The judgment of the court delivered by
VISWANATHA SASTRI, J. - P. V. Raghava Reddi and Kota Reddi, hereinafter referred to as ' the assessee' constitute a firm carrying on business in mica at Gudur under the name and style of the Continental Export and Import Company. The years of account to which this reference relates are 1948-49 and 1949-50 corresponding to assessment years 1949-50 and 1950-51. During this period the assessee exported mica to an organization of the Japanese Government styled Boeki-Cho (Board of Trade), sale of mica to private traders in Japan not being possible during the period of occupation by the American military authorities. The Assessee engaged San-E-Trading Co. Ltd. of Tokyo, hereinafter referred to as the 'the non-resident' to canvass orders for mica from the Japanese Board of Trade, and to be present at the inspection of goods in Tokyo and facilitate their acceptance by the Japanese importer. There were two agreements relating to the employment of the non-resident by the assessee, the first of which was to last from July to September, 1948, and the second for an indefinite period there-after until private imports of mica into Japan were allowed. The material portion of the first agreement (Annexure A) was as follows :
'It is hereby agreed that (1) the second party (non-resident) should secure the mica business for the first party (the assessee) from the requirements of the Boeki-Cho for the quarter July, August and September, (2) in lieu of the above, the first party to pay 4% commission on the gross sale proceeds of the mica to be sold to Boeki-Cho, (3) in view of the difficulties in this country (Japan) it is requested that the first party credits all these amounts to the account of the second party with them without remitting the same until definite instructions are received by the first party.'
The second agreement was in similar terms excepting that the commission payable to the non-resident was reduced to 2% on the gross sale proceeds. In accordance with this arrangement the assessee credited a total commission of Rs. 26,254-9-0 on six occasions in the account year 1948-1949 and a commission of Rs. 11,272-8-8 on the last day of the account year 1948-1950 to the account of the non-resident in the assessees books. The credits in 1948-49 were made as and when the sale proceeds were received by the assessee from Japan. Out of the amounts credited, sundry sums aggregating to Rs. 13,320/- were remitted or paid to the non-resident pursuant to his directions, leaving a balance of Rs. 24,207/- on March 31, 1950.
The Income-tax Officer assessed to tax the amounts of commission credited to the non-resident, namely, Rs. 26,255/- and Rs. 11,272/- constituting the assessee as the statutory agent of the non-resident under section 43 of the Income-tax Act for the assessment years 1949-50 and 1950-51. The Appellate Assistant Commissioner confirmed the assessments but the Appellate Tribunal canceled them holding that the sums credited to the non-resident did not attract liability to tax.
The Tribunal was of the opinion that the income in question accrued or arose to the non-resident in Japan and was not taxable under section 4(1)(c) of the Income-tax Act and that section 4(1)(a) relating to receipt of income in the taxable territories was 'specifically delimited by section 4(1)(c).' The Tribunal observed : 'The reference in section 4(1)(a) to income received in India can, in our opinion, refer only to the situation more specifically provided for in section 4(1)(b) as sub-section(a) provides a general cover for both the immediately following sub-sections (b) and (c). Section 4(1)(b) can not therefore by itself add a new liability to non-residents, the extent of which is clearly delimited under section 4(1)(c) of the Act to only incomes that accrue to them within the taxable territories. To read anything further in section 4(1)(c) will totally nullify the effects of section 4(1)(b). Income that has accrued once abroad cannot by any means accrue again in India. If such income is later remitted to India and received by or on behalf of such non-residents in India such subsequent receipt cannot be chargeable under the Act..... We hold that the commission has accrued and arisen to the non-resident company only in Tokyo. The credit therefore in the books of the Indian firm, though it may amount to a receipt by the non-resident company in India, is, in our opinion, only recovery in India of a debt which has arisen in Tokyo simultaneously with the accrual of the income. We hold that the present assessment on the Indian firm as the agent of the non-resident company cannot, by any means, be supported.'
