Skip to content


Kalyanji Ukka and Co. Vs. Commissioner of Income-tax, Bombay City Ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 35 of 1960
Judge
Reported in[1963]49ITR740(Bom)
ActsIncome Tax Act, 1922 - Sections 4(1)
AppellantKalyanji Ukka and Co.
RespondentCommissioner of Income-tax, Bombay City Ii
Appellant AdvocateN.A. Palkhivala, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - deduction - sections 4 (1) and 10 (2) of income tax act, 1922 - whether the applicant is entitled to deduction with respect to losses suffered in earlier years as well as depreciation in computation of available profits - unless assessee brings forward losses of previous years in books of accounts of current year he cannot claim to set off losses of prior years against profits of current years - depreciation cannot said to be an expenditure for purpose of business - claim of assessee is liable to be rejected. - - 97,398 in the hands of the assessee under section 4(1) (b) (iii). the further appeal filed by the assessee before the tribunal failed. question (c) is in the following terms :whether the tribunal was right in not allowing the applicant the losses suffered.....tambe, j.1. on a requisition made by this court under sub-section (2) of section 66 of the income-tax act (hereinafter referred to as the act), the income-tax appellate tribunal has drawn up a statement of the case and referred three questions for each of the assessment years 1945-46 and 1946-47. the questions for these two years are identical in terms. the questions that fall for consideration in substance relate to the principle of computing income, profits and gains within the meaning of sub-clause (iii) of clause (b) of sub-section (1) of section 4 of the act and determination of its quantum available for remittance in these two years. 2. the assessee is a partnership firm consisting of two partners, who are father and son. they belong to mandvi, a town in the then native state of.....
Judgment:

Tambe, J.

1. On a requisition made by this court under sub-section (2) of section 66 of the Income-tax Act (hereinafter referred to as the Act), the Income-tax Appellate Tribunal has drawn up a statement of the case and referred three questions for each of the assessment years 1945-46 and 1946-47. The questions for these two years are identical in terms. The questions that fall for consideration in substance relate to the Principle of computing income, profits and gains within the meaning of sub-clause (iii) of clause (b) of sub-section (1) of section 4 of the Act and determination of its quantum available for remittance in these two years.

2. The assessee is a partnership firm consisting of two partners, who are father and son. They belong to Mandvi, a town in the then native State of Kutch. The head Office of the firm is at Bombay, but at Bombay income earned is very small consisting of some commissions and interest which amount to a few hundred rupees only. The bulk of the income of this firm is derived from its business at Parbhani and Latur, which are places in the then native State of Hyderabad. The business carried on there is of ginning and pressing factories. The books of account of the head office are maintained according to the Samvat year. The relevant previous year to the assessment year 1945-46 is Samvat year 2000 (from October 30, 1943, to October 17, 1944) and for the assessment year 1946-47, the relevant previous year is Samvat year 2001 (October 18, 1944, to November 4, 1945). The accounting year at Latur is one ending with 31st August and that at Parbhani is one ending with 31th June of each year. Though some account books are maintained at Mandvi, no business is at all done there. The accounting year at Mandvi is also according to the Samvat year. For the purpose of working the ginning factories at Latur and Parbhani, the firm had to make large purchases of stores and other goods at Bombay and make payments for these purchase at Bombay. Similarly, the assessee used to defray certain expenses incurred for working these two factories also at Bombay. Monies used to be often sent by Latur and Parbhani to Bombay either through their respective current accounts in Bombay or in their account called kutch-Mandvi account. It is not in dispute that all the monies remitted by Parbhani and Latur either to Bombay or to Mandvi were received at Bombay. As already stated, the questions referred to this court for both the years are identical in terms. We do not, therefore, consider in necessary to give details of the state of accounts between Latur and Parbhani and Bombay for both the years. We feel and the parties also agree that it would be sufficient to give an analysis of the accounts for one year and we propose to give the analysis of the accounts for the Samvat year 2000, the relevant accounting year for the assessment year 1945-46.

