Judgment of the Court was delivered by
RAJAGOPALAN, J. - The question referred to this Court under section 66 (1) of the Income-tax Act, 'whether the payment of Malayan estate duty of R. 3,29,746 is a proper deduction out of the earlier unassessed profits of the assessee from 1st April, 1933' arose out of the assessment proceedings for the year 1949-1950, the corresponding previous year having ended on 12th April, 1949.
The headquarters of the business which the assessees family carried on was at Paganeri in Ramanathapuram district, and it had branches in Burma and Singapore among other places. The accepted basis for assessing the Hindu undivided family, of which the assessee Annamalai was a member, was that it was resident and ordinarily resident. In the year of account that ended on 12th April, 1949, the assessee received as remittances from abroad a total sum of Rs. 1,25,238 of which Rs. 1,25,034 came from Singapore and the balance of Rs. 204 from Burma. Rs. 80,652 represented the profits that had accrued to the assessee at Singapore in the year of account. There was no dispute about the liability of the assessee to be assessed to tax on that sum under section 4 (1) (b) (ii) of the Act. The Income-tax Officer upheld the claim of the assessee that the balance of the remittance, Rs. 44,586, fell outside the scope of section 4 (1) (b) (iii). The Income-tax Officer recorded.
'The representative raised the question of availability of profits. This has been examined. It is found that there are no prior unassessed and unremitted profits available. Hence this will be treated as from capital.'
To appreciate the finding of the Income-tax Officer it is necessary to set out some more facts. The figures themselves were never in dispute. Annexure A to the statement of the case showed that the balance of the unassessed and unremitted profits of the assessee between the years 1933 and 1939 at Singapore amounted to Rs. 3,38,576. The claim of the assessee was that this sum had been expended at Singapore itself, and no portion of that was available to him for the remittances made in the year of account. That was the claim the Income-tax Officer upheld. The assessees grandfather died on 4th December, 1941, and the assessees adoptive father died on 10th December, 1945. Estate duties were payable at Singapore, and a total sum of Rs. 3,29,746 was paid by the assessees family at Singapore. Though the question as framed by the Tribunal is only limited to this amount, the further claim of the assessee was that there were two other items of expenditure to be taken into account in deciding whether any portion of the profits that had accrued to the assessees family between 1933 and 1939 was available for remittance in the year of account. The assessee claimed that a sum of Rs. 89,053 had been expended abroad, though this expenditure would not have been allowable had there been a computation under section 10 (2) of the Act. The assessee also claimed that Rs. 73,249 represented unabsorbed losses covered by the special scheme sanctioned by the Central Board of Revenue.
The Commissioner exercised his revisional power suo motu and came to the conclusion, that the sum of Rs. 44,586 which the Income-tax Officer had excluded, was also assessable to tax in the assessment year 1949-50. The Commissioner recorded :
'The correct legal position under the Amendment Act of 1939, however, is that it is for the assessee to prove that the remittances are out of capital and not profits. The learned counsel has, however, made no attempt to prove this, his entire stand being based on merely legal grounds. It is well settled that prima facie remittance is out of profit subject to the proof by the assessee to the contrary, for all the facts are always within his special knowledge. It should not therefore be difficult for him to prove that the remittance was out of capital. Unless therefore this presumption is firmly rebutted by the petitioner with the help of account entries or other evidence the remittance has to be treated as profit undiminished by any capital expenditure. Unfortunately the Income-tax Officer, instead of ascertaining whether the remittance was out of capital or profits, went on to determine the profits available for remittance. However, as the assessee failed to establish that it was out of capital and the onus was entirely on him to do so, that remittance should have been deemed to come out of profits.'
The assessee appealed without success to the Tribunal. With reference to the claim for the loss - which does not really arise for consideration by us now, if we have regard to the frame of the question referred to us - the finding of the Tribunal was :
'...... in our opinion, earlier losses necessarily encroach into the capital, deplete it to that extent, and thereby get extinguished. Such losses cannot consequently be available as set-off for subsequent profits.'
With reference to the payments towards estate duty the Tribunal recorded :
'The contention that estate duty payments are available as a set-off against the computed profit fund, need not tarry us long. Estate duty is clearly a charge against capital and in no sense against profits. It is the theoretical profits of the foreign business that are computed for availability, and the question whether the same cash in-flow representing profits is utilised for the purpose of the discharge of this liability has, therefore, no place in the present discussion. Estate duty is clearly not a charge against profits and consequently not a deduction against the fund.'
