1. This is a reference by the Commissioner of Income-tax, Mysore cum Travancore-Cochin, Bangalore, which was formerly made by the Income-tax Appellate Tribunal, Bombay, under Section 66 (1), Indian Income-tax Act of 1922 as amended by Section 92, Income-tax (Amendment) Act of 1939 to the High Court of Judicature at Madras. That reference was heard on 4-8-1948 by Rajamannar C.J. and Yaha Ali J. who directed the return of the records in the case to the Income-tax Appellate Tribunal as it was represented to them that the Madras High Court had ceased to have jurisdiction to deal with the reference in view of the retrocession of the C. & M. Station, Bangalore, wherefrom the reference arose, to the Government of Mysore.
2. The assessees, who are respondents before us, are a firm of Engineering Contractors who had their office within the Mysore State limits. During the conferred account year ending March 1942 they did some building construction work for a war camp in Bangalore at Jalahalli which place is also situate within the limits of the Mysore State. It is notdisputed that the contract for these works was accepted by the Commander, Royal Engineering, Bangalore, whoso office was then in the C. & M. Station, Bangalore. The then Income-tax Officer of the C. & M. Station assessed the income which the firm had derived from these contracts as he was of the view that the same was derived from contracts made in the C. & M. Station, Bangalore and the income therefrom accrued or arose in the station within the meaning of Section 4 (1), Indian Income-tax Act as applied to it. The assessees carried up the matter in appeal and the Appellate Assistant Commissioner of Income-tax, C. & M. Station, Mr. P. W. A. Morris, the then Collector of the Station, by an order dated 4-12-43 allowed the appeal and set aside the assessment. He held that the income of the respondents was not liable to taxation in the station either on the ground of accrual or receipt and that no part of the business operations of the firm was carried out in the station. The Income-tax Department took up the matter before the Income-tax Appellate Tribunal, Madras Bench. That Bench concurred with the view that neither under Section 42, Indian Income-tax Act nor by virtue of Section 4 (1) (c) read with Section 10 of the Act the income of the assessees was liable to be taxed in the C. & M. Station, and they dismissed the Department's appeal. Thereafter the Department asked for and obtained a reference by the Appellate Tribunal to the High Court of Madras and that Court made the order above referred to. Subsequently, quite a long time afterwards, the present Commissioner of Income-tax has purported to re-file the reference in this Court; and thus the matter has come up for decision before us.
3. Mr. Section K. Venkataranga Iyengar, learned counsel for the assessee, has raised certain preliminary objections against the present reference to this Court. He contends that this petition if treated as a reference is very belated; and is not competent if it is to be treated as a mere refiling in this Court of a reference already made to the Madras High Court. He urges that the Madras High Court returned the reference so far back as 4-8-1948 and the same reference was refiled in this Court on 24-6-1950 nearly two years afterwards, that the explanation for the delay, viz. that the Income-tax authorities were taking legal or administrative advice from the Central Government is not sufficient justification for the very long delay. The present petition, however, does not purport to be and is not a fresh reference by the Appellate Tribunal under Section 66 (1) on any application by the Commissioner. The period of limitation of 60 days within which the Commissioner has to make an application to the Appellate Tribunal for making a reference does not, therefore, apply to this petition. Under Section 5 (c) of Act 31 of 1948, the Mysore Income-tax and Excess Profits Tax (Application to the Retroceded Area) (Emergency) Act, 1948, it has been specifically provided that an appeal or application pending before an income-tax or excess profits tax authority in the Retroceded Area immediately prior to the first day of July 1948 shall be deemed, on that date, to be an appeal or application pending before an income-tax or excess profits tax authority in Mysore vested with or ordinarily exercising the functions of such authority and the Indian Income-tax Act, 1922, or the Excess Profits Act, 1946, as the case may be, as in force in the Retroceded Area immediately prior to the firstday of July 1948, shall apply to such appeal or application. By Section 4 of Act 23 of 1947, the Retrocession (Application of Laws) Act, 1947, the words 'High Court' and 'Court of Resident' in any enactment in force in the C. & M. Station shall be construed as a reference to the High Court of Mysore; and under Section 5 of Act 24 of 1947, the Retrocession (Transitional Provisions) Act, 1947, any proceeding under a law in force in the Civil and Military Station prior to the date of retrocession initiated before an authority in the Civil and Military Station which is not finally disposed of or decided before that date, shall on that date be deemed to be a proceeding initiated before an authority in Mysore vested with or ordinarily exercising the functions of such authority and the proceeding may be continued thereafter before the authority in Mysore, as if first initiated before him. If the High Court of Madras was an authority which was exercising jurisdiction in the C. & M. Station under the Indian Income-tax Act of 1922 then proceedings which were pending before it and which were not finally disposed of on the date of the retrocession have to be continued before the Mysore High Court as if first initiated before it. It appears to us, therefore, there is no substance in this objection.