Latur Description ParbhaniRs. Rs.1,64,928 Opening debit balance 46,72568,030 Credits during the year 26,43657,349 Debits during the year 24,7431,54,247 Closing debit balance 45,03310,681 Reduction in the debitbalance 1,692

3. Included in the credits of Rs. 68,030 in the Latur branch, there are credits amounting Rs. 67,100 on five different occasions. Similarly, the credits in the Parbhani branch are on eight different occasions. The total debits of Rs. 57,349 in the Latur account consist of 74 different debits and the total debits of Rs. 24,743 in the Parbhani account consist of 31 debit items. The analysis of these debits in the two branch accounts is as follows :

Latur Description ParbhaniRs. Rs.40,632 Cash sent to 21,07116,717 Cost of goods sent andother expenses defrayedon behalf of branches 3,672----------- ------------57,349 24,743----------- ------------

4. In addition to the transactions between the branches and the head office at Bombay, Latur and Parbhani branches also sent to Bombay Rs. 25,000 and Rs. 34,501 (each on a single occasion) through Kutch-Mandvi account and there is no dispute that these two amounts were also ultimately received in Bombay. The total remittances from Latur and Parbhani to Bombay either directly or through Kutch-Mandvi amounted to Rs. 1,53,697. The income-tax authorities have computed the total profits of the business for the Samvat year 1999 at Rs. 97,368. The assessee in the first instance disputed the computation of the profits at this figure. According to the assessee two items ought to have been taken into account and given credit before computing his total profits. In the first instance the assessee's contention was that the loss incurred by the assessee in the years prior to April 1, 1943, should have been set off against the said amount of Rs. 97,398 and in the second instance it was contended that depreciation on the fixed assets admissible under section 10(2) of the Act should have been excluded from the said amount of Rs. 97,398. According to the assessee, therefore, the amount of profits for the Samvat year 1999 would not amount to Rs. 97,398 but amount to a figure reduced by setting off the amount of losses and the amount of depreciation therefrom. In the second alternative, it was contended on behalf of the assessee that at any rate even assuming that the profits for the Samvat year 1999 have been correctly computed at Rs. 97,398, they were not available in the Samvat year 2000 for being remitted to Bombay. According to the assessee, profits of the Samvat year 1999 amounting to Rs. 90,000 had already been remitted to Bombay in the assessment year 1999 itself and, therefore, the amount of profits which could be available for being remitted in the Samvat year 2000 was at any rate not more than Rs. 7,398. In the further alternative it was contended that at any rate there being remittances both from Bombay and Mandvi to Parbhani and Latur and from Latur and Parbhani to Bombay and Mandvi only the excess of remittances from Prabhani and Latur to Bombay and Mandvi could be the amount of profits brought to India and it is only that amount which was taxable in the hands of the assessee. According to the assessee, having regard to the accounts the excess of remittances would amount to only Rs. 18,033 during the Samvat year 2000 and that alone was the taxable income. The Income-tax Officer, holding that the profits for the Samvat year 1999 amounted to Rs. 97,398, held that the entire amount was available for being remitted to Bombay in the Samvat year 2000. He however held that the amount of profits that could be said to have been brought from Parbhani and Latur to Bombay would only be the excess of remittances in the account between Bombay on the one hand and Parbhani and Latur on the other hand and the amounts sent by Prabhani and Latur through Mandvi. On these findings he determined the amount of profits brought to Bombay at Rs. 87,100. The assessee appealed against the said order of the Income-tax Officer to the Appellate Assistant Commissioner, who first remanded the case to the Income-tax officer and after receipt of the report from the Income-tax Officer, held that the amount of profits for the assessment year (Samvat year 1999) amounted to Rs. 97,398; the entire amount was available for being remitted to Bombay, and in fact had been remitted to Bombay, and in this view of the matter brought to tax the entire amount of Rs. 97,398 in the hands of the assessee under section 4(1) (b) (iii). The further appeal filed by the assessee before the Tribunal failed.

5. Mr. Palkhivala has dealt with the last question first, the section question next and the first question last. We would, therefore, proceed to consider the questions in the same order. Question (c) is in the following terms :

'Whether the Tribunal was right in not allowing the applicant the losses suffered in earlier years as well as the depreciation allowable under the Indian Income-tax Act as deductions in the computation of available profits, if any

6. It is not in dispute that in years prior to April, 1933, the assessee in running its business had incurred losses. The contention of the assessee is that these losses should have been allowed as a deduction in the computation of profits of the business for the year 1999. We find it difficult to accept this contention of the assessee. There is no obligation on the income-tax authorities to allow the prior losses as a deduction under the Income-tax Act. Losses incurred in the previous years cannot be said to be an item of expenditure of the year of which the income is to be determined. It is true that the Income-tax Act enables the assessee to adjust the previous years losses against the profits of the year, but if the assessee does not choose to do so and bring forward the losses of the prior years in the books of account of the current year, there is no obligation on the income-tax authorities to allow the losses of prior years as a deduction in computing the profits of that year. In dealing with a similar contention in Sarupchand Hukumchand v. Commissioner of Income-tax, the learned Chief justice observed at page 218 :

'Now I can well understand the position where an individual or a firm carries forward losses from year to year and in any particular year the profits of that year may be set off against the losses which have been carried forward to that year. However, it may be that an individual or a firm may adjust at the end of each year its profit and loss and transfer it to the accounts of the partners and the profit and loss of the next year may be determined irrespective of what the position was at the end of the last year.'