What section 4 (1) (b) (iii) of the Act lays down is : 'Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which -having accrued or arisen to him without the taxable territories before the beginning of such year and after the 1st day of April, 1933, are brought into or received in the taxable territories by him during such year.'
That really it is the period between 1st April, 1933, and 31st March, 1939, during which the income, profits or gains should have accrued or arisen outside the taxable territories was not in dispute. The contention of the learned Advocate-General, who appeared for the assessee, was that it was the factual existence of unexpended profits of that period that was relevant in deciding whether a given remittance fell within the scope of section 4 (1) (b) (iii) and not a notional or fictitious fund made up of the profits that arose or accrued abroad minus what had been remitted in fact out of these profits to the taxable territories at any point of time, even after 1st April, 1939. The learned counsel for the respondent urged that the actual availability of profits for remittance was not a relevant factor. He contended that, if profits accrued or arose abroad, and those profits were not computed for taxation under the Indian Income-tax Act and were not taxed - that was the position between 1933 and 1939 - any amount brought into the taxable territories by the assessee during the accounting year subsequent to 1st April, 1939, should be presumed to be a remittance out of these profits, unless the assessee proved that it was a remittance out of the capital he held abroad. The learned counsel conceded that it was a rebuttable presumption, but he pointed out that in this case the finding was that the assessee did not offer any evidence to show from what source abroad he received the sum of Rs. 44,586.
The learned Advocate-General was right when he pointed out that section 4 (1) (b) (iii) did not enact any legal fiction. Is any presumption of law permissible, and if so under what circumstances, is the next question.
The basis for any presumption should be, as the learned Advocate-General urged, the normal course of conduct of a prudent man of business. He would rather meet any call for expenditure out of his income than deplete his capital, if the amount of the unexpended income still available to him is sufficient to meet that expenditure, and if there was no other factor to be considered.
Let us examine the case of the assessee from that view point. The profits that the assessee had earned at Singapore between 1933 and 1939 minus what he remitted to India amounted to Rs. 3,38,576. Between 1st April 1933, and 12th April, 1949, the assessee had to make two payments towards the estate duty payable at Singapore totaling Rs. 3,29,476. He paid those amounts. There was no evidence to show that he paid them out of his capital held at Singapore. There was no evidence either that he paid them from out of the computed sum of Rs. 3,38,576. He just paid. The learned Advocate-General claimed that there was no accretion to the capital of the assessee at Singapore in 1949 compared to the position in 1933, and that in fact there was a diminution. That aspect of the case does not appear to have been examined by the Tribunal. We shall proceed on the basis that there examined by the Tribunal. We shall proceed on the basis that there was no evidence either way. If the assessee was a prudent business man -and there was no evidence to show that he was not - the assessee would have met the charges not from his capital but from his accumulated income. If that is the presumption that should prevail, the answer to the question referred to this Court should be in favour of the assessee.
What is taxable under section 4 (1) (b) (iii) of the Act is only the income remitted and not any remittance from capital. If an assessee kept separate accounts for his capital and income abroad and proved that a given remittance was from the capital, that is not taxable. Kneen v. Martin was a case of that kind. If the assessee held both capital and profits abroad - we are concerned with the profits that accrued or arose abroad between 1933 and 1939 - the Income-tax Act did not impose any obligation upon the assessee to meet any given expenditure either from out of the capital or from out of his profits. His discretion was unhampered by any statute. He was not bound to fund the profits and keep them for remittance to the taxable territories, without expending any portion of those profits abroad. Payments towards estate duty constituted an item of expenditure. The assessee could make the payments out of his profits. The same principle would apply to any other item of expenditure. No doubt it was held in Ramaswami Ayyangar v. Commissioner of Income-tax and in Ramaswami Ayyangar v. Commissioner of Income-tax that payments towards estate duties would not fall within the scope of section 10 (2) of the Act. But then, there was no need for computation under section 10 in the case of profits that accrued or arose abroad between 1933 and 1939. If the assessee proved that he had paid the estate duty out of his profits, to that extent there would be a diminution, in fact, of his profits which he held abroad. Of course, if there was proof that he had made the payments out of his capital and the capital to that extent was diminished, the profits would still be would be a factual position that would arise for consideration. Such were the contentions of the learned advocate-General.
In the present case we are proceeding on the assumption that there was no evidence to prove (1) that the assessee paid estate duties out of his capital, or (2) that he paid it out of his profits, and further that there was no evidence to prove that the capital he held abroad was intact. There was proof that he had paid the estate duties amounting to Rs. 3,29,746. The contention of the Advocate-General was that to that extent the profits available for remittance in subsequent years should be held to have been depleted, and that there was no room for any other presumption on that point.
