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K. M. N. N. Swaminathan Vs. Commissioner of Income-tax, Madras. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai
Decided On
Case NumberCase Referred No. 29 of 1945
Reported in[1947]15ITR418(Mad)
AppellantK. M. N. N. Swaminathan
RespondentCommissioner of Income-tax, Madras.
Cases ReferredMarimuthu v. Commissioner of Income
Excerpt:
- .....at the instance of the assessee by the income-tax appellate tribunal under section 66 (1) of the indian income-tax act. the question referred for the opinion of this court is the following :-'whether, on the facts of the case, namely that the manager of the hindu joint family was outside british india for more than two years during the period of seven years preceding the previous year, the applicant, the hindu joint family, not ordinarily resident for the assessment year 1940-41 within the meaning of section 4b (a) of the indian income-tax act ?'the assessee is a hindu undivided family. in the year 1940-41 an assessment was made on the income of the family which had accrued outside british india during the previous year. during the seven years preceding that year the karta of the.....
Judgment:

GENTLE, C.J. - This reference is made at the instance of the assessee by the Income-tax Appellate Tribunal under Section 66 (1) of the Indian Income-tax Act. The question referred for the opinion of this Court is the following :-

'Whether, on the facts of the case, namely that the manager of the Hindu joint family was outside British India for more than two years during the period of seven years preceding the previous year, the applicant, the Hindu joint family, not ordinarily resident for the assessment year 1940-41 within the meaning of Section 4B (a) of the Indian Income-tax Act ?'

The assessee is a Hindu undivided family. In the year 1940-41 an assessment was made on the income of the family which had accrued outside British India during the previous year. During the seven years preceding that year the karta of the family was in British India for more than two years and also he was outside India for the same period. Taxation of income accruing within British India does not arise. The sole matter for decision is whether the foreign income of the assessee family, which was to brought into, or received in, British India, was chargeable to tax. The Income-tax Appellate Tribunal held that, in the circumstances set out above, tax was chargeable.

It is now convenient to give the relevant provisions of the of the Income-tax Act.

'Section 4 (1) - 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 -

(b) if such person is resident in British India during such year, -

(ii) accrue or arise to him without British India during such year,

Provided further that, in the case of a person not ordinarily resident in British India, income, profits and gains which accrue or arise to him without British India shall not be so included unless they are derived from a business controlled in or a profession or vocation set up in India or unless they are brought into or received in British India by him during such year.'

Section 4A defines when an individual, a Hindu undivided family and a company are resident in British India.

'Section 4B - For the purposes of this Act -

(a) an individual is not ordinarily resident in British India in any year it he has not been resident in British India in nine out of the ten year it he has not been resident in British India in nine out of the ten years preceding that year or if he has not during the seven years preceding that year been in British India for a period of, or for periods amounting in all to, more than two years;

(b) a Hindu undivided family is deemed to be ordinarily resident in British India if its manager is ordinarily resident in British India;

(c) a company, firm or other association of persons is ordinarily resident in British India if it is resident in British India.'

The foreign income of the assessee family was neither derived from a business controlled in India, nor brought into British India; therefore, under the proviso to Section 4 (1), it is not chargeable to tax if the family was 'not ordinarily resident.' By virtue of clause (b) of Section 4B, the status of the manager, who is the 'individual' in clause (b) of Section 4B, the status of the manager, who is the 'individual' in clause (a), determines the status of the family, which is deemed to be ordinarily resident if that is the managers status. The karta of the assessee family was resident in British India in nine out of the ten preceding years. Consequently in that respect, the requirement in the first part of clause (a) of Section 4B to make him 'not ordinarily resident' was not fulfilled. The exemption from tax will arise only if he can be brought within the second part of the clause.

The difference between 'resident', 'ordinarily resident' and 'not ordinarily resident' is a creature of the Indian Income-tax Act. When a resident is not ordinarily resident, he is relieved from liability to be taxed upon his foreign income. The expression 'ordinarily resident', which is found in clauses (b) and (c) of Section 4B, is not defined. But, since the later clause provides that a company, firm or other association of persons resident in British India is ordinarily resident, in that connection it might be said that reading clause (c) with Section 4A supplies a definition of 'ordinarily resident' in relation to a company, firm or association. As regards an individual, there is nothing in the Act by which 'ordinarily resident' is defined. Whilst the headnote to Section 4B appears to indicate that its provision defines or explains what is 'ordinary residence,' the section does not do so, save to a limited extent in clause (c). Clause (a) does not more than explain when an individual is 'not ordinarily resident'.

On behalf of the assessee family, Mr. T. V. Viswanatha Ayyar contended that under the second part of clause (a) of Section 4B, if an individual is outside British India for an aggregate period of more than two year during the preceding seven years, he is 'not ordinarily resident.' If that be correct, then presence in British India for not less than five years out of the preceding seven years is required before a person is excluded from the category of 'not ordinarily resident.' This argument was evolved out of a contention that the words in the seconds part of clause (a) 'he has not ............. been in British India for......... more than two years' mean that he has been outside British India for more than two years.

