1. The assesses is a Hindu undivided family. The head office is situated at Tulsipur in Indian territory, and there is a branch office at Koilabas in the State of Nepal. The head office and the Nepal branch function as independent business units. The Nepal branch sells goods to parties within the taxable territories in India either by way of outright sale or on consignment basis. The sale proceeds of such transactions are collected on behalf of the Nepal branch by the head office, which remits them to that branch either in cash or in the shape of goods. There are no transactions of purchase and sale inter se between the head office and the Nepal branch. The assessee has been uniformly treated as a resident in the taxable territories within the meaning of Section 4-A of the Income-tax Act, 1922, and has been assessed upon profits accruing or arising to it in the Nepal branch, apparently under Section 4 (1) (b) (ii), subject to a deduction of Rs. 4,500 by virtue of the proviso to Section 4 (1).
2. In this reference we are concerned with the assessment year 1954-55, the relevant accounting year of the assessee being the year ended Kartik Sambat 2010. During this accounting year, the Nepal branch sold goods directly to various parties in the taxable territories. The sale proceeds were realised by the head office in due course, but the entire amount of the sale proceeds was not remitted by the head office to the Nepal branch. A credit balance in the sum of Rs. 34,332 at the close of the year was recorded in the account of the Nepal branch maintained in the books of the head office. It would contribute to the appreciation of the entries made in that account if a synopsis of the account is reproduced:
By sale proceeds.
To cost of Kerosenetins.
To Hundi returned backto Bhatpar Rampur.
By different parties.
Mazdoori of Urd
To Bardana Account.
To different parties.
To adjustments throughNagul page 43.
3. The Income-tax Officer treated the sum of Rs. 34,332 as a remittance of the assessee's profits from the Nepal branch to India liable to tax by virtue of Section 4 (1) (b) (iii). It was never disputed that the accrued income of the assessee without the taxable territories which had accumulated prior to the accounting year and had not been subjected to tax on account of the statutory allowance of Rs. 4,500 in each of the past years when aggregated with the accrued profits of the previous year covered the sum of Rs. 34,332. What the assessee contended before the Income-tax Officer was that the sum of Rs. 34,332 did not represent any remittance of the profits of the Nepal branch and that, therefore, Section 4 (1) (b) (iii) was not attracted. This contention was not accepted by the Income-tax Officer. In appeal before the Appellate Assistant Commissioner the assessee reiterated this contention. He also contended that if the sum could he said to represent such remittance, it must be treated as a remittance from out of the taxed profits of the Nepal branch and not from the untaxed profits.
The Appellate Assistant Commissioner, however, pointed out that the head office, which functioned as a collecting agency of the Nepal branch, should have remitted the entire sale proceeds to that branch, and its retention of the balance of Rs. 34,332 amounted in effect to a remittance by the Nepal branch of that sum in cash from Nepal to India and was liable to be treated as a constructive receipt of income in India from the Nepal branch during the year. He also held that there was no evidence to show that two separate funds were maintained by the Nepal branch, one in respect of taxed profits and the other in respect of its untaxed profits, and consequently no presumption could arise that the remittance must be treated asproceeding out of the fund constituted of un-taxed profits. He, therefore, confirmed the assessment. The assesses proceeded in appeal to the Income-tax Appellate Tribunal, and relied principally upon the decision of this Court in Ram Lal Bechairam v. Commr. of Income-tax : 14ITR1(All) , in support of its contention that the amount could not be treated as remittance of profit and, therefore, Section 4 (1) (b) (iii) did not apply.
The Appellate Tribunal, however, agreed with the reasoning of the Appellate Assistant Commissioner and confirmed the finding that the sum of Rs. 34,332 represented the constructive receipt in India of the untaxed foreign profits of the assessee. Upon application made by the assessee under Section 66 (1), the Appellate Tribunal has referred the following question to this Court for its opinion;
'Whether on the facts and circumstances of the case the sum of Rs. 34,332 was a constructive remittance of untaxed profits of the Nepal branch and assessable to tax in terms of Section 4 (1) (b) (iii) of the Act?'
4. Section 4 (1) of the Income-tax Act, 1922, categorises the various cases where income, profits and gains form part of the total income of a person. Income, profits and gains may be received or be deemed to be received, or they may accrue or arise or be deemed to accrue or arise. Clause (a) deals with income, profits and gains which are received or are deemed to be received. Such income, profits and gains are liable to be included in the total income if they are received or deemed to be received in the taxable territories in the relevant previous year, and the law makes no distinction between an assessee who is resident or not resident in the taxable territories during the year. Clause (b) deals with income, profits and gains of a person resident in the taxable territories which have accrued or arisen or are deemed to have accrued or arisen during the previous year. If they have accrued or arisen or are deemed to have accrued or arisen in the taxable territories during the previous year, then by Sub-clause (i) they form part of the total income. If this has happened without the taxable territories, then by virtue of Sub-clause (ii) they are includible in the total income. And Sub-clause (iii) refers to income, profits and gains which,
'having accrued or arisen to him without the taxable territories before the beginning of such year and after the first day of April 1933, are brought into or received in the taxable territories by him during such year.'
