1. This reference relates to the assessment years 1958-59 and 1959-60. There are two sets of questions for the two years. We would reproduce the question relating to the assessment year 1958-59 as the questions for 1959-60 are identical. The relevant questions for 1958-59 are :
'1. Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in law in holding that the assessee should be assessed as a non-resident for the assessment year 1958-59
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding and had valid materials to hold that the management and control of the firm was wholly outside India during the accounting year relevant for the assessment year 1958-59
3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the penalty levied under section 271(1)(c) for the assessment year 1958-59 ?'
2. It is not in dispute that the question of penalty is completely dependent upon the answer to the reference on the assessment. If the answer is favourable to the assessee, then the penalty would have to be deleted.
3. One Subbaraya Mudaliar was carrying on the business of purchase and sale of textile goods at Penang and Ipoh in the Federal Malay States under the name and style of Chitra Palayakat Co. as a sole proprietor till April 12, 1950. He converted this individual business into a partnership business by taking Kumaresa Mudaliar and Thayumanaswamy Mudaliar as partner under a deed dated October 20, 1950. Kumaresa was to be the general manager of the business at Penang, Ipoh and other places. On July 14, 1953, there was another partnership deed which provided that Subbaraya should attend to the management of the business as the managing partner. Clause 8 of the said deed authorised Subbaraya to appoint any person as his duly constituted attorney for exercising all or any of his rights and powers and discharging and carrying out the duties and obligations of the managing partner. Most of the purchases were effected from a firm in Madras called the City Palayakat Co. of which Subbaraya was one of the partners.
4. The Malaya firm claimed that it was a non-resident, that the income of the firm accrued outside India and that the income was, therefore, not taxable in India. The Income-tax Officer completed the assessment for the two years accepting the assessee's claim. Subsequently, he reopened the assessment because Subbaraya, one of the partners of the assessee-firm was in India during the relevant previous years and he was of the view that Subbaraya had exercised de facto control over the business of the assessee-firm in India. Accordingly, he initiated proceedings under section 147(1), of the Income-tax Act, 1961 ('the Act'). The assessee did not dispute that Subbaraya was in India during the period from May 21, 1957, to July 29, 1958. It was, however, contended that he had come to India for the purpose of celebrating the marriage of his daughter, that he had executed a general power of attorney in favour of Palaniswamy for carrying on the business in Penang and that he did not attend to the business of the assessee-firm while in India. The assessee was required to produce the tapal register maintained by it. The reply of the assessee was that it had not maintained tapal registers. But it produced the press copy book. The Income-tax Officer noticed that almost the entire sales of the Madras firm for the years under consideration had been made only to the assessee-firm and that Subbaraya was in control and management of the Madras firm. He, therefore, concluded that Subbaraya was in de facto control of the assessee-firm during the period of his stay in India. He further noticed that Thayumanaswamy, another partner, had been assessed for the two years under consideration as a resident and ordinarily resident and his share income from the assessee-firm was also taken to be earned income and assessed accordingly. In his view, the control and management of the assessee-firm was not wholly situate outside the taxable territories and he purported to draw adverse inference from the non-production of the tapal register. Apart from completing the assessment on the basis that the firm was resident in India, he initiated action for levy of penalty for concealment of income and referred the question of levy of penalty to the Inspecting Assistant Commissioner as required by the law.
5. The assessee appealed to the Appellate Assistant Commissioner contesting the validity of the reopening of the assessment and also the findings on the question of control. The Appellate Assistant Commissioner, following the judgment of this court dated February 22, 1962, in T.C. No. 144 of 1959, in the case of this very assessee, held that the assessment of the assertion of Subbaraya that he was here only for the purpose of his daughter's marriage and that he had not associated himself with the transactions of the assessee-firm or even of the Madras firm.
6. The assessee filed an appeal to the Tribunal which, after elaborately considering the matter, held that Subbaraya had executed a power of attorney in favour of Palaniswamy on April 17, 1957, that the agent had been given plenary powers of management and control and that from the correspondence placed before it, it was satisfied that there was no control exercised from India. The Tribunal pointed out that the income-tax authorities had not consideration the materials which had been placed before them. The Tribunal noticed also that Thayumanaswamy, another partner, had gone to Penang during the period when Subbaraya had come down to India and had participated in the management of the assessee-firm, he having been paid salary by the assessee-firm . It was on a consideration of these materials that the claim of the assessee-firm that it was a non-resident was upheld. The result was that the assessments were cancelled and penalty also followed suit. It is against this order of the Tribunal that the present reference has been made to this court at the instance of the Commissioner.
7. The learned counsel, for the Commissioner contended that in the case of a firm it was enough if some part of the control, was located in India and that in the present case, the exercise and control, at any rate in part, could have been in India as the managing partner was in India. His further submission was that the earlier order of the High Court in this very case should have been followed by the Tribunal so has to hold that the assessee was a resident firm.
