1. The assessee is a Hindu undivided family and it carried on adat business in cloth at Sholapur and it also had a commission agency business at Sirshilla in the Hyderabad State at the material time. The year of account is Shake year 1867-68 (5-11-1945 to 24-10-1046).
In this year the assessee received in Shalapur from Hyderabad a sura of Rs. 23,039/- and this amount was included in the total income of the assessee by the Income-tax Officer as a remittance from an Indian State which was liable to pay tax.
It appears that in the assessment year. 1946-47 the profit made by the assessee in his Hyderabad business was Rs. 10,788/- and in the assessment year 1947-48 the profit made was Rs. 15,872/-.
The contention of the assessee was that to the extent of Rs. 10,788/- undoubtedly the sum of Rs. 23,039/- represented remittance of past profits and was liable to tax, but with regard to Rs. 12,251 it did not represent past profits and therefore could not be brought to tax.
The contention of the Department on the other hand was that as there were profits to the extent of Rs: 15,782 in the year 1947-48, what the assessee in substance did was to remit part of those profits which was Rs. 12,251, and therefore that sum was liable to tax.
2. It has often been stated and we assume hat it is still settled law, that when an assessment is made under Section 4(1)(b)(iii) it is an assessment on remittance of profits and such a tax cannot be levied on profits of the current year.
In their very nature, profits cannot be remitted in the very year in which they have arisen because it cannot be predicated of a business that it has made any profits till the year has been completed. But it is possible to remit profits of the past year because the profits have been made, ascertained and are available for remittance.
The very language of Section 4(1)(b)(iii) makes it clear that the profits must accrue or arise in the previous year but before the beginning of the previoug year and are brought into the taxable territories in the year of account.
Therefore to the extent that the sum of Rs. 12,251/- did not arise or accrue to the assessee at any time preceding the previous year, but actually accrued or arose to him in the previous year itself, tins amount cannot be brought to tax under Section 4(1)
3. The Advocate General has contended that this amount having accrued OK arisen to him in the year of account, the assessee is liable to tax under S. 4(1)(b)(i).
That is an entirely unsupported contention because at the relevant tune under Section 14(2)(c) income accruing to an assessee in an Indian State was not liable to tax.
Even though income accruing to an assessee in foreign countries might have been liable to tax, there was a special exception as far as the Indian States were concerned and an assessee was liable to tax in respect of income which accrued to him in an Indian State only on remittance basis. Therefore Section 4(1)(b)(ii) has no application.
It is then contended that the income may be liable to tax under Section 4(1)(a) which subjects to tax income on the receipt basis. But what has to be borne in mind is that under Section 4(1)(a) what is liable to tax is the first receipt independently of any accrual.
It is nobody's case in this reference that the assessee is sought to be taxed on the basis of the first receipt. He is sought to be taxed on the basis of income which has already accrued to him and which is being sought to be taxed on the basis that the income which has accrued is now being remitted to taxable territories.
Therefore, whereas Section 4(1)(b)(iii) subjects to tax a remittance of profits which has already accrued before the previous year. Section 4(1)(a) subjects to tax amounts which are in the nature of first receipts and if this is a cause of a remittance, as the statement of the case really makes' out, then the case must fall under Section 4(1)(b)(iii) and not under S. 4(1)(a)
4. The Tribunal has sought to requisition to its assistance the third proviso to Section 4(1) in construing Section 4(1)(b)(iii). In the first place, that is not the correct approach. One does not construe a section in the light of a proviso. If anything, one may construe a proviso in the light of a section. But even assuming one could look at the language of the proviso in order to construe Section 4(1)(b)(iii), in our opinion the third proviso does not give any assistance to the Department.
The principle of the third proviso is this that when the basis of the Income-tax Act was changed and tax was levied on the total income of a resident and became liable to pay tax on accrual wherever the income accrued to him, the Legislature wanted to give some relief to the tax payer and therefore the third proviso laid down that if income had accrued outside the taxable territory then to the extent of Rs. 4,500 that accrued income was not liable to tax if the whole of it had not been received in the taxable territories.
Therefore, a resident may choose not to bring income into India, the income may accrue to him outside the taxable territories and yet he would be liable to tax because the basis of the tax was the accrual basis, but to the extent of Rs. 4,500/-he received concession at the hands of the Legislature. .
But the very basis of the third proviso is that income accruing to the assessee outside the 'taxable territories is liable to tax. In the case of an Indian State, as just pointed out, income accruing in an Indian State was not liable to tax under Section 14 (2) (c).
Therefore, in considering the income of an assesses which has accrued to him in an Indian State the third proviso has no relevance whatsoever. As the income is not liable to tax, no question of relief with regard to that tax can arise under the third proviso.
5. The Advocate General has relied on a judgment which we gave in -- 'Dharamdas Har-govandas v. Commr. of Income-tax' : 25ITR133(Bom) . That judgment makes clear the scheme of Section 4(1)(a), Section 14(2)(c) and Section 4(1)(b)(iii), and there is nothing in that judgment which militates against the view that we have taken with regard to the basis of taxation when the taxation is on remittance and not on receipt.
The Advocate General has also relied on a judgment of the Supreme Court in -- 'Turner Morrison & Co. Ltd. v. Cominr. of Income-tax' : 23ITR152(SC) . There are certain observations in this judgment which may seem to help the-contention of the Advocate General.
The view of the Supreme Court was 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.
If on the taking of accounts it be found that there was no profit during the year then the ques-tion of receipt of income, profits & 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 necoiv-ed 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.
Therefore what the Supreme Court was considering was the case of fust receipt and a case of apportionment, and when the sale proceeds were first received in India they became liable to tax under Section 4(1)(a) and that liability was to be determined from the point of view of the business either yielding profits or the business yielding losses.
6. The Advocate General wants to apply this principle to the facts of this case, What he says is that when the sum of Rs. 12,251/- was remitted into the taxable territories it is true that it could not be stated whether that remittance was a remittance of profits, but when at the end of the year profits were ascertained and it was found that there were larger profits than Rs. 12,251./-, then, as its were retrospective effect should be given to the position discovered and it should be field that the sum of Rs. 12,251/- was remittance of profits and of nothing else.
In the first place, such a contention would be-contrary to the express provisions of Section 4(1)(b)(iii) as already pointed out. In the second place, what has got to be determined is the nature of the remittance when made. Could it be said that when Rs. 12,251/- were remitted they represented profits of the business? in the first place, they die! not represent the profits of the current year because, as we said before, it could not be stated that the business had made any profits.
In the second place, what Section 4(1)(b)(iii) requires is that the sum of Rs. 12,251/- should not be profits of the current year, but of the past year, and in no view of the case can it possibly be alleged that the sum of Rs. 12,251/- was a remittance of past profits. Under the circumstances, in our opinion, the Tribunal was in error in holding that this sura was liable to tax on a remittance basis.
7. The result therefore is that we must answer the questions submitted to us as follows (1) Theinterpretation put by the Tribunal upon the third proviso to Section 4(1) was erroneous. (2) in the negative.
8. Commissioner to pay the costs.
9. Answered accordingly.