Dissatisfied with the decision of the Tribunal, the Commissioner of Income-tax applied for and obtained a reference to this court of the following question :
'Whether the aforesaid sums of Rs. 26,255/- and Rs. 11,272/- being selling commission credited to the aforesaid non-resident companys account in the books of the assessee are chargeable in the hands of the assessee under the section 4(1)(b) for the assessment years 1949-1950 and 1950-1951.'
The answer to the question referred does not admit of any doubt or difficulty. It is not possible to accept the reasoning of the Tribunal which proceeds on an erroneous interpretation of section 4(1)(a) and (c) of the Act and the learned advocate for the assessee confessed his inability to support the decision of the Tribunal on the grounds on which it rests. Section 4(1)(b) applies to residents as well as non-residents while section 4(1) is confined to non-residents. Non-residents are not chargeable to tax on income which accrues or arises outside the taxable territories, but if the income is received or deemed to be by the non-resident in the taxable territories, it is taxable under section 4(1)(b). Actual or 'deemed receipt' of income in the taxable territories by or on behalf of a non-resident attracts tax under section 4(1)(b) even though the income may not be chargeable under section 4(1)(c) by reason of its having accrued or arisen outside. Receipt of income within the taxable territories by itself attracts tax whether the income accrued or arose within the taxable rioters or outside. So much is plain on the language of section 4(1)(a) and (c). If authority were needed it will be found in the judgment of the Supreme Court in Turner Morrison and Co. v. Commissioner of Income-tax, and of the Privy Council in Commissioner of Income-tax v. Mathias.
It was argued on behalf of the assessee (1) that there was no receipt of income by the non-resident in the taxable territories and (2) that the assessee is not liable to be taxed on the commission earned by the non-resident. The assessees contention that as the entire work of the non-resident on behalf of the assessee was done in Japan, the commission accrued to the non-resident in Japan must be accepted. the agency commission accrued at the place where the services were performed by the non-resident agent. The gross sale proceeds of the mica were received from Japan by the assessee in Gudur. A certain percentage of the sale proceeds was parable as commission to the non-resident on whose direction the amount payable as commission was credited to his account in the books of the assessee. The commission was not payable until the sale proceeds were received by the assessee and was payable out of the sale proceeds. The non-resident should be regarded as having received his commission in India for the first time when amount of the commission was separated from the sale proceeds and credited to his account according to the terms of the agreement between the parties. Even though the commission was not paid or remitted to the non resident, still as he agreed to treat the commission as realized and directed that the amount of commission payable from time to time should stand as a deposit to his credit in the books of the assessee to be withdrawn or remitted later on according to his pleasure, there is a receipt of the commission by the non-resident in India. Once the commission amount was credited to the non-resident in the books of the assessee, the amount became so completely under the non-residents control that by an act of his will he could have actually transferred it to anybody and any place he liked. The fact that owing to the conditions that prevailed in Japan during the American military occupation, the commission amount could not be drawn by the non-resident in Japan or remitted to him from India does not affect the question and the non-resident should be regarded as having received the commission in India the moment it was credited to his account in the books of the assessee. The position is the same as if the commission had been credited, on his direction, to his account with a bank in India. There is no foundation in fact for the contention of the assessee that the commission was received by the non-resident in Japan. The gross sale proceeds were remitted by the purchaser of the mica to the assessee at Gudur. The commission was payable to the non-resident by the assessee who was in India. The amount of commission had to be ascertained with reference to gross sale proceeds received by the assessee. They were so ascertained at Gudur and paid into account of the non-resident with the assessee. It is only then that the assessee could be regarded as having received the commission. The non-residents income qua income was received by him or on his behalf only in India.
For these reasons, we are of the opinion that the commission credited to the non-resident in that books of the assessee is taxable as a receipt of income within the meaning of section 4(1)(b) of the Act.
