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S.V.M. Sayed Cassim Vs. Third Income-tax Officer - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberWrit Petition Nos. 1093 to 1098 of 1966 and 604 of 1969
Judge
Reported in[1973]88ITR76(Mad)
ActsIncome Tax Act, 1961 - Sections 2(17) and 147
AppellantS.V.M. Sayed Cassim
RespondentThird Income-tax Officer
Appellant AdvocateM.R.M. Abdul Karim and ;P.M. Jummakhan, Advs.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredS.V.M. Seyed Cassim v. Income
Excerpt:
.....can be brought into net of taxation on condition that association is or was assessable under indian income-tax act - second condition that it was assessable or assessed as company for assessment year commencing on 01.04.1947 - thirdly when company declared by general or special order of board to be company for purpose of act. (ii) jurisdiction - petitioners aggrieved by notice issued by income tax officer - writ of prohibition issued only when records disclose total want of jurisdiction or exercise of jurisdiction when there is none or there is illegal exercise of jurisdiction in violation of accredited principles of law - respondent has no jurisdiction to issue notice against incorporated company which was admittedly in ceylon and whose income as such beyond reach of indian..........outside the taxable limits of india, and is outside the reach of the arm of taxation under the indian income-tax act. originally, the petitioner and three others as above were carrying on business in partnership under the name of s.v.m. mohamed jamaludeen & bros, at colombo. on december 12, 1946, s.v.m. mohamed jamaludeen & bros. (ceylon) ltd. was incorporated. the first directors and the promoters of the company were the four persons mentioned in these writ petitions. the question arose whether the provisions of section 44d were applicable to the assessments of the assessee-firm (quondam firm of s.v.m. mohamed jamaludeen & bros.) for all the years from 1947-48 to 1953-54. ramachandra iyer c.j., delivering the judgment of the division bench in t.c. no. 38 of 1958, observed, on.....
Judgment:

Ramaprasada Rao, J.

1. The petitioner, one of the shareholders of a company incorporated under the laws of Ceylon and admittedly functioning under the style of S.V.M. Mohamed Jamaludeen & Bros. (Ceylon) Ltd., is aggrieved by an order issued by the 3rd Income-tax Officer, Karaikudi, addressed as below :

M/s. S.V.M. Mohamed Jamaludeen & Bros. (Ceylon) Ltd.,

by Shri S.V.M. Sayed Cassim,

Middle Street,

Kilakarai.

The person who is said to represent the company is the petitioner. According to the petitioner, the petitioner and three others are the directors of the company which is functioning wholly outside the taxable limits of India, and is outside the reach of the arm of taxation under the Indian Income-tax Act. Originally, the petitioner and three others as above were carrying on business in partnership under the name of S.V.M. Mohamed Jamaludeen & Bros, at Colombo. On December 12, 1946, S.V.M. Mohamed Jamaludeen & Bros. (Ceylon) Ltd. was incorporated. The first directors and the promoters of the company were the four persons mentioned in these writ petitions. The question arose whether the provisions of Section 44D were applicable to the assessments of the assessee-firm (quondam firm of S.V.M. Mohamed Jamaludeen & Bros.) for all the years from 1947-48 to 1953-54. Ramachandra Iyer C.J., delivering the judgment of the Division Bench in T.C. No. 38 of 1958, observed, on merits, as follows :

' It cannot be disputed that the erstwhile partners had control over the company .... The assessee had foreign contracts, its large profit being attributable mainly to foreign imports .... By formation of a company to carry on the business, a kind of continuity can also be assumed to the posterity of the four partners who are all brothers .... It would follow that the formation of the company was a bona fide commercial transaction.'

2. After accepting the finding of the Tribunal that the dominant object in the formation of the company was not the avoidance of the tax, but purely a commercial one with a view to advance the prospects, continuity and success of the company, their Lordships would say, that though there is a benefit in the matter of the Indian Income-tax Act by such an overt act on the part of the quondam partnership firm, that benefit was purely incidental as a consequence of the formation of the company. They, therefore answered the question referred in the negative and in favour of the assessee.