In Ramanathan Chettiar v. Commissioner of Income-tax a Full Bench of this Court laid down at page 354 :
'As decided by this Court in the case of In re A. V. P.M. R. M. Murugappa Chettiar following the case of Scottish Provident Institution v. Allan, where there are remittances of money from foreign parts and the circumstances are such as to show that they may possibly be towards the profits, the burden of proving that it was capital lies on the assessee.'
This as well as other decisions followed the principle laid down in Scottish Provident Institution v. Allan and we shall examine the scope of that decision. We should however like to record at this stage that in Ramanathan Chettiar v. Commissioner of Income-tax the factual existence of available profits abroad, to which the remittances could be traced, was not in dispute.
In Scottish Provident Institution v. Allan the facts established were as follows : Before 1885 the Institution had no fund in Australia, and it was consequently necessary to remit sums from the United Kingdom for purposes of meeting the loans made in Australia. All sums so remitted were against specific investments and were so marked at the time. No sums were remitted from Scotland to Australia for investment after 1890. The interest accruing on the Australian investments prior to 1893 was not brought home, and the Institutions Melbourne representatives re-invested such interest in Australia As it fell due. The total amount sent from Scotland to Australia up to 31st December, 1898, was Pounds 1,504,000. The interest that accrued on that sum invested in Australia up to 31st December, 1898, was Pounds 1,034,707. The total remittances from Australia up to 31st December, 1898, came to Pounds 716,500. Therefore the total funds remaining in Australia as on 31st December, 1898, was Pounds 1,822,207. The original capital sent out from Scotland, it should be remembered, was less Pounds 1,504,000. The total amount remitted in 1898 was Pounds 217,350 which was included in the total of Pounds 716,500, it was the liability of this sum of Pounds 217,350, remitted during 1898, to be assessed to English income-tax that was the subject-matter of the litigation that ended with the judgment of the House of Lords. The learned Advocate-General pointed out that factually the amount available in Australia in 1898 was considerably in excess of the capital invested by the Scottish Provident Institution in Australia. The balance constituted income, the interest that had accrued on the capital sums sent out from Scotland and invested in Australia.
The Court of Session held that out of the remittances of Pounds 217,350, in 1898, a sum of Pounds 5,000 did not represent income and was not liable to be taxed. The Commissioners had found that this sum was in part re-payment of a debt, the principal of which was Pounds 70,000, and this amount of Pounds 5,000 was called direct by the borrowers solicitor in Australia to the Institution in England and never passed through the Institutions Australian representatives hands. The Lord President observed :
'It (Pounds 5,000) was never inmixed with the funds of the Institution in Australia, but was sent to this country by the borrower as and for payment of his capital-debt.'
That was a case therefore of positive proof that Pounds 5,000 came out of the capital that has been invested in Australia. With reference to the balance of the remittances in 1898 the Lord President observed at page 419 :
'When, however the question is, whether particular remittances, the real origin and character of which as capital or interest are not definitely established, should be regarded as consisting of capital or of interest, the fact that the amounts were entered in the accounts of the Institution, and treated as income in this country, may be admissible evidence upon that question. It further appears to me that, under the circumstances, indefinite remittances to this country must be presumed to consist of interest, not of capital, so long as the amount of capital remitted to Australia for investment still remains invested there.'
The scope of the presumption was limited by the Lord President himself. Factually there were profits available for remittance. Factually the capital invested in Australia remained intact. The learned Advocate-General was right in his contention that, in applying the presumption laid down by the Lord President, the established facts with reference to which that rule of law was laid down should not be ignored. It was the same principle that Lord. McLaren laid down in that case at page 420 :
'..... the sound principle is the one announced in your Lordships (Lord President) opinion, source of the fund remitted, in the absence of evidence to the contrary, must be determined according to the ordinary course of business in dealing with uninvested funds.'
In the case of the assessee, even if his capital at Singapore was intact - there was not even evidence of that and further as we pointed out there was no evidence of any increase while the claim of the assessee was that there was diminution - but, if in fact no profits were available for remittance from Singapore, there could be no basis for any presumption, that the remittance in the year of account was from a non-existent source.
