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income-tax Officer Vs. Raza Textiles Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberSpecial Appeal No. 285 of 1962
Judge
Reported in[1977]106ITR408(All)
ActsIndian Income Tax Act, 1922 - Sections 4A, 18(3B) and 18(7)
Appellantincome-tax Officer
RespondentRaza Textiles Ltd.
Appellant AdvocateDeokinandan and ;Gopal Behari, Advs.
Respondent AdvocateAshok Gupta, ;Brijlal Gupta, ;V. Sarup and ;K.L. Misra, Advs.
Excerpt:
- - this presumption is rebuttable and it can be effectively rebutted by the assessee showing that the control and management of the affairs of the firm is situated wholly without the taxable territories. where the control and management are situated wholly outside india the initial presumption arising under the section is effectively rebutted. from the correspondence referred to above we are clearly of the opinion that the control and management of the affairs of m/s......described himself as 'sole agent and representative in india, m/s. nathir mal and sons' or, as 'lokumal nathir mal and co., sole buying agents and representative in india for m/s. nathir mal and sons', would not make any difference. it was n. lokumal, a partner of m/s. nathir mal and sons, who was throughout acting for and on behalf of m/s. nathir mal and sons. if he chose to describe his status in some of these letters in some assumed name, it will not make any difference, in so far as his status as a partner of m/s, nathir mal and sons is concerned. it is the partner of m/s. nathir mal and sons who is acting in the assumed name. under section 18 of the indian partnership act a partner is the agent of the firm for the purpose of the business of the firm. section 19 lays down that.....
Judgment:

Ojha, J.

1. The respondent, M/s. Raza Textiles Ltd., Jwalanagar, Rampur, was directed by the Income-tax Officer, Rampur, under Section 18(3B) road with Section 18(7) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), to pay Rs. 1,39,739-5-0 as tax on a sum of Rs. 2,00,000 which was remitted by the respondents as commission to M/s. Nathir Mal and Sons, Djakarta, Indonesia, during the assessment year 1952-53. An appeal was filed by the respondent against the said order, but was dismissed by the Appellate Assistant Commissioner on the ground that it was not maintainable. This order was upheld by the Income-tax Appellate Tribunal. The respondent, thereafter, instituted a writ petition in this court, inter alia, on the ground that M/s. Nathir Mal and Sons was not a non-resident firm and, as such, the provisions of Section 18(3B) read with Section 18(7) were not applicable. This ground found favour with the learned single judge who decided the writ petition and without going into the merits of the other grounds raised in the writ petition, the order of the Income-tax Officer was quashed. On appeal, the judgment of the learned single judge was reversed by a Bench of this court on the ground that the finding recorded by the Income-tax Officer as to whether M/s. Nathir Mal and Sons was a non-resident firm or not, was a finding on a question of fact, of which the Income-tax Officer was the sole judge. The judgment of the Bench was, however, set aside by the Supreme Court (See : [1973]87ITR539(SC) ) on the ground that the question as to whether the said firm was a resident or a non-resident firm, even though a question of fact, was one concerning the jurisdiction of the Income-tax Officer and the High Court was entitled to give its own finding, the same being a jurisdictional fact. The special appeal was sent back to this court to be decided afresh.

2. Learned counsel for the appellant urged that on the material placed before the Income-tax Officer and before this court it is clear that the decision given by the Income-tax Officer was correct. In order to determine as to whether M/s. Nathir Mal and Sons was resident or non-resident, it would be necessary to consider the provisions of Section 4A(b) of the Act. It reads:

'For the purposes of this Act--...... (b) a Hindu undivided family, firm or other association of persons is resident in the taxable territories unless the control and management of its affairs is situated wholly without the taxable territories.'

3. The question which, therefore, falls for consideration is whether the control and management of the affairs of M/s. Nathir Mal and Sons at the relevant time was situated wholly without the taxable territories. From the use of the word 'wholly' it is obvious that even if the control and management of its affairs was situated partly within the taxable territories, the said firm would be a resident firm.