3. Once again, the question cropped up but in a slightly different way as regards the same shareholders and quondam partners of the aforesaid incorporated company and firm, respectively, vide in S.V.M. Seyed Cassim v. Income-tax Officer. Here, an attempt was made to proceed under Section 35(5) read with Section 440 of the old Act. Here again, a Division Bench of our High Court held that the Income-tax Officer had no power to proceed under Section 35(5) of the Act as the firm had ceased to exist and there could be no assessment on the firm, and that if at all the income can be deemed to have escaped assessment, it could only be done by initiating proceedings under Section 34 of the Act. In fact, the last observation was based on the argument of the learned counsel for the petitioners in that case that the items of income referred- to, which were derived from the company, could only be regarded as income escaping assessment and could not be brought in except by resort to Section 34. Apparently being encouraged by the said observation which was made by the learned judges in S.V.M. Seyed Cassim v. Income-tax Officer, : [1963]50ITR473(Mad) the present impugned notice was given by the respondent on the footing that there is reason to believe that ' your income chargeable to tax for the assessment year .... has escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961.' This notice is sent to the non-resident incorporated company. On issue' of this notice for the various years in question the petitioner has come up to this court for the issue of a writ of prohibition.

4. The department's case is that by issuing these notices, what wasintended was to bring to tax the income of the incorporated company inthe hands of its shareholders in India, since they were the persons whowere actually managing and administering the company, though outsideIndia, from inside India. As a matter of fact, it is only in an additionalcounter filed by the department, it is sought to be made out as to whatprompted the respondent to issue the impugned notice. The reasons are :

' (i) S. V. M. Mohamed Jamaludeen Bros. (Ceylon) Ltd. was incorporated in Ceylon as a company. The four major shareholders of thiscompany, viz., (i) S, V. M. Mohamed Jamaludeen, Kilakarai, (ii) S. V. M.Abdul Majid, Kilakarai, (iii) S. V. M. Ahmed Jamaludeen, Kilakarai, and(iv) S. V. M. Seyed Cassim, Kilakarai, were paid substantial monthlysalaries and bonus by the company for all the 12 months in the year andthey were residents of India, showing that they were managing thecompany's affairs from India.

(ii) The company is assessable to income-tax under the Indian Income-tax Act. not as a company but as an association of persons.

(iii) The company as an association, of persons is to be assessed as a resident and ordinarily resident person in India since the control and management of its affairs is not wholly outside India.

(iv) The said association of persons as per its own balance-sheets and profit and loss accounts had taxable income and hence an assessee under the Indian Income-tax Act.

(v) The association had not filed returns of income before the Income-tax Officer for purposes of assessment for the assessment years in question.

(vi) Hence the proceedings under Section 447 have to be started. '

5. It is asserted that though there exists an incorporated company duly registered under the laws of Ceylon, yet this corporate personality can be ignored and the same is assessable to income-tax under the Indian Income-tax Act, though not as a company but as an association of persons. The reason given for this attempt on the part of the revenue to treat the incorporated company as an association of persons is that the petitioner and others in these petitions are to be deemed as the real persons who are in management of the company's affairs and actually in administration thereof. It is stated that ' the company as an association of persons is to be assessed as a resident and ordinarily resident person'in India ' and the income of the company is taxable as such in the hands of such association of persons.

6. I have already referred to the judgment in T. C, No. 33 of 1958 Commissioner of Income-tax v. S. V. M. Mohamed Jamaludeen & Sons, decided on 26-9-1961--Unreported, and the decision in S. V. M. Seyed Cassim v. Income-tax Officer. The findings of fact in both the cases referred to above are clear and clinching. Indisputably, a company which has been incorporated under the Ceylon laws is in existence and is the trading apparatus which is producing Income. But, what is attempted now is that that apparatus is being managed by four persons in India and certain inferences are drawn from the facts that they are paid servants of that company ; they are receiving bonus from the said company ; they are having certain privileges in respect of the said nonresident company. It is said that all these factors put together would show that there is concentration of management and administration in the hands of the petitioners and others and it should be deemed that the petitioner and three others conjointly taken together should be treated as an association of persons and the corporate personality of the company as such should be lightly brushed aside.