8. The question of the residence has to be determined in the light of the facts of each year. The Tribunal has found that in the present case, Subbaraya went over to India for the purpose of getting his daughter married date. No doubt, he stayed for nearly or a little more than a year but before going over to India, he had executed a power of attorney in favour of Palaniswamy. The partnership envisages or enables the managing partner to delegate his powers in favour of any other person to that that person could manage the firm on his behalf. Mr. A. N. Rangaswamy, appearing for the Commissioner in this case, referred to the clauses in the power of attorney and also a clause in the partnership deed which gave the managing partner powers of delegation. Clause 7 of the partnership deed specified the powers of the managing partner. Except power to engage or dismiss the clerk, servant, workman, traveller, or canvasser for the business of the partnership and fix their remuneration, the other powers set out in clause 7 of the partnership deed have been repeated in the power of attorney thereby showing that the agent had all the powers of Subbaraya, the managing partner, except the power to appoint or dismiss any employee. It is not suggested that Subbaraya, during the period of his stay in India, engaged any employee or dismissed any employee. The rest of the powers having been delegated to the agent, it is the agent who function in Penang and controlled the business.
9. Apart from the agent being there, another partner, Thayumanaswamy, went over from here and attended to the business for which he was paid remuneration. This also shows that the partners did not want to take any chance with the agent carrying on the business and they wanted to see that the agent exercised the powers only in a proper manner. Thus, between Thayumanaswamy and the agent, the entire management and control was being exercised and that too in Penang.
10. It is also reasonable and provable that Subbaraya would have not been thought it necessary to trouble himself over the affairs of the firm especially when he was here for the purpose of arranging for his daughter's marriage and performing it. Some reference was made to Subbaraya being concerned in the Madras business and being in a position to effect purchase for the assessee-firm as most of the sales of the Madras firm were only in favour of the assessee-firm. Here also there is no evidence to show that Subbaraya actually any purchase for or on behalf of the Madras firm. Even assuming that he alone so, the work could have been done only with reference to the affairs of the Madras firm and it would not mean that he was exercising control over the Penang firm.
11. The reference to the judgment of this court for the earlier year does not appear to us to conclude the issue. As pointed out earlier, the questions of control has to be considered in the light of facts in each year. The circumstances present in that year are not reflected here because we have pointed out the peculiar features which clearly show that Subbaraya did not want to be troubled about the management of the affairs of the assessee-firm while he was in India. There is nothing unreasonable or improbable about it. We are, therefore, unable to draw the inference, from the judgment of this court in the earlier order that the assessee-firm was resident in India during the relevant years.
12. The learned counsel brought to our notice the decision of this court in CIT v. PL. M. TT. Firm : 87ITR260(Mad) . In that case, the assessee-firm had four partners, all resident in India. The firm was carrying on business of pawn-broking and money-lending in Ceylon under a deed dated July 15, 1942. Under the deed, the entire de facto control of the principal to give instructions to the agent as to the manner or method of conducting a business. The assessing authority and the Appellate Assistant Commissioner rejected the claim of the assessee in that case to be assessed as a non-resident for the assessment year 1962-63. The Tribunal held that the assessee was liable to be assessed as a non-resident. This held that the court in answering the reference, pointed out that the assessee had discharged its burden by proving that it had appointed a power of attorney agent to run the business without reserving any right in itself to have any management or control and that there was nothing on the evidence to show that in spite of the terms of the document, the actual control and management of the business was not wholly vested in the agent or that the deed was not acted upon. The present case, if at all, is a fortiori case. In the present case, the managing partner had full and absolute control over the affairs of the company under the document. He had also the power to delegate his functions. When once the managing partner had delegated his functions, the position would be the same as, if not better than, the one in the decided case so as to justify with the agent, and that no part of the control was exercised by the principal.
13. In Erin Estate v. CIT : 34ITR1(SC) , the Supreme Court was concerned with the question of the determination of residence in the case of a firm. It was pointed out that (p. 5) :
'...... 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 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 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 a 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 beside 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 shows 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......'
14. The above passage would clearly go to show that the mere presence of the managing partner in India is not conclusion of the issue. Particularly in the context of his having delegated his powers as he was authorised to do in favour of Palaniswamy, this would be a case of actual control in Malaya and not in India. The question has to be decided in the light of the actual or the factual exercise of control. There is nothing to show that any part of the control was exercised from India and, therefore, the Tribunal was right in coming to the conclusion that the firm was not resident in India in the relevant years.
15. No separate arguments were advanced on the question of the penalty.
16. The result is that the questions are answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs.
17. Counsel's fee Rs. 500 one set.