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The Commissioner of Income-tax Vs. Ar. Pi. S. Pl Firm (Kedah) on Behalf of Non-resident Partner, S.M.M. Muthukaruppan Chettiar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberCase Referred No. 44 of 1947
Judge
Reported inAIR1950Mad645; [1950]18ITR935(Mad)
ActsIncome Tax Act, 1922 - Sections 4A and 23(5)
AppellantThe Commissioner of Income-tax
RespondentAr. Pi. S. Pl Firm (Kedah) on Behalf of Non-resident Partner, S.M.M. Muthukaruppan Chettiar
Appellant AdvocateC.S. Rama Rao Sahib, Adv.
Respondent AdvocateS. Krishnamachariar, Adv.
Excerpt:
.....piece of evidence indicated that control and management of assessee company situated within british india - income-tax officer rightly assessed firm as resident - question answered in affirmative and against assessee. - - we have got the following facts which, in our opinion, clearly lead to the inference that the firm in the present case was resident in british india during the years of account 1939-40 and 1940-41. it has not been suggested anywhere in the proceedings that there was any change in the system of control or management of the business during the period 1939 to 1941, and the case has proceeded on the basis that the same state of affairs continued throughout this period. this letter, in our opinion, clearly indicates that chidambara in british india, was looked to..........british india to muthukaruppa, chidambara refers to the fact of his having drawn moneys from the keddah business to the headquarters and justifies his withdrawals on the ground that the discharge of debts, presumably partnership debts, in british india was as important as the conduct of the business on a large scale at keddah. this ia with a view to satisfy muthukaruppa that he was not withdrawing moneys from keddah in order to reduce the volume of the business and the profits derivable at keddah, but with a view to discharge debts carrying a high rate of interest and payable by the partnership in british india. this letter shows that the moneys of the firm at keddah had largely been drawn by the partner chidambara who was resident in british india and applied for payment of the.....
Judgment:

Viswanatha Sastri, J.

1. The assessment years with reference to which this reference arises are 1940-41 and 1941-42, the respective accounting years being 1939-40 and 1940-41. With reference to both these years, the question that has been referred runs as follows :

'Whether, on the facts and in the circumstances of the case, the assessee firm was resident in British India during the year of account, within the meaning of Section 4-A (b), Income-tax Act?'

With reference to the assessment year 1940-41, the following question has been referred :

'Whether, on the facts and in the circumstances of the case, the assessment of S.S.M. Muthukaruppan Chettiar (non-resident partner) under Proviso 2 to Section 23 (5) (a) of the Act was correct in law?'

