1. This is a reference by the Commissioner of Income-tax, Central and United Provinces, under Section 66(2), Income-tax Act, which has been made at the instance of the Maharaja of Benares, Captain His Highness Maharaja Sir Aditya Narain Singh Bahadur, K.C.S.I. The Income-tax Officer assessed the Maharaja to tax on an income of Rs. 48,880 in respect to property in British India. The assessment year is 1934-1935. There was an appeal to the Assistant Commissioner, who reduced the estimate of income to Rs. 47,174, but otherwise upheld the assessment of the Income-tax Officer. Thereafter an application was made to the Commissioner of Income-tax under Section 66(2) of the Act, requiring him to state a case for the decision of this Court upon certain questions. Three questions of law have been referred to us by the Commissioner. Of these, No. (2) reads as follows:
Granting that the assesses was a non-resident, was the Income-tax Officer precluded by any revision of the Act from serving a notice on him without appointing an agent within the meaning of Section 43?
2. The Commissioner's opinion is that the question should be answered in the negative. He says:
Section 43 gives an Income-tax Officer discretion to treat certain persons as agent of a nonresident for the enforcement of the liability in special cases under Section 42. This section does not create any liability that is not already there in Section 4(1) of the Act and is an extension of the meaning of this section - not a section that creates a new liability, but one that facilitates assessment and collection of the demand in the case of nonresidents or in other words a machinery section not a section that lays down that the profits or gains are assessable to income-tax only in the name of an agent of the non-resident . It was therefore open to the Income-tax Officer to address notices direct to the assessee, even though he be a non-resident. That is what he has done and the fact that the notices were served on the representative of the assessee in British India without recourse to the provisions of Section 43, therefore, makes no difference to the validity of the assessment, specially as the notices duly reached the assessee and were formally complied with.
3. The Commissioner quotes as authority the case in Chief Commissioner of Income-tax, Madras v. Bhanjee Ramjee & Co. (1921) 8 A.I.R. Mad. 212. In that case the assessee was residing in Cochin State, but did considerable business in British Cochin. He accepted notices and submitted returns to the Collector of Malabar, of which district British Cochin forms a part for the purposes of income-tax. The learned Judges of the Madras High Court were of opinion that the Proviso to Section 33(1) of Act 7 of 1918 (which corresponded with Section 42(1) of the present Act)
supports the construction that the profits or gains are chargeable if they can be got at in British India whether they are assessed in the name of an agent of the non-resident or not.
4. Further on they say:
All that the latter part of the section does is to provide machinery by which the tax can be levied where the non-resident cannot himself be got at.
5. The point fell to be considered by the Bombay High Court in the case in Commissioner of Incom-tax, Bombay v. National Mutual Association of Australia Ltd. (1933) 20 A.I.R. Bom. 427 in which reference was made to Income-tax, Madras v. Bhanjee Ramjee & Co. (1921) 8 A.I.R. Mad. 212. At page 527 the learned Chief Justice remarked:
It is further to be observed that the Madras High Court in Chief Commissioener of Income-tax, Madras v. Bhanjee Ramjee & Co. (1921) 8 A.I.R. Mad. 212 held that a principal could be assessed under Section 42 without the necessity of appointing an agent under the latter part of the section and Section 43.
6. At page 535 Eangnekar J. observed:
In the course of the discussion it was suggested that before Section 42 can apply it is necessary that a notice under Section 43 must be served on a person by the Income-tax Officer stating that he intended to treat him as the agent of the non-resident person before such person can be treated as an agent and chargeable to income-tax within the meaning of Section 42, and as that was not done in this case, Section 42 did not apply. The answer to the argument is that in this case the principal is sought to be taxed under the Act and the income which was not shown in the return was his income by reason of the meaning of the word 'income' in Section 4 as extended by Section 42. The point arose in 44 Mad 7731 and it was held that a principal was liable to assessment under Section 42 without an agent being appointed under Section 43. In my opinion this view is correct.