Under Section 4 (1) (b) (ii) the income chargeable to tax of any person resident in British India includes income which accrues outside British India. Pausing there for a moment, prima facie a resident is liable to tax upon his foreign income irrespective of other considerations. Then comes the proviso by which a residents foreign income is not liable to tax when it is not brought into the country or derived from a business controlled in India, if the resident is 'not ordinarily resident' in British India.

Section 4A enacts when an individual is resident. Clause (a) of Section 4B gives the circumstances in which an individual, including a residents, is 'not ordinarily resident.' Since the karta was resident for nine years out of ten years, the first part of the clause (a) does not help the assessee family. The second part of the clause alone has to be considered. So far as is material, it provides that in individual is 'not ordinarily resident' when he has not been in British India for an aggregate period of more than two years during the preceding seven years. It seems to me that the test is one of presence in, and not absence from, British India, and the length of time of presence will determine when an individual is 'not ordinarily resident.' The which have to interpreted, omitting those which are unnecessary, are the following :-

'If he has not...... been in British India for...... more than two years.'

If he fulfills what those words mean, an individual is 'not ordinarily resident.' What is the opposite of the words which are quoted above In my view, the opposite words would be 'if he has..... been in British India for ....... more than two years.' That being so, the meaning of the words in question is that a person is 'not ordinarily resident' so long as he is not present in India for an aggregate period of more than two years during the preceding seven years. It is immaterial, in my view, to consider the length of time, in the preceding seven years, during which the individual is outside British India. In think the words of the latter part of the clause mean, unless he has been in British India for more than two years; in other words, a person is not ordinarily resident unless he has, within the preceding seven years, actually been in British India for a period aggregating to more than two years. The phraseology is not simple of construction but, if we approach the matter in the way in which I have ventured to do, it seems to me that this is what the latter part of the clause means : If, during the preceding seven years, an individual is in British India for more than two years, he is not included in the category of 'not ordinarily resident,' irrespective of the period during those seven years, in which he has been outside the country. If it had been the intention to give the meaning, which Mr. Viswanatha Ayyar suggested it bears, the clause would expressly have provided that presence in British India for five years at least in necessary in order to remove an individual from the category of 'not ordinarily resident.'

Whilst the actual construction of clause (a) of Section 4B, particularly the latter part of the clause, was not the point for decision, nevertheless if was the subject of observations in the case of Marimuthu v. Commissioner of Income-tax, Madras, decided in this Court. The actual decision in that case related to aggregating the periods of presence of more than one karta of the family within British India. But, in the course of the judgment of my learned brother, at page 844 it was observed in regard to clause (a) of Section 4A as follows :-

'In order to be ordinarily resident in British India, the manager must have been resident in British India, within the meaning of Section 4A (a) in nine out of the ten preceding years and must also have been here for at least two years during the previous seven years.'

In my view, when the words 'more than' replace 'at least,' that observation correctly expresses the meaning of clause (a) of Section 4A.

The foreign income of every resident in British India, even when it is not brought into the country, is chargeable to tax, save when the residents is 'not ordinarily resident.' For an individual, including a resident to be 'not ordinarily resident', so as to escape tax, it must be shown that the position is covered by clause (a) of Section 4B. When an individual has been a resident for nine out of ten preceding years, then in order to escape tax on his foreign income, he must not have been in British India for more than an aggregate period of two years during the preceding seven years. In the present case the status of the karta of the assessee Hindu undivided family determines the status of the family. The karta was resident in British India for nine out of the preceding ten years and he was in British India for an aggregate period of more than two years during the preceding seven years, of the years in question. In these circumstances he has not fulfilled the requirements of clause (a) of Section 4B so as to be 'not ordinarily resident,' and it follows that the family is similarly situated.

In my opinion, the income of the assessee Hindu undivided family which accrued outside British India during the relevant years was correctly included in the assessment for the year 1940-41 and the answer to the question referred to should be in the negative. The Commissioner will have his costs, Rs. 250.

PATANJALI SASTRI, J. - I agree. I have already expressed my view of the meaning of Section 4B (a) in Marimuthu v. Commissioner of Income-tax, Madras. It is true that the point was not argued as it did not actually arise for decision in that case, but I am not sure whether that in itself is not a recommendation of that view, in a matter of interpretation of ambiguous language. However, having now heard full arguments on the point on both sides, I see no reason to depart from that view. The construction contended for by Mr. Viswanatha Ayyar would involve this consequence. A person by adopting the simple expedient of being absent, say, in a neighbouring Indian State for 3 1/2 months every year during the seven years period referred to in the section, could relieve himself of his status as an 'ordinarily resident,' however close in quality and preponderating in duration his connection with British India may be. This, it seems to me, could not have been intended by the Legislature, and a construction which would lead to such repugnant result should not be readily accepted.

It may be pointed out in passing that the state in Marimuthu v. Commissioner of Income-tax, Madras, that in addition to being resident in British India in nine out of the ten preceding years, an 'ordinarily resident' must also have been in British India for at least two years during the previous seven years is not strictly accurate. As Section 4B (a) requires that the aggregate period of stay should be more than two years, he must have been in British India for at least two years and a day.

Reference answered in the negative.


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