The factual position in Kneen v. Martin, was as follows : The assessee was domiciled in the United States but she lived in the United Kingdom. She owned securities, stocks and shares in America, the income arising from which during the years 1930-31 and 1931-32 was paid into an account called the 'income' account, on of two separate bank accounts she had with a bank in New York, and was later spent or invested wholly in America. No income arising in America was ever credited to the assessees other account called the 'capital' account with the New York Bank. Into that account were paid from time to time the proceeds of sales of investments, and out of it were purchased new investments. During the years 1930-31 and 1931-32 certain securities were sold and the proceeds of the sale were, with the exception of one case in which the proceeds were credited temporarily to the 'Capital' account at the New York Bank, remitted direct by the stockbrokers to the credit of the assessees account at London, the amounts so received being used for the assessees living expenses. The assessee contended that the sums received by her from America were remittances of capital, and the fact that income arose to her in America were remittances of capital, and the fact that income arose to her in America from securities in the same period did not make the said remittances assessable to income-tax. That contention was upheld. Finlay, J., observed :
'The position which arises appears to me to be simply this. The respondent has got income in America; she has got investments in America. She does not, to use a phrase which has been used by judges of much authority in more than one case, in forma specifica remit any of the income. She does cause the proceeds of the investment to be remitted in forma specifica....... I think, it is, to a large extent, a question of fact whether the true view is that this was a remittance of income or on account of income........ If I rightly followed the argument of the Crown, it was this, that if you found foreign income and if you found remittances from abroad, then you could tax the foreign income, measuring it by the remittances. I cannot think that that is right.'
In the Court of Appeal Slesser, L. J., observed at page 50 :
'The Attorney-General has pressed upon us this consideration, that the Commissioners have said that they considered that in the absence of evidence to the contrary, there is a presumption that to the extent to which there is income arising in any country remittances received from that country are income, an income within the charge to tax, but that such presumption may be rebutted. The learned Attorney-General argues that there is no such presumption. He points out that it is not a presumption merely of business practice..... but that, as a matter of presumption as the language is there used by the Commissioners, if there be any presumption at all it is in favour of the subject and that the Crown have to prove that they are entitled to exact the tax. He goes on to argue that in so far as there is no presumption...... it would put an impossible obligation upon the Crown and make a very complicated investigation before the Commissioners in any particular case to ascertain whether this would be capital or not.'
Dealing with that argument the learned Judge observed :
'I am inclined to agree with him that there is no presumption arising one way or the other........ It seems to me that this matter is just such a matter of fact as the Commissioners are eminently suited to inquire into. They have inquired into it in this case and they have rebutted the presumption which is alleged.'
In Kneen v. Martin the position was, there was income available in America, but no remittance was made out of that income. Even when income was available, Slesser, L. J., was of the view, that there was no room for any presumption either way, that the remittance was either out of capital or out of income. But it should be remembered, that in that case it was found as a fact by the Commissioners that the remittance in question had been out of the assessees capital fund.
In Bipin Lal Kuthiala v. Commissioner of Income-tax, the assessee realised a sum of Rs. 1,57,000 in the accounting year 1943-44 by sale of timber for Rs. 1,91,000 in Jubbal, which was then a native State. Out of this sum he received Rs. 1,25,000 in cash in Jubbal, Rs. 29,000 in cash in British India and Rs. 3,000 by adjustment by payment in British India to a creditor of the assessee. The profits of the transaction were computed to be Rs. 18,758. The question was whether the remittance of Rs. 32,000 included the entire profits earned, that is Rs. 18,758. The question was answered in the affirmative, and their Lordships of the Supreme Court observed at pages 5 and 6 :
'The profits on the sale of timber in 1942-43 has since been ascertained at Rs. 18,758........ There being this profit, as eventually ascertained, the presumption, according to the cases referred to in the judgment under appeal, will be that the remittances of money from foreign business to British India must be of profits, unless the contrary were shown by the appellant.'
Their Lordships further observed :
'The appellant cannot question that there was, in fact, profit which was less than the amount remitted. It was open to him to adduce evidence to show that he was winding up his business and reducing the establishment or was not in need of so much monies to be invested as capital in his business and, therefore, was remitting his capital which became unnecessary for the Jubbal business. This he failed to do. In the circumstances, the appellant did not discharge the onus that was on him and the Income-tax Appellate Tribunal was quite correct in coming to the conclusion that the sum of Rs. 32,000 included the profits made on the sale of timber for Rs. 1,91,000 in the accounting year 1942-43.'
These observations must be correlated to what was found in that case, that factually a sum of Rs. 18,758 which constituted profits was available for remittance in the year of account from Jubbal to the taxable territories.
