This is a reference under Section 66 (1) of the Indian Income-tax Act, made by the Income-tax Appellate Tribunal in relation to an assessment made under Section 23 (2) read with section 34 of that Act, for the assessment year 1938-39. The question of law which has been referred for out decision is as follows :-
Whether, in the circumstances of this case, in determining the profits and gains accruing or arising to the assessee from the Cairo business under Section 4 (2) of the Indian Income-tax Act, 1922 (prior to its amendment in 1939), for assessment on the remittance basis, such expenses as are not admissible under Section 10 (2) of the Act are deductible from the gross profits in addition to those that are admissible under this section ?'
The assessee is a Hindu undivided family carrying on business in Agra. It has also got a branch business at Cairo in Egypt. It may be noted that the year of account for the business at Cairo ended October 1937 and that for the business at Agra head office ended March 20, 1938. The material facts appearing from the statement of the case are these :-
During the year of account of the assessee a sum of Rs. 50,258 was brought from Cairo into British India. At the branch business at Cairo, the assessee made a profit of Rs. 1,50,243 during the four years ending October 20, 1938, and during this period a sum of Rs. 1,59,558 was expended at Cairo. Out of this sum, Rs. 1,24,685 was admissible expenditure in accordance with the provisions of Section 10 (2) of the Income-tax Act.
The Income-tax Officer held that the entire sum of Rs. 50,258 was a remittance of profit. In appeal, the Appellate Assistant Commissioner took the view that only Rs. 43,151 represented profits earned at the Cairo branch during the four years ending October 20, 1938, and consequently the sum of Rs. 43,151 only out of Rs. 50,258 should be treated as a remittance of profits. The substantial point of complaint before the Income-tax Appellate Tribunal was that in assessing the income, profits and gains of the Cairo branch for the four years in question, the entire sum of Rs. 1,59,558 - the total expenditure - should have been deducted and not merely a sum of Rs. 1,24,685 expenditure admissible under section 10 (2) of the Income-tax Act. The Tribunal reached the conclusion that in the computation of the net income for income-tax purposes only those expenses could be taken into consideration which were admissible under the Income-tax Act, and as the expenditure was made before the profits were determined, it was open to argument that inadmissible expenses might have been met out of capital. Dissatisfied with the decision of the Tribunal the assessee made an application for reference of the question of law arising out of the order of the Tribunal to this Court. Hence this reference.
In order to appreciate the controversy between the parties, it is necessary to bear in mind the terms of Section 4 of the Income-tax Act, as it stood before the amendment of 1939. That section, so far as it is material for the purposes of this reference, is as follows :-
'4 (1) Save as hereinafter provided, this Act shall apply to all income, profits or gains, as described 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.
(2) Income, profits and gains accruing or arising without British India to a person resident in British India shall, if they are received in or brought into British India, be deemed to have accrued or arisen in British India and to be income, profits and gains of the year in which they are so received or brought, notwithstanding the fact that they did not so accrue or arise in that year................'
It is clear from the language of sub-section (2) that it is a 'deeming' provision and it means that income, profits and gains which have accrued or arisen without British India to a person resident in British India shall be treated as having accrued or arisen in British India, provided they are received in or brought into British India. There is no question that the sum of Rs. 50,258 was brought into British India. The only question, therefore, is whether this sum represents income, profits and gains which accrued or arose to the assessee at Cairo. It is manifest from the language used in sub-section (1) that the Income-tax Act shall apply to 'income, profits or gains, as described or comprised in Section 6.' In other words, only such income, profits and gains attract income-tax as have been computed in the manner provided in Sections 7 to 12. As we are concerned with income under the head 'business,' profits and gains have to be computed in accordance with Section 10 and it is obvious that only those allowances which are mentioned in sub-section (2) of Section 10 can be deducted in the computation of the profits and gains chargeable to income-tax. Thus the question as to what was the income, profits or gains made by the Cairo branch which attracted income-tax can be answered by stating that only the sum of Rs. 1,24,685 could be deducted from the trade receipts.
The solution of the problem as to whether the sum of Rs. 50,258 brought into British India was a remittance of profit or not would depend, in this case, upon the answer to two questions; firstly what was the amount of profits and gains which accrued or arose to the assessee from the Cairo business; secondly whether the entire amount of such profits and gains was available to the assessee for the purpose of being remitted to British India It is open to an assessee who earns income in a foreign country to spend the same in any manner he likes and not to remit it to British India. The liability to tax in respect of such income, however, rests upon the fact that the income is brought or received in British India and not upon the fact that it accrues to the assessee in a foreign country. The assessee being at liberty to spend the whole or part of his foreign income outside British India, it is always a relevant question whether any and what part of the foreign income has been expended by the assessee before the remittance in question is made to British India. If the entire income is spent by the assessee before any remittance is made, it cannot be said that the remittance is one of profits. Now it is not necessary that an assessee should spend his income only after it has been ascertained for income-tax purposes. He is at liberty to spend it either after ascertaining it in accordance with the Income-tax Act, or before it is ascertained in that manner. In a case where the trading receipts exceed the total amount of expenditure and there is consequently a balance in the hands of the assessee, the money spent prior to the determination of the income (for income-tax purposes), should in out opinion, be treated as having been spent out of the income. That part of the income which had been spent before the remittances in question were made ceased to be income and, therefore, could not be brought into British India as such. Thus, for the purpose of determining the question whether the entire income chargeable under the Income-tax Act was available at the time of the remittance to British India, expenditure, although not admissible under Section 10 (2) of the Income-tax Act, must be taken into consideration. The excess of profits and gains, as determined under the Income-tax Act, over the inadmissible expenditure would represent the amount available for transmission to British India and it will be this excess which should be treated as a remittance of profits.
We have indicated above how and for what purpose the expenses admissible under Section 10 (2) and those not so admissible are top be deducted from the gross profits and our answer to the question formulated by the Tribunal is in the affirmative. As regards costs, out order is that the Commissioner of Income-tax must pay the costs of the assessee which we assess at Rs. 200.
We certify that counsel for the Department is entitled to Rs. 200 as his fee and he is allowed six weeks time within which to file his certificate.
Reference answered in the affirmative.