Clause (c) speaks of income, profits and gains of a person who was not resident in the taxable territories during the previous year and the income, profits and gains have accrued or arisen or are deemed to have accrued or arisen to him in the taxable territories during that year.
5. Now in order that an amount should be includible in the total income of a person under Section 4 (1) (b) (iii), it must be (a) income, profits and gains of the person, (b) should have accrued or arisen to him without the taxable territories, (e) before the beginning of the previous year and after April 1, 1938, and (d) should havebeen brought into or received in the taxable territories by him during the previous year.
6. The question before us is whether the sum of Rs. 31,332 entered as a credit balance can he said to represent a remittance from the Nepal branch to the head office. Now it is clear upon the facts that the sum of Rs. 34,332 was not actually brought into or received in the head office from the Nepal branch. The head office collected the sale proceeds of goods sold in the taxable territories by the Nepal branch, and this sum represents a portion or those sale proceeds. Money was never in fact remitted by the Nepal branch to the head office. The Income-tax authorities, however, say that inasmuch as the sum of Rs. 34,332 constituted a part of the sale proceeds belonging to the Nepal branch, the head office was obliged to remit the entire amount of the sale proceeds to the Nepal branch and in retaining this part of the sale proceeds it must be deemed that the Nepal branch had remitted the said sum to the head office. The Appellate Assistant Commissioner refers to it as a constructive remittance by the Nepal branch to the head office, and the Appellate Tribunal has endorsed that finding.
The argument assumes that there was an obligation on the head office to remit forthwith the entire amount of the sale proceeds to the Nepal branch. It ignores the important circumstance that the two businesses, that at the head office and that at the Nepal branch, belonged to the same person, and that essentially it was a matter of internal accounting between the two business units. There is no evidence that the head office was bound to remit the entire amount of the sale proceeds to the Nepal branch. The head office performed the function of a collecting agent on behalf of the Nepal branch, but nothing has been shown to indicate that, functioning in that behalf, the head office was obliged to forward forthwith or even during the year of account, the entire amount of the collections realised by it. The case, it seems to us, falls within the scope of the following observations made by this Court in Ram Lal Bechairam's case : 14ITR1(All) (supra).
'In an open and current account kept for the facility of accounting between the two shops belonging to the same proprietor, it is a matter of chance as to what is the balance that may remain due at any given moment or one to the other. It may vary from time to time and from day-to-day and it is always a matter within the discretion of the head office when, if at all, the balance shall be adjusted. It does not even follow that it will ever be adjusted since there could be no legal obligation on the Semohi branch (in the taxable territories) even to transmit money to its own Bhadohi branch (outside the taxable territories).'
It is true as pointed out by the Appellate Tribunal, that in Ram Lal Bechairam's case : 14ITR1(All) (supra) goods were supplied by the Bhadohi branch to the Semohi branch and conversely from the Semohi branch to the Bhadohi branch, and that inasmuch as the two businesses belonged to the same person, the decision in the case proceeded on the basis that no profits could have arisen, since no man can make a profit out of himself. This, however, in our opinion, does not detract from the force of the observations set out above. These observations were noticed in a subsequent case between the same parties, Ramlal Bechairam v. Commr. of Income-tax : 19ITR246(All) , by a Bench, of which one of the learned Judges was party to the earlier decision, and they were interpreted as laying down that the amount shown as a credit balance in the books of the Semohi shop in favour of the Bhadohi shop could not be treated as a remittance from the latter at all.