4. Learned counsel for the appellant placed reliance on certain decisions interpreting Section 4A(b) aforesaid. They are : Bhimji R, Naik v. Commissioner of Income-tax : [1946]14ITR334(Bom) , Subbayya Chettiar v. Commissioner of Income-tax : [1951]19ITR168(SC) and Commissioner of Income-tax v. Erin Estate : [1951]20ITR412(Mad) . In the first case referred to above it was held that the control and management mentioned in Section 4A(b) of the Act must be de facto control and management and not de jure control and management, and further that in the case of a firm the problem ought to be approached from the same angle as in the case of a company.

5. The second case was of a Hindu undivided family. It was held that in order to bring the case under the exception of Section 4A(b) of the Act the court has to ask whether the seat of the direction and control of the affairs of the family is inside or outside the taxable territories, and that the word 'wholly' suggests that a Hindu undivided family may have more than one 'residence' in the same way as a corporation may have. Against the decision in Commissioner of Income-tax v. Erin Estate : [1951]20ITR412(Mad) referred to above, an appeal was filed before the Supreme Court which was dismissed. The decision of the Supreme Court is Erin Estate v. Commissioner of Income-tax : [1958]34ITR1(Mad) . It was held by the Supreme Court as follows:

'Whether or not the appellant is a resident firm under Section 4A(b) would depend upon the legal effect of the facts proved in the case. The status of the appellant which has to be determined by reference to the relevant section of the Act is a mixed question of fact and law and in determining this question the principles of law deducible from the provisions of the said section will have to be applied......Where the partners of a firm are residents of this country, the normal presumption would be that the firm is resident in the taxable territories. This presumption is rebuttable and it can be effectively rebutted by the assessee showing that the control and management of the affairs of the firm is situated wholly without the taxable territories. The onus of rebutting the initial presumption is on the assessee. The 'control and management' contemplated by the section evidently refers to the controlling and directing power. Often enough, this power has been described in judicial decisions as the 'head and brain'; the affairs of the firm which are subject to the said control and management refer to the affairs which are relevant for the purpose of taxation and so they must have some relation to the income of the firm. When the section refers to the control and management being situated wholly without the taxable territories it implies that the control and. management can be situated in more places than one. Where the control and management are situated wholly outside India the initial presumption arising under the section is effectively rebutted. It is true that the control and management which must be shown to be situated at least partially in India is not the merely theoretical control and power, not de jure control and power, but the de facto control and power actually exercised in the course of the conduct and management of the affairs of the firm. Theoretically, if the partners reside in India they would naturally have the legal right to control the affairs of the firm which carries on its operations outside India. The presence of this theoretical de jure right to control and manage the affairs of the firm, which inevitably vests in all the partners, would not by itself show that the requisite control and management is situated in India. It must be shown by evidence that control and management in the affairs of the firm is exercised, may be to a small extent in India before it can be held that the control and management is not situated wholly without the taxable territories......The control and management must no doubt be shown to have been actually exercised; and the exercise of the control and management should not be illusory or merely notional. Once it is shown that control and management of the affairs of the firm was exercised by the partners residing in India, it would not be relevant to enquire whether the control and management thus exercised amounted to a substantial part of the control and management of the affairs of the firm. The exercise of the control and management even in part in the taxable territories would be enough to fix the appellant with the character of a resident within Section 4A(b).'

6. In fact, counsel for both the parties relied on the aforesaid observations of the Supreme Court in support of their respective contentions. It is in the light of these observations that the question as to whether M/s. Nathir Mal and Sons was a resident or non-resident has to be decided.