4. The next objection raised by Mr. Venkataranga Iyengar is that by an agreement or arrangement between the Government of Mysore and the Income-tax Department of the Government of India which was enforced and authorized to administer the provisions either of the Mysore Income-tax Act or the Indian Income-tax Act which may be applicable to the assessment with which we are concerned in this case, the assessment leviable and payable to the C. & M. Station Income-tax authorities for the year in question has ROW become payable to the Government of Mysore; that the Government of Mysore Income-tax authorities have duly and validly assessed to income-tax under the Mysore Income-tax Act. this income of the- assessees as having accrued or arisen within the Mysore State, that those taxes have been duly paid and that matter has, therefore, become final and concluded; that if we allow this reference and permit the Indian Income-tax authorities, who it must be deemed in this matter to be acting merely for and on behalf of and for the real and ultimate benefit of the Government of Mysore, the Government of Mysore will be allowed to collect further tax to which they are in no way entitled. In this matter there was formerly a conflict of claims between the Income-tax Department of the Government of Mysore and that of the former Civil and Military Station. By reason of the retrocession of the C. & M. Station, Mr. Venkataranga Iyengar argues, there has been such a merger of the claims which would render it opposed to justice, equity and good conscience for the Commissioner to collect and pay any excess of tax to the Mysore Government. This would moreover have the effect of allowing the Mysore Income-tax authorities to re-open their own assessment made in Income-tax proceedings, which had been properly and finally decided by themselves.
5. For the Commissioner it is urged by Mr. Chandrasekhar, learned counsel who appears for him, that this is not the concern of the assessee but merely one of an arrangement between the two Governments. He, however, has not denied the nature of the financial arrangements referred to by Mr. Section K. Venkataranga Iyengar.
6. Neither Mr. Section K. Venkataranga Iyengar nor Mr. D.M. Chandrasekhar has been able to cite any precedent which might have been of use to us in deciding this rather interesting question apparently because the situation that has given rise to it is out of the ordinary. But it must be admitted that there appears to be considerable force in that objection. The Mysore Government's claim to assess and collect the tax from the assessee having been fully satisfied it is not easy to see how they can again seek to collect afresh or recover any more income-tax revenue from the assessee. If a creditor has once chosen to accept a certain payment or adjustment from his debtor and given a full and final discharge of his claim, it can hardly be doubted, that he cannot, merely by employing an agent disclaim or revoke the settlement or discharge, and seek to collect some extra sums under colour of a totally inconsistent claim put forward through the agent. That is apparently the legal position occupied by the Commissioner of Income-tax vis-a-vis the Government of Mysore with regard to the assessment for the year concerned in this case.