7. It is, therefore, clear that unless the assessee has brought forward losses of the previous years in the books of account of the current year, he cannot claim to set off the losses of the prior years against the profits of the current year. In the case before us the assessee has led no evidence to show that he had brought forward the losses incurred by its business prior to the year 1933. That being the position, in our opinion, the Tribunal was justified in not setting of this loss against the profits of the assessment year 1945-46.

8. The claim of the asssessee that depreciation allowable under sub-section (2) of section 10 of the Act should have been allowed to it prior to the determination of the profits, in our opinion, also is not well-founded. Now depreciation is claimed in respect of the asset which were at the material time located in the Hyderabad State. It is not in dispute that the provisions of the Income-tax Act were not applicable to those areas. if the assessee's contention is accepted that provisions of sub-section (2) of section 10 of the Act should be made applicable so far as depreciation goes, there would be no valid reason why the other provisions of the Income-tax Act should also be not called in aid in computing the profits of the assessee's business that year. It has been repeatedly pointed out that the profits determined under the Income-tax Act do not necessarily depict the true profits : certain expenditure through incurred during the course of the business may not be allowable as deductions in the computation of income. In our opinion, therefore, there is no warrant to compute the profits, of a business in a native State in accordance with the provisions of the act in the absence of any specific provision to that effect in sub-clause (iii) of clause(b) of sub-section (1) of section 4 of the Act. In out opinion the income or profits within the meaning of section 4 (1) (b) (iii) would be the income as understood in the commercial sense, in other words, the excess of business incoming over the business outgoing. Depreciation cannot be said to be an expenditure or an outgoing expenditure for purposes of business. On the other hand, it has been held by this court that it is a reserve created out of the profits to meet the reduction in value of the assets of the firm by wear and tear. We are, therefore, of the opinion that the Tribunal was justified in reflecting the claim of the assessee in this respect.

9. Our answer to the aforesaid question (c) is that the Tribunal was right in no allowing the applicant the loss suffered in earlier years as well as the depreciation allowable under the Indian Income-tax Act as deductions in the computation of available profits, if any.

10. Question (b) is in the following terms :

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 90,000 (Rupees ninety thousand) has been rightly included in the total amount of available profits which could be remitted to the taxable territories, if any

11. To appreciate the contentions raised before us, it would be necessary to state a few more facts. The statement of account submitted by the department and which is annexure 'I' to the statement of case, shows that the business of the assessee was running more or less at loss up to the year 1936-37, and the profits earned by it from 1937-38 to 1941-42 were nearly sufficient to wipe off the loss incurred by the concern in the years 1932-33 to 1936-37. The account thus shows that there was no accumulated profits of the business at the commencement of the Samvat Year 1999. As already stated the profits of that year have been computed by the income-tax authorities at Rs. 97,398. Now during the currency of that year, i.e., currency of the assessment year 1944-45, relevant accounting year being the one ending with 31st August, 1943, Rs. 90,000 consisting of two items of Rs. 85,000 and Rs. 5,000 were remitted by the Latur branch to Bombay on 6th May, 1943, and 17th May, 1943, respectively. This entire amount of Rs. 90,000 was sought to be taxed in the hands of the assessee in the assessment for the year 1944-45, under sub-section (2) of section 14 as it then stood read together with section 4(1) (b) (ii) of the Act. The combined effect of section 4(1) (b) (ii) and section 14(2) of the Act was that the income, profits and gains accruing or arising within the native States were not liable to tax unless such profits and gains were received or deemed to be received or brought into the taxable territory in the relevant assessment year by or on behalf of the assessee. It was the case of the department that Rs. 90,000 remitted by the Nature branch to Bombay in May, 1943, was liable to tax because that income has been brought and received by the assessee from Latur, a place in the native State to the taxable territories. The assessee's contention on the other hand was that the said amount was not liable to tax. The income-tax authorities as well as the Tribunal upheld the contention of the department and the said sum was brought to tax. Ultimately, the matter come to this court on a reference. This court took the view that there could be no profits, which could be remitted unless the profits are ascertained at the end of the year. In other words, profits could only be remitted in the year subsequent to the one in which they are determined. In this view of the matter, this court held that when profits of the Latur branch were determined at Rs. 97,398 on 31st August, 1943, they could only be remitted at a time subsequent to 31st August, 1943. Therefore, when the sums of Rs. 85,000 and Rs. 5,000 were remitted in May, 1943, they could not be remittances of profits because no profits were determined by that date. The remittances amounting to Rs. 90,000 were, therefore, not remittances of profits and, consequently, that amount could not be brought to tax. As already stated, in the instant case, the assessee has raised a contention that though the determined profits for the assessment year 1944-45 were Rs. 97,398, the entire amount was not available for being remitted to Bombay inasmuch as Rs. 90.000 out of it had already been remitted during the course of the assessment year 1944-45. In rejecting this contention the Tribunal in its appellate order observed :

