department asked the Tribunal to raise the question for the decision of the High Court, the Tribunal raised that question, and the Solicitor-General, impressed obviously by the enormity of the claim made by the Department, very wisely stated that he wanted to withdraw the question and did not press for an answer. But the Department undeterred have come again for a final determination of this question.
7. There is also a decision of the Privy Council, which, though not directly in point, does clearly suggest how surprised the Privy Council was that a contention like the one that is now being put forward before us should ever have been put forward by the taxing Department. That case was Commissioner of Income-tax, Bombay v. Currimbhoy Ibrahim & Sons Ltd. In that case the non-resident was the Nizam of Hyderabad and the agents who were sought to be taxed were Currimbhoy Ibrahim and Sons Ltd. and the contention of the Department was that the assessee company had obtained a loan of Rs. 50,00,000 from the Nizam and in respect of this loan they had paid interest and this interest was sought to be taxed in the name of the assessee on the ground that the non-resident had earned this amount through a business connection in the taxable territories. Now, the Nizam had also property in Bombay in respect of which other agents had been appointed, but the Department having taxed Currimbhoy Embrahim & Sons Ltd. in respect of the interest on the loan also sought to tax the company on the income earned by the Nizam from his property in Bombay. The Privy Council held that no business connection had been established and therefore Currimbhoy Embrahim & Sons Ltd. were not agents of the Nizam. It is true that on that decision no further question arose, but at page 402 their Lordship says this : 'It would indeed be strange if the respondent company as mere debtors to a non-resident paying him outside British India moneys which are not assessable to Indian Income-tax at all, could be made liable for the income-tax due on the non-resident's house property in Bombay with which they had no concern.'Therefore, the view of the Privy Council was that an agent is not liable to pay tax in respect of the income of his principal with which he as an agent has no concern at all, and i. e. exactly the principal underlying Section 42. The whole basis of the Section 42 is not that there should be a non-resident and an agent not merely that the non-resident should be liable to tax under one of the heads mentioned in Section 42, but that when vicarious liability is sought to be imposed upon the agent the limit of that liability is that the agent must be concerned with the head in respect of which the principal is sought to be taxed.
8. It is then urged by Sir Nusserwanji that this interpretation might lead to multiplicity of the assessments. It is said that a non-resident may have several agents in respect of several heads under which income is deemed to accrue or arise within the taxable territories. We see no objection in principal as to why there should not be more than one assessment. If the taxing Department chooses to tax non-resident in his own name, no difficulty can arise, because then there would be one assessment. But if the taxing Department chooses to tax a non-resident in the name of his agent, then in respect of each agency there must be a separate assessment because each agent is a separate assessee and treated as an assessee for all purposes under the Act. Therefore it is not a case of multiplicity of assessments in respect of one assessee. What Sir Nusserwanji overlooked is that each agent in respect of each business or each head under Section 42 is a separate assessee and there must be a separate assessment in respect of every assessee under the Indian Income-tax Act. Therefore we see no objection on principle to several agents of the non-resident being assessed and there being separate assessments.
9. Therefore, in our opinion, the Tribunal, with respect to it, was in error when it took the view that the assessee can be charged in respect of all the income earned by the non-resident which fell under Section 42. We will therefore answer the question submitted to us as follows :-
'In view provisions of the Section 42 (1) the agent Ramnarayan Rajmal is liable to be charged only on income accruing to Shivnarayan Brothers through dealings with him.'
10. Commissioner to pay the costs.
11. Reference answered accordingly.