7. In Income-tax, Madras v. Bhanjee Ramjee & Co. (1921) 8 A.I.R. Mad. 212, to which reference has already been made, the learned Judges cited as authority two English cases, namely Tischler & Co. v. Apthorpe (1885) 52 L.T. 814 and Werle & Co. v. Colquhoun (1888) 20 Q.B.D. 753. In each of the last-named two cases the assessee was a firm of wine merchants in Prance doing business in England. In Werle & Co. v. Colquhoun (1888) 20 Q.B.D. 753 at p. 760 Lord Esher M.R. observed:
Another point was raised : that if no one could be found to be assessed under Section 41 of 5 & 6 Vict., Order 35, as an agent or factor, that shewed that no such trade was carried on as was intended by the statute. As to that, I agree with the judgment of Mathew 3., in Tischler & Co. v. Apthorpe (1885) 52 L.T. 814 that if the Grown can find such an agent as is described in Section 41, they can assess him; but, supposing they cannot, they must take such means as they are able, to get at the person who should be assessed. Whether the right means have been taken to assess the appellants we are not asked, and that question is not before us; but I do not think that the right to assess is limited by Section 41, which is only machinery.
8. The law which governed these decisions was embodied in the statute and section above referred to, namely Section 41 of 5 & 6 Vict. (1842). Now, apart from the danger which ordinarily attends any attempt to apply the analogy of English law to an Indian statute, there are certain important points of distinction between the law as laid down in Section 41 of 5 & 6 Viet, and the provisions of Section 42 of the Indian Income-tax Act. In the first place, it will be seen that under Section 41 of 5 & 6 Viet, it was enacted that the non-resident should be chargeable in the name of his agent or factor, whereas in the Indian Act the income is made chargeable in the name of the agent; that is to say, in Section 42 of the Indian Act there is no mention of charging the non-resident, but the income is chargeable in the name of the agent, while in the English statute the nonresident himself is chargeable in the name of the agent. In the second place, Section 43 of the Indian Act provides facility for the appointment by the income-tax authorities of a person who may be treated as an agent for the purposes of Section 42 and gives a wide range of selection. In the third place, it is laid down in Section 42 that the agent shall be deemed to be the assessse, a provision which was absent in 5 & 6 Viet. We shall have occasion to refer to this provision at a later stage.
9. We have not been referred to any authority based on the English Act of 1818 and, in any case, having examined Section 101 of that Act and Rules 5 and 13 of the General Rules passed thereunder, we do not think that the position is affected. We are clearly of opinion that the question before us must be decided by reference to the provisions of the Indian Act alone, and we would hesitate to draw any support from foreign authorities based on the English law. It has been held on several occasions by various Courts that Section 40 and the following sections are 'machinery' or enabling section. Ch. 5 which contains these sections, is headed 'liability in special cases' and some argument might perhaps be based on the language of this heading, but we dc not think that it is necessary to pursue this point. We will assume that Section 42 is a 'machinery' section.
10. Now, Section 4(1) of the Act provides:
Save as hereinafter provided, this Act shall apply, to all income, profits or gains, as describe or comprised in Section 6 from whatever source derived, accruing or arising, or received in British India or deemed under the provisions of this Act to accrue, or arise or to be received in British India.
11. Section 6, which is a charging section, lays down that:
Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing....
12. Now we come to Ch. 5. Section 40 deals with the guardian, trustee or agent of a minor, lunatic or idiot or of a person residing out of British India and provides that tax shall be levied upon and recoverable from such guardian, trustee or agent, being in receipt on behalf of the beneficiary of any income, profits or gains in like manner and to the same amount as it would be leviable upon and recoverable from any such beneficiary if of full age, sound mind, or resident in. British India, and in direct receipt of such income, profits or gains. Non-residents are again dealt with, specifically and in detail, in Section 42. Section 42(1) reads as follows:
In the case of any person residing out of British India, all profits or gains accruing or arising to such person, whether directly or indirectly, through or from any business connection or property in British India, shall be deemed to be income accruing or arising within British India, and shall be chargeable to income-tax in the name of then agent of any such person, and such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax : Provided that any arrears of tax may be recovered also is accordance with the provisions of this Act from any assets of the non-resident person which are, or may at any time come, within British India.
13. Section 43 provides that:
Any person employed by or on behalf of a person residing out of British India, or having any business connection with such person, or through, whom such person is in the receipt of any income, profits or gains upon whom the Income-tax Officer-has caused a notice to be served of his intention of treating him as the agent of the non-resident person shall, for all the purposes of this Act, be-deemed to be such agent:
Provided that no person shall be deemed to be the agent of a non-resident person, unless he has had an opportunity of being heard by the Income-tax Officer as to his liability.