'As regards the plea of Rs. 90,000 having been sent in S. Y. 1999 from Latur to Bombay, there is really no substance in it. For the assessment year 1944-45 the department sought to tax the said amount of Rs. 90,000 under section 4(1) (b) (iii) and the matter ultimately went to the High Court. In the judgment of March 31, 1952, their Lordships of the Bombay High Court have held that when the sums of Rs. 85,000 and Rs. 5,000 were remitted on the 6th May, 1943, and the 17th May, 1943, these were not remittance of profits and they could not be remittances of profits because no profits though there were remittances to the extent of Rs. 90,000 they were not on account of profits. Hence we think that the assessee cannot now be heard to say that the said amount of Rs. 90,000. But, in our S. Y. 2000 were reduced by the said amount of Rs. 90,000. But, in our opinion, to determine whether there were sufficient profits available for being remitted, it is really not necessary to go into the question of profits and losses made by the assessee in the past so many years. It is quite sufficient to point out that in the immediately preceding year, i.e., prior to the commencement of S. Y. 2,000 the assessee's own books showed that the Latur and Parbhani branches made profits to the extent of Rs. 97,398.'

12. In short, the view taken by the Tribunal is that the determined profits of the previous year to the assessment year must be taken to be the profits available for being remitted in the relevant accounting year. The determined profits amounted to Rs. 97,398. The assessee in the previous case had said that the remittances of Rs. 90,000 were not remittances of profits and, therefore, now cannot be heard to say that the said amount of Rs. 90,000 formed part of the profits of the assessment year 1945-46.

13. Mr. Palkhivala contends that it is not sufficient for the department to establish that profits have been determined but the department must further prove that the determined profits were available at the place of business in the native State at the date of remittance for being remitted to the taxable territories. The Tribunal was not justified on observing or holding that the stand of the assessee in the previous year's case was that Rs. 90,000 did not represent or form part of the profits. On the other hand, according to him, the stand of the assessee was that the sum of Rs. 90,000 which was sent in that year cannot have, in the eye of law, the character of the remittance of profits because on the dates when the amounts had been remitted, the profits had not been determined and, therefore, it was not liable to be brought to tax under section 14(2) of the Act. Mr. Joshi, on the other hand, contended that the amount of Rs. 90,000 cannot, in the eye of law, have the character of profits; it is only when the profits are determined that they could be remitted. The sum of Rs. 90,000 could as well have been sent from the fixed capital, circulating capital or out of the amounts borrowed by the Latur branch. It was open to the assessee to lead evidence to the contrary and no evidence having been led by the assessee to the contrary, the assessee is not entitled to claim that the amount of Rs. 90,000 formed part of the profits of the business.

14. Section 4(1) (b) (iii) is in the following terms :

'Subject to the provision of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which - ....

(b) if such person is resident in the taxable territories during such year, - ....

(iii) having accrued or arisen to him without the taxable territories before the beginning of such year and after the 1st day of April, 1933, are brought into or received in the taxable territories by him during such year.'

15. Now to bring into operation the said provisions, the essential conditions which must be established are :

(1) that the remittances should be out of income, profits and gains arising without the taxable territories.

(2) the income, profits and gains should have accrued or arisen to the assessee :

(3) they should have accrued or arisen after the 1st day of April, 1933;

(4) they should have accrued or arisen before the beginning of the accounting year;

(5) they should have been received or brought into the taxable territories during the accounting year; and

(6) the receipt in and bringing into the taxable territories should have been by the assessee.