7. The contract in respect of which commission was paid by the respondent to M/s. Nathir Mal and Sons was for the supply of vests to the said firm which in its turn was to supply the same to the Indonesian Government. The vests were supplied by M/s. Jwala Fabrics, Rampur, a branch of the respondent-company. The respondent had filed along with the writ petition copies of certain letters exchanged between M/s. Jwala Fabrics, Rampur, and one N. Lokumal. These letters are annexures 'B to I' to the writ petition. Annexure 'B' is a letter from Jwala Fabrics and is addressed to N. Lokumal who has been described as partner, M/s. Nathir Mal and Sons, Indonesia, Camp No. 20, Central Court, New Delhi. The letter starts with the words: 'This is to confirm the discussions the undersigned had with you......' It relates to the contract in question. Annexure 'C' is a letter confirming the arrangements mentioned in the letter, annexure 'B', and has been signed by N. Lokumal as partner of M/s. Nathir Mal and Sons. Annexure 'D' is a letter from Jwala Fabrics addressed to M/s. Nathir Mal and Sons, Djakarta, C/o. N. Lokumal Esq., Ratnagar Bungalow, Murbad Road, Kalyan. N. Lokumal has in annexures 'E' and 'F' described himself as sole agent and representative in India of M/s. Nathir Mal and Sons. In annexure 'E' by using the words 'We regret to state......We shall, therefore, request you.....,,..We have already settled......' N. Lokumal has identified himself with Nathir Mal and Sons. Likewise, in annexure 'F' N. Lokumal says : 'I agree and authorise you to entrust the shipment to Djakarta of vests', Annexures 'G' and 'H' are signed by N. Lokumal and these letters start with : 'Lokumal, Nathir Mal & Company, Importers, Exporters, Commission Agents, Manufacturers, Representatives, Sole Buying Agents & Representatives in India for Messrs. Nathir Mal & Sons, Djakarta (Indonesia)'. Annexure 'I' is a letter from Jwala Fabrics addressed to N. Lokumal, representative in India, M/s. Nathir Mal & Sons, Ratnagar Bungalow, Murbad Road, Kalyan. It states : ' ......the question of delivery period was fully discussed with you... ...It is, therefore, surprising that you are not prepared to extend the delivery period......We trust you would take up the matter of extension with your Indonesian Government and see to it that it is obtained......'

8. From a perusal of the aforesaid letters it is apparent that N, Lokumal was actually exercising the de facto control and power in the course of the conduct and management of the affairs of M/s. Nathir Mal and Sons, as its partner. He had his office in India and was in a position to settle the terms of the contract with the respondent. He was acting on his own and there is nothing to indicate that he was seeking instructions from the firm at Indonesia before taking initiative in the matter. Annexure 'C' further indicates that the delivery of the vests was to be given to N. Lokumal. This letter also contains directions in regard to the labelling of the vests. The mere fact that in some letters in place of describing himself as partner of M/s. Nathir Mal and Sons, N. Lokumal has described himself as 'sole agent and representative in India, M/s. Nathir Mal and Sons' or, as 'Lokumal Nathir Mal and Co., sole buying agents and representative in India for M/s. Nathir Mal and Sons', would not make any difference. It was N. Lokumal, a partner of M/s. Nathir Mal and Sons, who was throughout acting for and on behalf of M/s. Nathir Mal and Sons. If he chose to describe his status in some of these letters in some assumed name, it will not make any difference, in so far as his status as a partner of M/s, Nathir Mal and Sons is concerned. It is the partner of M/s. Nathir Mal and Sons who is acting in the assumed name. Under Section 18 of the Indian Partnership Act a partner is the agent of the firm for the purpose of the business of the firm. Section 19 lays down that subject to the provisions of Section 22 the act of a partner which is done to carry on in the usual way business of the kind carried on by the firm, binds the firm, and that the authority of a partner to bind the firm conferred by this section is called his 'implied authority'. N. Lokumal being a partner of M/s. Nathir Mal and Sons, by virtue of his rights and obligations as a partner, was a part and parcel of the 'head and brain' of the firm. From the correspondence referred to above we are clearly of the opinion that the control and management of the affairs of M/s. Nathir Mal and Sons was at the relevant time situated, at any rate, partly within the taxable territories. In this view of the matter, the learned single judge was right in quashing the order of the Income-tax Officer.

9. In the result, the appeal fails and is dismissed with costs.


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