7. It was said that the sum of Rs. 34,332 constituted a constructive remittance from the Nepal branch to the head office. We assume that what was intended to be said was that you must suppose that the entire amount of the sale proceeds received by the head office during the previous year in the account of the Nepal branch was forwarded to the latter and a sum of Rs. 34,332 must be deemed to have been remitted by the Nepal branch to the head office, and that this sum proceeded out of the accumulated profits of earlier years. But can one legitimately suppose this to have happened There was no settlement of account between the two businesses, and it has not been shown that there was any obligation upon the head office to forward the entire sale proceeds to the Nepal branch. There was a mere entry in the account showing a credit balance at the end of the year. It was a matter of mere book-keeping. One is reminded of the observations of the Lord Chancellor in Gresham Life Assurance Society, Ltd. v. Bishop, (1902) 4 Tax Cas 464 at p. 472:
'The Legislature must be supposed to have contemplated the possibility of drawing a distinction between money received in this country and money accounted for or credited in account. If it were not for the difficulty of ear-marking money I should think no one would have any doubt that the money must be received in this country to bring it within the words of the statute. If it were not money but some commodity, say tobacco, which a trader carrying on business in London and Paris was accounting for to his London house, no one would say that though the Paris tobacco was credited in account as a set-off against some expense or something that the supposed London firm had to set off against the same claim, and that as the London firm was paid by the Paris tobacco, therefore, the tobacco was liable to the import duty on tobacco because it was taken into account in the books of the London firm.
In no way that I can give any reasonable interpretation to has the money reached this country or been received in this country. It, like the tobacco in the case suggested, has not been imported, and if the Legislature had intended that bringing it into account was to be equivalent to its being received, it would have been easy to say so
I do not think any amount of book-keeping or treatment of these assets, wherever they may be, will be equivalent to or the same thing as receiving the amount in this country.'
In the same case, Lord Brampton deprecated the use of the word 'constructively' and admitted to a want of appreciation of the expression 'constructive receipt'.
8. It is true that in order to constitute a remittance no money need actually pass. That was settled by the House of Lords in this case. But though no money may actually pass, there must be a remittance in the sense in which that word is used in ordinary commercial practice. The remittance must result in the receipt of a sum of money, and what is meant by that was succinctly put by Lord Lindley in the same case, namely, Gresham Life Assurance Society's (1902) 4 Tax Cas 464 (supra) when he said:
'My Lords I agree with the Court of Appeal that a sum of money may be received in more ways than one, e.g., by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.'
Since then the Courts in England have been called upon to consider numerous cases in which the question has arisen where without the actual passage of money a remittance has taken place. In each case, the decision has turned upon the particular facts before the Court. Two of these cases, Hall v. Marians, (1935) 19 Tax Cas 582 and Thomson v. Moyse, (1960) 39 Tax Cas 291, have been cited before us, but in neither of them do the facts correspond to those in the instant case. In order that the provisions of Section 4 (1) (b) (iii) should be attracted it must be established that the profits were brought into or received from without the taxable territories into the taxable territories. There is no material before us on the basis of which we can conclude that the sum of Rs. 34,332 was brought into or received from the Nepal branch into the head office in India.
9. The Appellate Tribunal has held that the sum of Rs. 34,332 represented a remittance of the untaxed foreign profits earned by the Nepal branch. Assuming that the sum represented a remittance from the Nepal branch to the head office, the alternative submission of learned counsel for the assessee is that the remittance could not be said to have proceeded from the untaxed profits of the Nepal branch. He contends that there were sufficient profits, which had suffered tax in earlier years, with the Nepal branch which could constitute a fund from which such remittance could have been made, and that it must be presumed that the assessee made the remittance from that fund and not from the fund of its untaxed profits.Now the ordinary presumption is that when money is received in the taxable territories from without the remittance is out of profits: Mayyappa Chettiar v. Commr. of Income-tax. : 1ITR37(Mad) ; Commr. of Income-tax v. R.M. Raja : 31ITR217(Bom) . The assessee urges that there is an overriding presumption, namely that where there are two funds at the disposal of a person, one fund upon which income-tax has been levied and another fund which is still liable to income-tax, the presumption is that the former will be drawn upon to make payments and not the latter. In the instant case, however, there is nothing to show that two such distinct funds were maintained by the Nepal branch.
10. The last contention raised for the assessee is that in any event, the sum of Rupees 34,332 includes a sum of Rs. 3,162 which is out of the profits of the relevant previous year and cannot be taken into consideration under Section 4 (1) (b) (iii), which refers to profits which have accrued or arisen before the beginning of the previous year. That this is so is sought to be established by reference to certain data contained in the assessment order. As the question was never raised before the Appellate Tribunal, and even though not raised has not been decided by it, we are not inclined to express any opinion in the matter. Similarly, and for the same reason, we cannot allow the assessee to raise, for the first time before us, the question whether the sum of Rs. 34,332 can be treated as the profits of the assessee.
11. Inasmuch as, in our judgment, the sum of Rs. 34,332 cannot be said to be a remittance made by the Nepal branch to the head office during the relevant previous year and that, therefore, the provisions of Section 4 (1) (b) (iii) are not attracted, we answer the question referred in the negative.
12. A copy of the judgment under the seal of the Court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal.
13. The assessee is entitled to its costs.