The further point taken on behalf of the assessee is that, assuming that there was a receipt of income by the non-resident in India, the assessee was not chargeable to tax on such income. the Income-tax Officer treated the assessee as the statutory agent of the non-resident under section 43 and charged the assessee to the tax under that section read with section 40(2). In the statement of the case drawn up by the Tribunal it is stated that 'the liability of the assessee for any tax due from the non-resident under the Act was not also challenged.' The question referred to us is, however, comprehensive and covers the liability of the assessee to be charged to tax as agent of the non-resident. As the point was argued before us on behalf of the assessee, we proceed to deal with it. It was urged that whatever might be the liability of the non-resident to tax on the commission income if he is found in India, the assessee cannot be constituted an agent and charged to tax on that income under section 43 of the Act. Reliance was placed on the decisions in Commissioner of Income-tax, Bombay v. Metro Goldwyn Mayer (India) Ltd.; Caltex (India) Ltd. v. Commissioner of Income-tax, Bombay, and Abdullabhai Abdul Khader v. commissioner of Income-tax for the contention that section 43 could not be invoked only where section 42 would apply and that as section 43 was only the machinery to give effect to section 42 it would have no application to cases not falling within the purview of section 42. In the last of the trilogy of cases cited above, Chagla, C.J., observed as follows : 'Now it is not necessary to emphasize the fact that section 43 merely sets up a machinery to give effect to the substantive provisions of section 42. Therefore before we can go to section 43 we must find that the non-resident was liable to pay tax under section 42. It is only when he is so liable that the question of appointing a statutory agent under section 43 can arise.'
The learned Chief Justice then went on to explain the significance of the words ' business connection in the taxable territories' occurring in section 42 as importing the idea that the non-resident must be carrying on business in India through some definite agency. The assessees contention is that since the non-resident is not carrying on business in India through an agent, he has no 'business connection in the taxable territories' within the meaning of section 42. Where section 42 is inapplicable, the appointment of a statutory agent under section 43 is not permissible and the agent so appointed cannot be charged to tax on the income of the non-resident. This argument overlooks the plain language of section 43. The learned Chief Justice of the Bombay High Court while emphasising that section 43 is machinery for giving effect to the provisions of section 42 did not purport to lay down that section 43 has no other purpose. Granting that the income in question in this case does not attract the provisions of section 42 of the Act and that the non-resident has no business connection in India, it does not follow that action under section 43 of the Act could not be taken or that section 43 could not be read with any other section of the Act.
Under section 43 a person can be treated as statutory agent if (i) he is employed by or on behalf of the non-resident or (ii) if he has any business connection with the non-resident or (iii) if through him the non-resident is in receipt of any income, or profits or gains. The first condition is not satisfied in this case as it was the non-resident that was employed by the assessee and not the vice versa. It is open to question whether the third condition is satisfied for the non-resident receives the income from and not through the assessee. The second condition is, however, satisfied for there is a business connection between the assessee and the non-resident. The assessees contention is that the words 'business connection' in section 43 means the same thing as the corresponding words 'business connection in the taxable territories' in section 42 and that as the business connection in the present case was only in Japan, section 43 would not apply. The difference in language between sections 42 and 43 arising from the omission of the words 'in the taxable territories' that is to say, the omission of a reference in section 43 to the place in which the business connection should exist, is significant. While under section 42 there must be business connection in the taxable territories, for the purpose of constituting a person as a statutory agent under section 43 it would be sufficient if there is a business connection between him and the non-resident, irrespective of the place in which the business connections exists. Unless, of course, the liability of the non-resident to pay tax is based on some provision of the Act like section 4 or section 42 the mere appointment of a person as statutory agent of a non-resident does not make him liable to tax. If income, profits or gains of a non-resident are received in India the revenue authorities need not have recourse to section 42 but may charge the statutory agent under section 43 read with sections 40 and 4(1)(a). In the present case the assessee was in receipt of the income of the non-resident and would be chargeable to tax as an agent under section 40(2) of the Act. In Turner Morrison and Co. v. Commissioner of Income-tax the Supreme Court was of the opinion that 'the language of section 43 will also attract the provisions of section 40, for that section also contemplates a person who is entitled to receive on behalf of the non-resident any income, profits and gains chargeable under this Act and may even attract the provisions of section 4(1)(a).'
For this reason, it must be held that the assessee was rightly charged on the income of the non-resident as statutory agent under sections 40(2) and 43. Our answer to the question referred is in the affirmative and against the assessee. Advocates fee Rs. 250/- and other costs to be paid by the assessee.
Reference answered in the affirmative.