Ganeshilal and Sons v. Commissioner of Income-tax is much nearer the claim of the assessee in the proceedings before us. During the four years ending with 20th October, 1938, the firm of Ganeshilal and Sons made a profit of Rs. 1,50,243 at Cairo. It expended a sum of Rs. 1,59,558 at Cairo. Out of this sum, Rs. 1,24,685 would have been admissible expenditure had there been a computation under section 10 (2) of the Income-tax Act. In the year of account ending with 20th March, 1938, the assessee brought into British India a sum of Rs. 50,258 from Cairo. The learned Judges recorded :
'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 ?'
The learned Judges proceeded to observe :
'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 our 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.'
We are in entire agreement with the principle laid down in the passage quoted above, though the learned counsel for the respondent invited us to differ from the learned Judges of the Allahabad High Court.
The learned Judges stated :
'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.'
It was upon Ganeshilal and Sons v. Commissioner of Income-tax that the learned authors based their statement in INCOME-TAX ACT by Kanga and Palkhivala, 3rd edition, page 328 :
'In computing the amount of foreign profits available at the time of remittance, the actual total expenditure incurred abroad and not merely the expenditure admissible under section 10 (2) should be deducted. 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.'
That, in our opinion, is the correct summing up of the law on the point.
Duke of Roxburghs Executors v. Commissioners of Inland Revenue was one of the cases cited before us. It is enough to observe that, if the factual position as ascertained by the Commissioners of the actual availability of funds to which the remittances could be traced is taken into account, there was no departure from the principles laid down in the earlier cases.
What would have been the position had there been an accretion to the assessees capital at Singapore, added to the capital from out of the profits earned abroad, before making a given remittance, does not arise for consideration in this case, and we therefore express no opinion on such a question.
The Tribunal virtually held that computation under section 10 (2) of the Act should conclude the question at issue, and that payments towards estate duties at Singapore would not fall within the scope of section 10 (2) of the Act. We hold that the factum of expenditure should not have been ignored and that the view taken by the Income-tax Officer, that in fact no portion of the profits earned between 1933 and 1939 was available for remittance during the year of account, was the correct one. the Tribunal, it may be remembered, declined to take note of unabsorbed losses covered by the special scheme. We have already pointed out that the consideration of the correctness of that finding does not, at any rate strictly, fall within the scope of the question we have to answer. None-the-less, we have to point out that the extreme form in which the Tribunal formulated its proposition does not appear to us to be sound in law. The Tribunal recorded :
'...... in our opinion earlier losses necessarily encroach into the capital, deplete to that extent and thereby get extinguished. Such losses cannot consequently be available as set-off for subsequent profits.'
That would mean that if in any year a businessman sustained a loss, to that extent his capital would be diminished for purposes of computing the next years profits. Put in that form, it should be obvious that that is not the scheme of the Act, at any rate, with reference to losses and profits from business that accrued within the taxable territories. Set-off is a statutory right quite distinct from any necessity to deplete capital.
In view of what we have said above, there can be only one answer to the question as it has been framed. The necessity or propriety of a deduction under section 10 (2) of the Act does not arise. The real problem we have to discuss was, whether in the circumstances of the case, remittances to the extent of Rs. 44,586 could be presumed to have come out of the profits the assessee family earned abroad between 1933 and 1939. To view the same problem from a different angle, the question was whether in the circumstances of this case, the payment of Rs. 3,29,746 could be presumed to have been out of those profits. Such a question is necessarily one of fact to be answered with reference to the circumstances of each case, and with reference to the normal course of conduct of a prudent man of business. If factually there were profits available and if factually the assessees capital held abroad was intact, the assessee could be presumed to have met his charges abroad was intact, the assessee could be presumed to have met his charges abroad was intact, the assessee could be presumed to have met his charges abroad from out of his profits. It would really be more a case of inference from the proved fact. Whether it is proved that in fact the charges or payment of the estate duties abroad were met out of the profits, or whether it is presumed that the charges were so met, the position would be the same. To that extent they would cease to be unexpended profits. It is only an existent source that could be viewed as a possible source to which a given remittance could be traced. If money is expended or is presumed to have been expended, to that extent that source would be depleted, and if the depletion was in full it would be non-existent. There can be no basis for any presumption that a remittance came from a non-existent source.
We answer the question in the affirmative and in favour of the assessee. The assessee will be entitled to the costs of this reference. Counsels fee Rs. 250.
Reference answered in the affirmative.