1. On this reference certain questions have been referred to us by the Tribunal one at the instance of the assessees and two at the instance of the Income-tax Commissioner. The assessees are the trustees of a trust created by the late Sir Rustom Jehangir Vakil, who died in 1933 leaving behind him three sons, Jehangir, Percy and Toos, and his widow, Lady Tehmina. The relevant assessment year is 1950-51 and the accounting year is the financial year ending 31st March, 1950. One of the assets of the trust consists of 390 shares of the New Jehangir Vakil Mills Ltd. of Bhavnagar. The said company carried on business at the relevant period at Bhavnagar outside the taxable territories and the dividend on these shares would have been taxable in the taxable territories only if it was received by the assessees in the taxable territories in the year of account within the meaning of section 14(2)(c) of the Income-tax Act.
2. A few relevant facts in connection with the dividend that was declared and paid in the accounting year are these. The directors of the New Jehangir Vakil Mills Ltd., by their report dated the 17th of May, 1949, recommended a dividend of Rs. 51 and a bonus of Rs. 300 per share. On the same date a notice was issued convening a general meeting of the members of the company on the 15th of June, 1949. On the 21st of May, the assessees received a sum of Rs. 1,50,000 from the New Jehangir Vakil Mills Ltd. through the firm of Jesingbhai Ujamshi of Ahmedabad. The same was debited by the mills to the assessees' account at Bhavnagar on the same date. The mills declared a dividend on the 15th of June, 1949, and credited to the assessees' account in its books on the 30th of June, two sums of Rs. 1,17,000 and Rs. 19,890 being the bonus and the dividend on 390 shares. This account was debited on the 15th of July, 1949, with a sum of Rs. 1,035 as interest on the sum of Rs. 1,50,000 which had been debited on the 21st of May, 1949. On the 20th of July, 1949, a sum of Rs. 47,250 was credited to this account being the assessees' share in the managing agency commission. The balance of Rs. 33,105, after adjusting the credits against the sum of Rs. 1,50,000 and Rs. 1,035 was paid by a cheque on the 16th of July, 1949. The assessees accepted the assessment on the balance which was remitted to them but contended that the amount of Rs. 1,50,000 which they had received at Ahmedabad was a loan and not a remittance of profits or income and, therefore, it was not taxable in India. The Department took the view that the receipt of Rs. 1,50,000 was not by way of a genuine loan, but it was in the nature of a camouflage for the receipt of income and there was constructive, if not actual, receipt of income. Both the Income-tax Officer and the Appellate Assistant Commissioner also took the view that, in any event, this was merely pre-payment of the expected income. The Tribunal, in dealing with the matter, took note of what had been held by the Income-tax Officer and the Appellate Assistant Commissioner but did not express their own view as to the correctness or otherwise of this position; but they upheld the inclusion of this amount in the taxable income of the assessees on the ground that the dividend, when declared, should have been remitted to the assessees in the taxable territories, and if it was in fact credited to their account at Bhavnagar and adjusted against the loan account, there was a constructive remittance from the State to the taxable territories. The question that has been referred to us as arising out of this order at the instance of the assessees is :
'Whether on the facts and circumstances of the case the sum of Rs. 1,50,000 can be deemed to have been received by the assessee in the taxable territories in the year of account within the meaning of section 14(2)(c) of the Income-tax Act ?'
3. The Tribunal in their order observed :
'When the dividend was declared, ordinarily it should have gone to the credit of the assessees' account. Instead of the dividend being remitted to the assessees and the assessees thereafter remitting the money back to the company for the payment of the loan, the assessees' loan account was credited and a corresponding debit given to the account of the assessees as a shareholder. In these circumstances, we think that the moment the dividend became payable to the assessees and was adjusted against the loan account, there has been a constructive remittance from the State to the taxable territories.'