16. These being the essential conditions for bringing the provisions into operation, it would necessarily follow that the burden of establishing these conditions would lie on the department when it is seeking to tax any amount under these provisions. One of the essential conditions is that the income, profits and gains which had accrued or arisen to the assessee without the taxable territories, had been brought or received by the assessee into the taxable territories. For a thing to be brought from non-taxable territories to the taxable territories, the thing must at the time of its bringing, exist outside the taxable territories and the burden of proving this fact, in our opinion, would necessarily lie on the department. That burden, however, is not heavy to discharge. There is a presumption that a thing that exists continues to exist unless the contrary is shown. Now when the department establishes that certain profits have arisen or accrued to the assessee outside the taxable territories in the absence of any indication or evidence to the contrary it will have to be presumed that the accrued profits continued to remain outside the taxable territories and were available for being remitted to the taxable territories. It is no doubt true that the assessee can show that though the profits have accrued or arisen to him outside the taxable territories, they were at a certain point of time not available to him to be brought into the taxable territories because he had in a certain manner dealt with them or expended them. But this could only be within his special knowledge and the burden, therefore, of showing the manner in which he has dealt with the profits or proving that he has expended the accumulated profits would lie on him. It is indeed true that the profits accruing to an assessee are ascertained or get ascertained at the end of the year, but that would not mean that no part of the profits of a business located outside the taxable territories could be received in the taxable territories during the course of the year. The decision of this court in the former case is distinguishable on facts. There the question was whether the entire amount of Rs. 90,000 was liable to tax as remittances of profits. It was not then contended that in the said sum of Rs. 90,000 profits were embedded and those profits be taxed. The decision of the Supreme Court in Turner Morrison & Co. Ltd. v. Commissioner of Income-tax, indicates that part of the profits of a business situated outside the taxable territories could be received in the taxable territories even during the currency of a year. The facts in that case were that the association incorporated in England carried on the business of manufacturing salt in Egypt. Part of the salt so manufactured was consigned by the association to a company for sale in India. All handling of the cargoes at Calcutta was done by the company and the company effected sales and received the sale proceeds. After deducting the expenses and commission the balance was remitted by the company to the association in Egypt. The Income-tax Officer treated the company as agents of the non-resident association and assessed them to income-tax under section 4(1) (a) or alternatively under the first part of section 4(1) (c) of the Act. Two questions were raised before their Lordships

'(1) Whether the company was assessable to tax under section 4(1) (a) and

(2) Whether section 42 had any application to the case ?'

17. Now, section 4(1) (a) renders both the resident as well as non-resident liable to tax if the income, profits and gains are received or deemed to be received in the taxable territories. On the facts stated above, the company had received the sale proceeds in India and the question arose whether by reason of receiving the sale proceeds the company could be said to have received income, profits and gains of the business. It has to be noted that the sale proceeds were received by the company during the currency of the year and not after the end of the year. At page 160 of the report their Lordships observed :

'There can, therefore, be no question that when the gross sale proceeds were received by the agents in India they necessarily received whatever income, profits and gains were lying dormant or hidden or otherwise embedded in them. Of course, if no the taking of accounts it be found that there was no profit during the year then the question of receipt of income, profits and gains would not arise but if there were income, profits and gains, then the proportionate part thereof attributable to the sale proceeds received by the agents in India were income, profits and gains received by them at the moment the gross sale proceeds were received by them in India and that being the position the provisions of section 4(1) (a) were immediately attracted and the income, profits and gains so received became chargeable to tax under section 3 of the Act. In our opinion there is no substance in the first main contention adumbrated by Mr. S. Mitra.'

18. The ratio that follows from this decision, in our view, is that when trading receipts are received by a businessman profits attributable to those trading receipts are dormant in those trading receipts. Though whether the trading receipts contain an element of profit or not can only become known at the end of the year. If the business has made profits, then the trading receipts would include proportionate profits attributable to those trading receipts. Applying these principles to the business of the Latur branch, it can be said that as and when the Latur branch received trading receipts, those receipts contained the profits attributable to those receipts, the business having resulted in profits. Therefore, in the remittances of Rs. 85,000 and Rs. 5,000 received by Bombay from Latur were included profits attributable to them.

19. Mr. Joshi, however, argues that the aforesaid decision of the Supreme Court would have no application to the facts of the present case, as it deals with sales proceeds. There is no evidence that Rs. 90,000 remitted from Latur to Bombay were part of the sale proceeds of the business at Latur. According to Mr. Joshi, Latur might have sent Rs. 90,000 out of its fixed capital or out of its circulating capital or may have even remitted the money from its borrowings and in the absence of any proof tendered by the assessee that the sum of Rs. 90,000 was sent out of the sale proceeds trading receipts, it cannot be said that, at the time it was sent, it contained any profits. The assessee could have easily proved it and he having failed to discharge the burden which lay on him, it should not be held that the sum of Rs. 90,000 contained any profits attributable to it. It is indeed true that this decision would have application only if it is established that Rs. 90,000 were sent out of the sale proceeds or trading receipts and would have no application if it was sent out of the assessee's fixed capital or circulating capital or out of its borrowings. In our opinion, in the absence of any indication or evidence that the sum of Rs. 90,000 came out of the assessee's fixed capital or circulating capital or the borrowings, we would not be justified in assuming that the said sum did not come out of trading receipts. That would not be in conformity with the normal course of business. We are here dealing with remittances made by the branch office to its head-office during the course of its business. Having regard to the normal course of business, it would be reasonable to assume that the remittances made in due course of business are made out of the trading receipts. Further at no time it was the case of the department that the amount of Rs. 90,000 was sent by Latur out of its fixed capital or circulating capital or out of the borrowings. In the prior year the department was claiming those remittances as out of profits. On these facts and in the circumstances, it will be reasonable to hold that the said remittances of Rs. 90,000 were out of trading receipts of the assessee.