7. Reliance is placed upon Section 2(17) of the Act. Section 2(17) defines a company as meaning any Indian company, or any association whether incorporated or not and whether Indian or non-Indian which is or was assessable or was assessed under the Indian Income-tax Act, 1922, as acompany for the assessment year commencing on the 1st day of April, 1947, or which is declared by general or special order of the Board to be a company for the purposes of this Act. Reference is also made to the definition of ' Indian company '. Based on these statutory definitions, it is contended that the notice should effectively be interpreted as one issued to a company within the meaning of Section 2(17)(ii) of the Act of 1961, for which there is a corresponding provision in the old Act also, which need not be referred to as it is not necessary. It is argued that the notice as such having been validly issued, it is for the petitioner to submit himself to the jurisdiction of the respondent and explain the merits of the case, so as to bring himself out of the purview of Section 2(17)(ii) of the Income-tax Act. On the other hand, the contention of the petitioner is that as the notice is addressed directly to an outside company represented by a person in India, this itself projects the impression that the respondent did not have jurisdiction at all to issue such a notice as the law does not permit him to do so. The other argument is that if the revenue cannot bring into the net a company incorporated outside India, then it cannot by circuitous means and an assumptive process bring it under Section 147 of the new Act or Section 34 of the old Act, as if there was an escapement of tax over the income of the company as such, but in the hands of the persons in India who are to be deemed by a fiction to be an association of persons. The third argument is that there has not been an escapement of any income factually or otherwise of the shareholders, namely, the petitioner and others, and they having been assessed to such tax from 1947-48 till date and their status as an individual shareholder and as an assessee in the eye of law having been recognised by the department, they cannot on irrelevant considerations assume that the petitioner and others taken together must be considered as an association of persons and that such association oi persons should not be called upon to answer the alleged escapement of income of an incorporated company which is a totally different legal entity.

8. I am unable to agree with the learned counsel for the revenue that the notice gives out an impression that the respondent intends to act under Section 2(17)(ii) of the Act. It is no doubt true that an association, whether incorporated or not, whether Indian or non-Indian, could be brought into the net of taxation; but the condition precedent for such a situation is that the said association is or was assessable under the Indian Income-tax Act, 1922. The second condition is that it was assessable or was assessed as a company for the assessment year commencing on the 1st day of April, 1947, and the third alternative is, when such a company has been declared by general or special order of the Board to be a compa. for the purposes of this Act.

9. Once again, if we refer to the earlier activity of the revenue, to bring to tax the alleged escapement of income in the hands of the petitioner and others, it is clear that their first attempt was to tax them notwithstanding the fact that the company was incorporated by the partners of the firm and that the said company as transferee of the assets of the partnership firm was functioning in the eye of law. The second attempt was as if there was an escapement of income ol a firm which in the eye of law never existed. Both the attempts failed as was seen in the judgment in T. C. No. 38 of 1958* and the decision in S.V.M. Seyed Cassim v. Income-tax Officer. The third and present attempt is a direct one against the incorporated company itself. I am of the view that even if the taxing provisions under the Indian enactment enables a global assessment of income of an assessee who is assessable to tax, yet that would not mean that the Indian authorities have global jurisdiction over every non-resident in the world. It would be to vest an extraordinary jurisdiction in the revenue if they are to be permitted or authorised to issue notices to persons or incorporated companies who are admittedly dealing as nonresidents and as persons outside India. Again, what is sought to be done, or at any rate what is sought to be explained is that the revenue wants to treat the petitioner and others as an association of persons who are earning income within Indian territory and which income is referable to an incorporated company outside India. This is not what the notice says. The notice is directed against the incorporated company, namely, S. V. M. Mohamed Jamaludeen & Bros. (Ceylon) Ltd, A representative of the company is sought to be served in India who happens to be one of the shareholders. From a fair reading of the notice and particularly the way in which the addressee has been described, I am unable to accept that what is intended is to bring to book an association of persons consisting of representatives of the incorporated company. If that were so, they could have said so and presumably, it would have been difficult for them to say so in view of the decisions of this court rendered earlier. But this is a matter which is left entirely to the department to look into and proceed if they so desire. But, as the notice is directed against a non-resident incorporated company which is admittedly outside the jurisdiction of the Indian taxing authorities, the complaint of the petitioner that the respondent had no jurisdiction to issue such a notice is well-founded. A writ of prohibition is issued only when the records disclose total want of jurisdiction or an exercise of jurisdiction when there is none or there is an illegal exercise of jurisdiction in violation of accredited principles of law. The first essentialrequisite for the issue of writ of prohibition is satisfied in this case, namely, that the respondent has no jurisdiction to issue the notice against an incorporated company which is admittedly in Ceylon and whose income as such is beyond the reach of the Indian authorities. In this view of the matter, the process has to be interdicted at its threshold.

10. The rule nisi is made absolute and all these writ petitions are allowed.There will be no order as to costs.


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