4. With great respect to the Tribunal, we find it somewhat difficult to follow the reasoning underlying this passage. When a dividend is declared, no doubt the shareholder is entitled to receive it; but it is quite competent to a shareholder to direct that it should not be sent to him in the taxable territory, but should be sent somewhere else. If he does so direct, we do not see how it follows therefrom that he must be deemed to have received it first in the taxable territory and then to have sent it out. In our opinion, such a transaction does not by itself import any receipt in the taxable territory, constructive or otherwise, and the basis on which the Tribunal came to the conclusion that there was a constructive receipt is, with respect to the Tribunal, a basis which we cannot uphold. None the less, we have yet to determine whether there was a remittance of Rs. 1,50,000 to India.
5. Now, the facts of this case which we have set out above are very eloquent and the proximity of dates and the particular action by the parties concerned can leave little doubt in the mind of any one that the amount of Rs. 1,50,000 was actually paid to the assessees at Ahmedabad at the instance of the New Jehangir Vakil Mills Ltd., Bhavnagar. It was an accelerated payment of a proposed dividend and bonus. It was known on the 17th of May, 1949, that the bonus and the dividend had been recommended, and in the ordinary course of events there could have been little doubt that the annual general meeting would sanction the bonus and the dividend and it would become payable within a short time. With this knowledge, within four days of the report of the directors recommending the dividend and the bonus, the mills company requests Jesingbhai Ujamshi of Ahmedabad to pay an amount of Rs. 1,50,000. In order to give this amount the appearance of a loan in their own books of account, they debit the assessees with a sum of Rs. 1,035 as interest, and the moment the dividend is declared they credit to their account the dividend and the bonus and their share in the managing agency commission. There can be little doubt, in our view, that this is nothing more or less than accelerated payment of an amount which both the assessees and the company knew was to become due and payable in a little while, but which in fact was paid in advance in Ahmedabad. Therefore, the receipt is in Ahmedabad of income which became legally payable to the assessees at a future date, but the payment of which was accelerated by both the parties. In this view of the case, in our opinion, the income was rightly brought to tax.
6. Mr. Palkhivala for the assessees has relied on a decision of the Court of Exchequer in Scotland in Commissioners of Inland Revenue v. Gordon. There the assessee, who was a partner in a firm carrying on business in Ceylon, made an overdraft arrangement with a bank in London, and under this arrangement, whenever the overdraft reached Pounds 500 it was transferred to the Colombo branch of the bank. At that branch it was converted into rupees and the overdraft was satisfied in Colombo by payments made into the Colombo branch from the firm in which the assessee was a partner, the payments representing his share in the profits of that firm. It was held that the amount which was paid into the bank's branch at Colombo was not a remittance out of profits received in the United Kingdom. The case does not appear to us to be comparable with the case before us, the essential difference being that in that case there was no remittance to the United Kingdom at all. What was done was that a loan was contracted in the United Kingdom and thereby a debt created; and that debt was transferred to Colombo and satisfied in Colombo, that is outside the United Kingdom, out of profits which the assessee had earned as a partner in Colombo. Obviously, therefore, there could have been no case of a remittance; but in the case before us there was an actual remittance of money to Ahmedabad in the taxable territories and it is not a question of paying the amount outside the taxable territories to satisfy a pre-existing debt.
7. Mr. Palkhivala also very fairly drew our attention to a case which the Department relies upon and that is the Full Bench decision of the Madras High Court in Commissioner of Income-tax v. Nadimuthu Pillai.
8. What was decided in that case is well stated by Krishnaswami Ayyangar, J., at page 260 :
'A man with profits available in a foreign country and wanting to bring them into this country may find it necessary as a measure of convenience to obtain a temporary overdraft, or resort to a temporary borrowing which he proceeds to make good immediately out of his profits . In such a case, the remittance though in forma specifica is a remittance of capital, it is in truth a remittance of profits, and is taxable as such. The loan or the overdraft, as the case may be, and its repayment by the assessee out of profits may be so connected together by proximity of time or otherwise, as to lead to the inference that the remittance was in substance a remittance of profits though to start with, it might appear or is made to appear as if it came out of a capital source.'
9. With these observations we are in respectful agreement and they apply in toto to the facts before us which leave no doubt in our mind that having regard to the proximity of time and all the other factors that we have enumerated above, what was done in this case was a remittance of profit and was taxable as such.