14. It will be seen that the word 'agent' for the purposes of Section 42 has a wider scope than it has in ordinary use. The first thing which falls to be considered is the significance to be attached, in the light of Section 42(1), to the words 'shall be chargeable to income-tax in the manner hereinafter appearing' in Section 6; that is to say, we have to consider what is the 'manner hereinafter appearing' as regards a non-resident. Section 42 provides the method of charging a non-resident and lays down that in circumstances such as we are now dealing with, profits and gains of the non-resident shall be chargeable to income-tax in the name of the agent and that
such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax.
15. 'Assessee' is defined in Section 2(2) as the person by whom income-tax is payable. It is thus only the assessee who can be called upon to pay income-tax. The only construction which we can place on the language of Section 42(1) is that the agent alone and not his non-resident principal shall for the purposes of the Act be treated as the assessee, i.e. as the person to whom a notice under Section 22(2) shall issue and by whom the tax is payable. The word 'shall' in Section 42(1) is significant; it shows that the provisions of that section are mandatory, and in our opinion the department is precluded from issuing notices to the principal and from treating the principal as the assessee except to the limited extent, that any arrears of tax may also be recovered from assets of his which may be found in British India. If the Legislature had intended that the principal also might be treated as the assessee, one would have expected to find the word 'may' instead of 'shall'; or the Legislature might have inserted a provision investing the nonresident principal also with the character of assessee, if he could be got at, in the same way as it has provided for the recovery of arrears of tax from the assets of the principal in British India. When the agent in British India is invested with the character of assessee in the mandatory terms which we find in Section 42(1) and to the apparent exclusion of the principal, it would seem to follow that the non-resident principal is divested of that character.
16. In certain English cases it was argued that the provision as regards liability of the resident agent was enacted by the Legislature to assist the income-tax authorities in collecting the tax and was not intended to alter the incidence of taxation. That argument might have considerable force with reference to the law prevailing in England, but we have formed our opinion in this case on the language of the relevant sections of the India Act and on the imperative phraseology of the provisions of Section 42(1).
17. It appears to us that in the case of a person residing out of British India who has property or business connexions in British India the income-tax authorities are not competent to serve notices upon him; such notices must be served upon his agent in British India or upon such person as may be deemed to be his agent within the meaning of Section 43, and who will be treated as such. The Proviso to Section 42 does not, to our minds,' militate against the view that we have taken and does not support the opinion of the Commissioner that it is, open to the Income-tax Officer to address notices direct to the assessee even though he be a 'non-resident'. With all respect to the learned Judges of the Madras High Court who decided Income-tax, Madras v. Bhanjee Ramjee & Co. (1921) 8 A.I.R. Mad. 212, we do not agree that the Proviso to Section 42 in any way goes against the construction that the income of a non-resident shall be chargeable to income-tax in the name of the agent. The Proviso contemplates the possibility of the assessee, i.e. the agent, not being able to pay the income-tax. It is I only natural to suppose that the non-resident will place the agent in funds in order-to enable him to pay the income-tax demand, but if the agent is not provided with such funds, then, apart from such steps as might be taken against the agent, the Proviso empowers the authorities to recover the tax from the assets of the nonresident in British India, and in the majority of cases the non-resident will have such assets in British India because the income which has accrued to him has-accrued to him through or from some business connexion or property in British India, and even if in some extraordinary case there be no such assets for the time being, the authorities are empowered to seize any assets when they come at any future time in British India. That in our opinion, is the only effect of the Proviso, which does not override the mandatory provisions contained in the preceding paragraph that the income shall be chargeable to income-tax in the name of the agent.
18. We answer Question No. (2) in the affirmative. Learned Counsel for the Maharaja informed us that in this view of the case he does not want us to answer Questions Nos. (1) and (3) so far as the present assessment is concerned, and as counsel for the Department does not insist that the said questions should be answered, we refrain from expressing any opinion on them. Let a copy of our judgment be sent to the Commissioner under the seal of the Court and the signature of the Registrar. The Department must pay the costs of this reference. The hearing of the case lasted for more than a day and counsel for the Department is allowed six weeks within which to file the certificate. We fix his fees at Rs. 200.