20. We have to ascertain here whether the entire profits amounting to Rs. 97,398 were available with the assessee at Latur at the commencement of Samvat Year 2000 for being remitted to Bombay during the course of that year. Rupees 97,398, being the computed profits of Samvat Year 1999, will be presumed to be available to the assessee at Latur for being remitted to Bombay, but the assessee contends before us that he having remitted the amount of Rs. 90,000 was in Samvat Year 1999 the entire amount of profits of Rs. 97,398 was not available at the commencement of the year 2000. In other words, we have to consider the question whether the remittance of Rs. 90,000 can have any effect on the availability of Rs. 97,398 at the commencement of the assessment year 1946-47. Whether the said remittance of Rs. 90,000 was in its entirety a remittance of profits or whether any part thereof represents the profits of the business. For reasons stated above, it is not possible to hold that the sum of Rs. 90,000 in its entirety represents the profits. On the evidence on record all that can be said is that the remittance of Rs. 90,000 was out of the trading receipts of the assessee at Latur. On the authority of the Supreme Court decision referred to above, this amount of Rs. 90,000 would contain the proportionate profits attributable to those trading receipts. What that amount would be, would depend on the total turn over of the assessee of that year and that amount will have to be ascertained by the Tribunal in the light of the principle laid down by the Supreme Court in the aforementioned case.

21. Our answer to question (b) is that on the facts and in the circumstances of the case the entire amount of Rs. 90,000 has not been rightly included in the total amount of available profits, which could be remitted to the taxable territories, but the amount that could be included in the total amount of available profits is Rs. 90,000 minus proportionate profits attributable to the said amount of Rs. 90,000 computed in the light of this judgment.

22. The last question is in the following terms :

Question (a) : 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the action of the income-tax authorities, taxing the sum of Rs. 97,398 (Rupees ninety-seven thousand three hundred and ninety-eight) as remittances of income under section 4(1) (b) (iii) of the Act ?'

23. Mr. Palkhivala contends that even assuming that the entire sum of Rs. 97,398 was available profits which could be remitted to the taxable territories, on the facts and in the circumstances of the case, it cannot be said that the entire amount has been remitted to the taxable territories. It is his argument that the Bombay head-office was making purchases of stores for conduct of the business at Latur and Parbhani and making payments for such purchases. Similarly, the Bombay head-office was making payments directly to the sellers from whom goods and materials were purchased by Parbhani and Latur. These represent the remittances shown to have been made by the head-office to Parbhani and Latur during the course of the year. The remittances made by Latur and Parbhani, therefore, cannot be taken as remittances of profits by the amount that can be taken as remittances of profits is the excess of remittances from Parbhani and Latur to Bombay over the remittances from Bombay to Parbhani and Latur. According to Mr. Palkhivala, taking the overall account of remittances between Bombay, Parbhani and Latur and between Kutch-Mandvi, Parbhani and Latur the excess amount comes to only Rs. 18,033 and that should be taken to the amount of profits remitted during the course of the year. So far as the amount expended by the Bombay office in making the purchases, the department has deducted these amounts from the total remittances made from Parbhani and Latur and there is no reason to treat the other remittances from Bombay on a different footing, they being payments made by the Bombay office to the sellers for the goods purchased for Parbhani and Latur. Mr. Palkhivala referred us to a decision in Commissioner of Income-tax v. Jankidas Kaluram Rewari and Commissioner of Income-tax v. R. M. Raja.