7. Apart from this technical objection, we think the order of the Appellate Tribunal confirming that of the Appellate Assistant Commissioner of Income-tax is, on its merits, correct. The respondent firm had its office within the Mysore State and it carried on these and its other contracts there. The contract was fulfilled by the erection of buildings only at Jalahalli within the Mysore State. No part of the building operations involving any work or manufacture or sale of any manufactured article took place in the station. Merely because the contract happened to be signed for purposes of convenience of the Military authorities or payment was made through the Imperial Sank of India in (he Civil Station for the same reason cannot, in our opinion, render the profits, income or gains derived from the contracts with which we are concerned in this ease to be deemed to have been derived by any per-son through or from any business connection in British India. The Appellate Assistant Commissioner of Income-tax has pointed out that many of the cheques issued by the Military authorities were sent to the firm's Bankers in the Mysore State limits and cashed by the latter and that it could not be said that the income was received or can be deemed to have been received in the station to attract liability to fax under Section 4 (1) (a). It is difficult to hold that merely because a person who was resident outside the Mysore State, say in Madras, asked a building contractor whose business activities were confined entirely to Mysore State to put up a building for him in Mysore State and chose for his own convenience, and because he happened to have a current account in Madras, to issue cheques to the former in payment of his bills, that the former had any business connection or made profits in Madras so as to render him liable to income-tax in Madras. The Appellate Tribunal have in the course of their order dated 22-11-44 set out the facts of this case and found that the income in the case if it at all accrued or arose or was received, was with reference to a business and that the whole of the business had been carried on outside the C. & M. Station, Bangalore. The persons carrying on the business were non-residents. Their office was situate outside the C. &M.; Station. In those circumstances the Tribunal found it difficult to say that while the income from carrying on of the business is to be taxed, it can be suggested that such business was carried on in any part of Civil and Military Station, Bangalore, and therefore the income accrued or arose in that place. The mere acceptance of the tender in C. & M. Station was merely a chain in the causation but it was not the proximate cause from which the income by carrying on business of house building had arisen or accrued as contemplated by Section 4 read with Section 10, Income-tax Act in the C. & M. Station. They also agreed with the Appellate Assistant Commissioner in holding that merely because the cheques were drawn on the Imperial Bank of India in C. & M. Station, Bangalore, by the Military authorities, it could not be said that the income had been received or could be deemed to have been received in the station by or on behalf of the respondent firm. They relied on a case in -- 'Commissioner of Income-tax, Bombay Presidency and Aden v. Chunilal B. Mehta', AIR 1932 PC 232 (A), and to observations therein which are as follows :
These considerations lead their Lordships to the conclusion that under the Indian Act a person resident in British India carrying on business there and controlling transactions abroad in the course of such business is not by these mere facts liable to tax on the profits of such transactions. If such profits have not been received in or brought into British India it becomes or may become necessary to consider on the facts of the case where they accrued or arose. Their Lordships are not laying down any rules of general application to all classes of foreign transactions, or even with respect to the sale of goods. To do so would be nearly impossible and wholly unwise to use the language of Lord Esher in -- 'Erichsen v. Last', (1881) 8 QBD 414 . They are not saying that the place of formation of the contract prevails against everything else. In some circumstances it may be so, but other matters -- acts done under the contract, for example -- cannot be ruled out a priori. In the case before the Board the contracts were neither framed nor carried out in British India; the High Court's inclusion that the profits accrued or arose outside British India is well founded.'
The Departmental representative who appeared before the Tribunal appears to have given up the contention that the acceptance of the contract in the C. & M. Station, Bangalore, amounted to an operation of the respondent's business within the station. The Tribunal observed that he did very rightly give up that ground because in their opinion also it could not be said in the circumstances of the case that any portion of the business was carried out in the station. We think the profits and gains were earned directly from the work done and materials supplied within the Mysore State. It could not, therefore, be said, as found by the Appellate Tribunal, that it was the contract that was the source of income but the construction which was in the nature of an asset or business capable of yielding the income. The Madras High Court in a case in --'Commr. of Income-tax, Madras v. Anamallais Timber Trust Ltd.', : 18ITR333(Mad) (C) in which the facts are very similar, and which has referred to and relied on , has taken the same view as we do and fully supports the assessee in this case.We are, therefore, entirely in agreement with the reasoning and the conclusion of the Appellate Tribunal.
8. In the result our answer to the question raised before us is that the Tribunal was right in holding that the income assessed by the Income-tax Officer or any part thereof with which we are concerned in this case was not taxable under the Indian Income-tax Act as applied to Civil and Military Station, Bangalore. In view of the peculiar circumstances of the case, the parties will bear their own costs of this reference.
9. Order accordingly.