The facts that have led up to this reference are these: The assessee firm carries on a money, lending business out side British India at a place called Keddah. Its major partner was Ar. Pl. S. Pl. Palaniappa Chettiar on whose death his son Chidambaram Chettiar succeeded as a partner. S.M.M. Kasi alias Muthukaruppan Chettiar is a minor partner in the firm owning an one-fifth interest, the remaining four-fifth interest beloning to Chidambaram Chettiar. The Keddah money-lending business was started many years ago as a partnership and has been continued ever since. Muthukaruppan Chettiar, the partner holding an one fifth share, went out to Keddah as agent of the firm in order to manage the firm's affairs there. The Income-tax Officer assessed the firm constituted by Chidambaram Chettiar and Muthukaruppan Chettiar as a resident in British India during the years of account above stated. The assessment was upheld on appeal by the Appellate Assistant Com. missioner. The Appellate Tribunal, however, came to a different conclusion and held that on the facts and circumstances placed before it, the assessee firm was not resident in British India and therefore was not assessable as a resident. It is with reference to this matter that the first of the questions above stated arises. Under Section 4-A (b), Income-tax Act, a firm is resident in British India unless the control or management of its affairs is situated wholly without British India. We have got the following facts which, in our opinion, clearly lead to the inference that the firm in the present case was resident in British India during the years of account 1939-40 and 1940-41. It has not been suggested anywhere in the proceedings that there was any change in the system of control or management of the business during the period 1939 to 1941, and the case has proceeded on the basis that the same state of affairs continued throughout this period. The major partner owning a four-fifth share Palaniappa and after him his son, Chidambara, were resident at Karaikudi in British India. The partner having an one-fifth share, Muthukaruppa, was sent out as an agent to manage the affairs of the partnership business at Keddah. In addition to his being a partner and therefore entitled to take part in the management of the firm's affairs, Muthukaruppa executed a salary chit stipulating for the payment of an agreed salary and a bonus, in favour of Palaniappa the father, of Chidambara. This arrangement shows that Palaniappa and after him Chidambara, were controlling the affairs of the partnership business at Keddah through Muthukaruppa who was treated, in addition to being a partner, as a salaried agent. We have next the fact that when Muthukaruppa after the term of his agency, wished to return to British India, the succeeding agent, Ramanatha, was appointed by Chidambara and sent from British India and later on a power-of-attorney was executed by Chidambara in favour of the new agent. The terms of his appointment were settled by Chidambara including his salary and bonus. We have next a series of letters of the years 1939-1941 which passed between Keddah and Karaikudi and back which throw light on the manner in which this business was conducted and managed. Since the Appellate Tribunal did not correctly apprehend the finding of the Appellate Assistant Commissioner as regards the nature and effect of these letters, it is necessary for us to refer in detail to a few of the letters to show the nature of the business connection that existed between Chidambara the partner who wag resident in British India and the business that was actually carried on at Keddah. It may here be stated that according to the usual Chetty practice, the accounts of the business at Keddah have been sent from time to time regularly to Chidambara Chettiar at Karaikudi. This circumstance alone, however, would not result in Chidambara exercising control and management over the affairs of the firm at Keddah. There are, however, additional Circumstances in the present case which lead to the inference that Chidambara was in fact exercising control and management from British India over the affairs of the firm. In the letter dated 9th August 1939 Chidambara writes to Muthukaruppa about the amount that had to be paid by Muthukaruppa in respect of certain moneys which he had drawn on account of bonus during the lifetime of his father Palaniappa. In the letter dated 19th October 1939 written by Muthukaruppa to Chidambara in British India, he refers to the amounts that were lying in the business at Keddah, about the amounts that were expected to arrive and suggests that it would be convenient and in the interests of the business if property consisting of gardens or houses were purchased whenever they were available. He also suggests that, in the alternative, moneys might be transmitted to the headquarters for discharging the debts payable at the headquarters, presumably by the partnership business. He winds up by asking Chidambara to consider these matters and apparently expects a direction from Chidambara as to the way in which the moneys should be dealt with or disposed of. This letter, in our opinion, clearly indicates that Chidambara in British India, was looked to by Muthukaruppa for directions as regards the application of the moneys of the firm at Keddah. In a letter dated 22nd April 1940 written by Chidambara the principal partner, from British India to Muthukaruppa, Chidambara refers to the fact of his having drawn moneys from the Keddah business to the headquarters and justifies his withdrawals on the ground that the discharge of debts, presumably partnership debts, in British India was as important as the conduct of the business on a large scale at Keddah. This ia with a view to satisfy Muthukaruppa that he was not withdrawing moneys from Keddah in order to reduce the volume of the business and the profits derivable at Keddah, but with a view to discharge debts carrying a high rate of interest and payable by the partnership in British India. This letter shows that the moneys of the firm at Keddah had largely been drawn by the partner Chidambara who was resident in British India and applied for payment of the partnership debts. This is clearly indicative of the control and management of the business by the resident partner. There are two other letters dated 10th March 1941 and 31st March 1941 which show that the agent who was to succeed Muthukaruppa was selected and sent by Chidambara from British India and a power-of-attorney was executed in favour of the new agent by Chidambara from British India empowering the agent to conduct the business as successor to Muthukaruppa. The cumulative effect of the Several circumstances and the correspondence above narrated leads, in our opinion, to the conclusion that it cannot be predicated of the firm in this case that the control or management of its affairs was situated wholly without British India. Therefore, the Income-tax Officer was right in assessing the firm as a resident and the decision of the Appellate Tribunal to the contrary is erroneous. The Appellate Tribunal has overlooked the significance of the letters that we have referred to above and its finding is therefore vitiated by a misapprehension of the crucial documents in the case. It is not right, as the Appellate Tribunal has done, to brush aside these documents as merely informative. Informative correspondence is a necessary part of the exercise of control and management of a firm's business and the substance of the acts of management and control has to be looked into. The giving of information and the furnishing of accounts may be a relevant piece of evidence in arriving at the conclusion whether the control and management were exercised from British India.

2. We, therefore, answer the first of the questions formulated in this judgment in the affirmative and against the assessee. We answer the second of the questions formulated in this judgment in the affirmative and against the assessee, because it was agreed in the course of the proceedings below, that the answer to the previous question should also govern the answer to be given to this question.

3. In the result, both the questions are answered against the assessee and in favour of the department. The Commissioner of Income-tax would be entitled to his costs which we fix at Rs. 250.


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