24. Now, the view taken by the Punjab High Court in Commissioner of Income-tax v. Jankidas Kaluram Rewari has been generally accepted and has also been accepted by this court in Commissioner of Income-tax v. R. M. Raja and it has been well summarised in the placitum in Commissioner of Income-tax v. Jankidas Kaluram Rewari, in the following terms :

'In the absence of any indication to the contrary and in the absence of any explanation by the assessee, the income-tax authorities may well start with the presumption that the remittances either represent the profit earned by the assessee or at least include the profit earned by him and may be within their limits in assessing him on the remittances to the extent to which they can legitimately be regarded as representing the profit. However, this is by no means a presumption of law and its strength must vary according to the circumstances of each case. There may be cases in which in view of the surrounding circumstances the presumption may be very particularly strong so that it would require evidence of a specially cogent nature to rebut it. There may, on the other hand, be cases in which the presumption may be exceedingly weak and may be rebutted by a very small amount of evidence and even without any extraneous evidence and by the attendant circumstances alone. A case in which there have been remittances only from abroad to the assessee may fall within the first description. A case in which remittances have been received on both sides but the remittances to the assessee from abroad are very much in excess of the remittances made by him may be regarded as a case of the middle type. A case in which remittances on both sides are almost equal is a case falling within the third category in which the presumption in favour of the remittance representing the profit earned by the assessee in the foreign business must be considered to be very weak and in some cases almost negligible. In every case it is a question of fact to be determined with reference to the circumstances of the particular case whether or not to raise such a presumption and whether or not the presumption of initially raised has been rebutted.'

25. The Tribunal, in rejecting the aforesaid contention of the assessee in its appellate order, observed :

'Relying upon the principle laid down by the Punjab High Court in Jankidas Kaluram's case, it is submitted on behalf of the assessee that since there is flow of funds in both the directions, the net reduction in the debit balance in the case of each branch should be taken as the excess remittances and the same treatment should be accorded to the Kutch-Mandvi account. On this basis, according to the assessee, there would be excess remittances of Rs. 18,033 for 1945-46 through three accounts Latur, Parbhani and Kutch-Mandvi. Mr. Sankara Narayana did not seriously dispute that that much amount would be taxable under section 4(1) (b) (iii) provided the profits to that extent were available for being remitted. In our opinion, the correct manner to decide whether any remittance falls within section 4(1) (b) (iii) is to take a particular or individual remittance and to find out the purpose for which it was made and whether there were sufficient profits available at the time when the remittance was made to cover it. But, unfortunately in this case, the assessee specifically expressed its inability to produce any correspondence between the head-office and the branches which would throw light on the remittances made by the branches to Bombay as and when they were made. Hence, the income-tax authorities adopted the second best method, which is certainly only a rough and ready method to find out the quantum of remittances.... The Appellate Assistant Commissioner also found that the total profits available for remittance from Latur and Parbhani together amounted to Rs. 97,398 and as that amount was less than the amount of excess remittances from the branches, he considered Rs. 97,398 as taxable under section 4(1) (b) (iii).'

26. It may be stated that the rough and ready method adopted was to deduct the expenses incurred in Bombay for purchase of stores only from the remittances from Latur and Parbhani in determining the excess. It is clear that the principle laid down in Jankidas Kaluram's case has not been followed by the Tribunal. On the other hand, it has taken the view that the correct manner to decide whether any remittances fall within section 4(1) (b) (iii) is to take a particular or individual remittance and find out the purpose for which it was made and whether there were sufficient profits available at the time when the remittances were made. The Tribunal then called upon the assessee to produce correspondence between the head-office and branches which could throw light on each of the remittances. On account of the failure on the assessee's part to produce the correspondence, the Tribunal has not taken the excess of remittances as the profit remitted to Bombay, but has held that the entire amount of Rs. 97,398 had been remitted, the total remittances being greater than the said amount.

27. In our opinion the reasoning adopted by the Tribunal in its entirety cannot be sustained on the facts of the present case and also in view of the approach to the question mentioned in Jankidas Kaluram's case. It is indeed true that if it is established that the accumulated profits were available to the assessee in non-taxable territories and the amounts equivalent to those profits were transferred from the non-taxable territories to the taxable territories, then the presumption would arise that the remittances are remittances of profits, but as pointed out in Jankidas Kaluram's case, it is not a presumption of law but one of fact and that presumption gets to a certain extent weakened if it is found that there had been remittances both from the taxable to the non-taxable territories and from the non-taxable to the taxable territories.

28. Mr. Joshi on behalf of the department contends that Jankidas Kaluram's case would have no application to the facts of the present case because that is a case where the assessee runs business at both the taxable and the non-taxable territories. In such a case the presumption may get to a certain extent weakened, but we are not dealing with such a case. On the other hand, no business is carried on by the assessee in Bombay. The only business carried on by the assessee is at Parbhani and Latur. Jankidas Kaluram's case, therefore, will have no application to the facts of the present case and the remittances made from Bombay to Latur and Parbhani can hardly be of any relevance in determining the issue.