10. We will, therefore, answer the question referred to us in paragraph II of the statement of the case at the instance of the assessees in the affirmative.
11. Turning next to the questions that have been referred to us at the instance of the Income-tax Commissioner, although the statement of the case states that the Commissioner required the Tribunal to refer one question of law, two questions have in fact been referred. The facts out of which these questions arise are these. On the 27th of March, 1951, Jehangir was assessed for the relevant assessment year 1950-51 on an income of Rs. 1,33,000 which included his share in the trust income, namely, Rs. 81,000. The tax demanded was Rs. 42,560 out of which Rs. 39,485 was adjusted against advance payments made under section 18A of the Act. In the case of Percy, a provisional assessment was made under section 23B on the 16th of March, 1951, and the tax liability fixed at Rs. 40,640. After adjusting the advance payment made under section 18A, the balance payable was Rs. 25,000. In respect of Toos, the Department had similarly recovered advance tax under section 18A of about Rs. 30,000. Now it appears that up to the assessment year 1949-50, the Income-tax Officer used to make the assessment on the trustees, but the tax was demanded and recovered directly from the beneficiaries under section 41(2). In the relevant assessment year, the Income-tax Officer proceeded to make the assessment on the trustees; but instead of recovering the tax from the beneficiaries directly as in the past, he demanded the entire tax from the trustees and the amazing part of it is that in demanding such tax he refused to give credit to the trustees for the tax paid by the beneficiaries either under section 18A or under section 23B, and it is arising out of this order of the Tribunal that the following question has been raised at the instance of the Commissioner :
'(1) Whether on the facts and circumstances of the case the tax paid by the beneficiaries under section 18A or section 23B of the Act can be set off against the liability of tax of the trustees in respect of the same income ?'
12. We are surprised that responsible officers of the Income-tax Department should taken up so unreasonable an attitude in matters of taxation. What is sought to be taxed in the hands of the trustees is the income which the trustees received on behalf of the beneficiaries, and the Department apparently wants to recover the full tax both from the trustees as well as from the beneficiaries, or, in any event, to recover the full tax from the trustees and retain all advance payments made on behalf of the beneficiaries. The position in law appears to us to be absolutely and entirely clear, that tax shall be levied upon the trustees under section 41(1) (to quote only the relevant part of the sub-section) '....... in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable...' These words cannot leave any doubt in the mind of any reasonably minded person that although the tax may be recovered from the trustees, it is on the income which the trustees receive on behalf of the beneficiaries that the tax is to be imposed 'in the like manner and to the same amount as it would be leviable upon' the beneficiaries themselves. Mr. Joshi, appearing for the Department, has found himself entirely unable to support the stand taken up by the Department and has not attempted to argue that payments made under section 18A or under section 23B are not to be adjusted against the claim for tax.
13. Our answer, therefore, to this question will be in the affirmative.
14. There is another question referred to us apparently as arising out of the question which the Income-tax Commissioner required to be referred to us and that question is :
'(2) Whether it is open to the Income-tax Officer to proceed against the trustees when the demand under section 18A and/or assessment under section 23B of the Act had already been made against the beneficiaries and partly recovered ?'
15. Such a question could have been, if at all, referred at the instance of the assessees. The parties to complain of the want of authority of the Income-tax Officer to proceed against the trustees would be the assessees and not the Income-tax Commissioner, and we fail to see how this question came to be raised as a corollary to the question which the Income-tax Commissioner required to be raised. In any event, neither the assessees nor the Income-tax Commissioner wish that we should decide or answer this question. We, therefore, do not answer the question.
16. In the last paragraph of the statement of the case, the Tribunal refers to a question which the assessees desired the Tribunal to refer to us; but it does not state that it refers that question to us. On the other hand, it states that there is clear authority on that question. The assessees do not wish that the question should be treated as raised because Mr. Palkhivala concedes that it is covered by a decision of this court and he does not wish to have the question answered. Therefore, the question contained in paragraph 17 is not answered.
17. No order as to costs.
18. Reference answered accordingly.