29. It is indeed true that both in Jankidas Kaluram's case as well as Raja's case, the assessee was carrying on business both in the taxable as well as in the non-taxable territories. But those facts, in our opinion, were not a decisive factor for the decision in those cases. In the case before us even though the assessee does not carry on any business worth the mention in Bombay, on the facts stated, it does appear that the assessee had been, on behalf of its branches, transacting considerable business at Bombay and the nature of the work done by the assessee at Bombay is stated in the statement of the case, which is in agreed statement of case, in the following manner :

'For the purpose of working the ginning factories at Latur and Parbhani, the firm had to make large purchasers of stores and other goods at Bombay and make payments for these there. Similarly, it used to defray certain expenses incurred for working the two factories also at Bombay.'

30. These being the facts found, it can reasonably be assumed that the remittances said to have been made from Bombay to Parbhani and Latur represent the expenses incurred by Bombay in the year for the purpose of its business at Parbhani and Latur. Therefore, the initial presumption that the remittances from Latur and Parbhani either represent profits earned by the assessee or at least include the profits earned by the assessee would get limited only to the extent of the excess of remittances from Latur and Parbhani. The statement of case shows that the excess of remittances from Latur was Rs. 10,681 and the excess of remittances from Parbhani amounted to Rs. 1,692.

31. The Tribunal has held that the initial presumption had not been rebutted by the assessee, because he has failed to produce the correspondence relating to each of the remittances. We find it difficult to agree with the Tribunal that the only manner in which the assessee could rebut the presumption was by producing the correspondence. The assessee has, however, produced the books of account. The assessee has shown that the Bombay head-office was incurring expenditure for Parbhani and Latur by making purchases of stores for Parbhani and Latur and by making payments at Bombay on behalf of Latur and Parbhani. The assessee having established these facts, in our view, the assessee has been successful in rebutting the initial presumption and getting it limited only to the excess of remittances. Latur has further remitted an amount of Rs. 25,000 to Kutch-Mandvi and that amount in due course had been brought to Bombay. Similarly, Parbhani had remitted Rs. 34,501 to Kutch-Mandvi, and that amount also has been brought to Bombay. It is the assessee's case that these two remittances also should be treated on the same footing as remittances from Parbhani and Latur to Bombay, and only the excess of remittances from Parbhani and Latur to Kutch-Mandvi over the remittances from Kutch-Mandvi to Latur and Parbhani should be taken as profits remitted. On the facts found it is not possible for us to accept this contention. It has not been shown that Kutch-Mandvi was incurring any expenditure for the purpose of the business carried on at Parbhani or Latur. On the other hand, the statement of case says : 'No business at all is done at Mandvi.' That being the position, it is not possible to hold that any part of the remittances made from Parbhani and Latur to Kutch-Mandvi were in repayment of any expenses incurred by Mandvi for the purpose of the business at Parbhani and Latur.

32. Mr. Palkhivala urged before us that the Tribunal should be directed to ascertain the facts and according to him at Mandvi also expenditure was incurred in due course of business for Parbhani and Latur. In our opinion, we would not be justified in affording a second innings to the assessee. If the assessee had any evidence, he had full opportunity to lead that evidence as he had led in case of Bombay. In our opinion, therefore, on the strength of the initial presumption referred to in Jankidas Kaluram's case and affirmed by this court in Commissioner of Income-tax v. R. M. Raja, the Tribunal was right in holding that remittances of Rs. 25,000 and Rs. 34,000 from Latur and Parbhani to Kutch-Mandvi were remittances of accumulated profits. Accumulated profits thus would amount to Rs. 10,681 plus Rs, 1,692 plus Rs. 25,000 plus of 34,501 : total Rs. 71,874. Whether profits to the extent of Rs. 71,874 were available at the time of the remittances or not at Parbhani and Latur would depend on the decision of the second issue.

33. Our answer, therefore, to question (a) is that on the facts and circumstances of the case, the Tribunal was in error in holding the action of the income-tax authorities taxing the sum of Rs. 97,398 was remittances of income under section 4(1) (b) (iii) of the Act. On the other hand, it should have upheld the action of the income-tax authorities taxing the sum of Rs. 71,874 as remittances of income under section 4(1) (b) (iii) of the Act provided accumulated profits to the extent of that sum were available at Parbhani and Latur for being remitted.

31. The answers to questions (a) and (c) for the year 1946-47 are as indicated in the judgment. Question (b) for the assessment year 1946-47, in our opinion, does not survive.

34. The reference is answered accordingly. The assessee shall pay two-thirds costs of the department.

35. Reference answered accordingly.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //