RAJAGOPALAN J. - Subramania Chetty, who resided in Pondicherry and carried on business there was a 'non-resident' for purpose of assessment to income-tax in India. His divided brother, Vinayagam Chettiar, resided at Madras, where he had his own business, on the income from which he was assessed to tax. Though a non-resident, Subramaniam had business connections with the taxable territories. Subramaniam obtained licences from the Government of India to import machinery, mill stores, etc., into India. Such imports were made from abroad through Madras and other ports.
In the year of account that ended on March 31, 1950, Vinayagam claimed he had purchased from Subramaniam machinery, etc., imported by the latter into Madras to the value of Rs. 2,37,195. The gross profits on the sales of these imports effected subsequently by Vinayagam were estimated at 19 per cent. of the purchase price and Vinayagam was assessed on that basis and by recourse to section 42(2) of the Income-tax Act. The gross profits Vinayagam made on the sale of goods in the year of account purchased from others besides his brother, Subramaniam, were estimated at 12 per cent. The difference of 7 per cent. was based on the assumption that the purchase price of Rs. 2,37,195 claimed to have been paid to Subramaniam was inflated. As Subramaniam was a non-resident the provisions of section 42(2) were applied and Vinayagam was assessed.
Independent of the assessment of Vinayagam on his income, proceedings were taken against him under section 43 of the Act. That there was a business connection between Subramaniam and Vinayagam was obvious. After notice to Vianayagam and after hearing his objections his main plea was that the only business connection he had with his brother was that of a purchaser of the goods - the Income-tax Officer passed his order on September 14, 1950, declaring Vinayagam to be the agent of the non-resident principal, Subramaniam.
Proceedings were then taken to assess Vinayagam as a statutory agent on the income of the non-resident, Subramaniam, which accrued to his in Indian in the year of account that ended with March 31, 1950. The assessee for these proceedings was described as 'P. Subramaniam Chetty, Pondicherry, by agent, P. Vinayagam Chettiar, Madras.' The value of the goods imported by Subramaniam through Madras and the other ports during the year of account was estimated at Rs. 5 lakhs and the profits on the sale of all these imported goods effected in India were estimated at Rs. 50,000. The total world income of Subramaniam was estimated at Rs. 1 lakhs. On the entire income of Rs. 50,000 that was held to have accrued to Subramaniam in India, Vinayagam was assessed to income-tax and super-tax.
The Assistant Commissioner, to whom the assessee appealed, confirmed the assessment. When Vinayagam appealed further to the Tribunal, it called for a further report from the Income-tax Officer and what was styled a remand report was submitted by the Income-tax Officer in due course. At that stage additional evidence was taken under the directions of the Tribunal to decide the questions, whether the declaration under section 43 of the Act was correct. The Income-tax Officer also reported :
'Though the profit under section 42(2) assessed in the hands of Vinayagam Chettiar, Madras, is Rs. 27,212, the notional profits alleged to have been retained by the non-resident in Pondicherry as a result of the fiduciary relationship between the two as envisaged in section 42(2) could now be taken to be at 7 per cent. being the difference between 19 per cent. and 12 per cent. adopted in the above calculation on Rs. 2,37,195, being the sales effected by the non-resident to his agent, Mr. P. Vinayagam Chettiar. This works out to Rs. 16,604.'
The Tribunal confirmed the declaration under section 43 of the Act, that Vinayagam was the agent of the non-resident, Subramaniam. The Tribunal, however, deducted Rs. 16,604 on which Vinayagam had already been assessed to tax under section 42(2) of the Act and confirmed the assessment on the balance of Rs. 50,000, that is, Rs. 33,396.
Under the directions of this court the Tribunal referred to following question under section 66(2) of the Act :
'(1) Whether, on the facts and in the circumstances of the case, and on the evidence on record, the Appellate Tribunal was right in treating the petitioner, Vinayagam, as the agent of the non-resident principal, P. Subramaniam Chetty of Pondicherry ?
(2) Whether the determination of the income of the non-resident principal at Rs. 33,396 even under section 23(4) is correct in law ?'
In answering the first question it is wholly unnecessary to decide what was the volume of the turnover of Subramaniams business that Vinayagam handled in India. That would be very relevant factor only in answering the second question. As pointed out in Ramnarayan Rajmal v. Commissioner of Income-tax a declaration under section 43 by itself does not impose any tax liability. The machinery for determining the tad liability of a person declared to be an agent under section 43 is that provided by section 42(1).'
What we have to decide under the first question is, whether there was material on which the Tribunal could sustain the finding that Vinayagam was the agent of Subramaniam. That question has to be answered in the affirmative. The material was set out in full in the remand report of the Income-tax Officer. The learned counsel for the assessee submitted that he had no opportunity to rebut the additional evidence taken by the Income-tax Officer at the stage of remand. No such plea was taken before the Tribunal and at that stage Vinayagam knew what was the additional material on which the appeal would be ultimately disposed of by the Tribunal. On the material placed before us - really it was an argument unrelated to anything on record - we are unable to accept the contention of the learned counsel that Vinayagam had no effective opportunity of rebutting the additional evidence disclosed in the remand report of the Income-tax Officer. That material was enough to sustain finding that Vinayagam, who was shown to have sought instructions from time to time from Subramaniam, was the latters agent.
We should like to refer at this stage itself to one feature of the case. That Vinayagam handled goods of the value of Rs. 2,37,195 was admitted by him. These were goods imported into Madras by Subramaniam. Vinayagam claimed that he had bought them and that in disposing of these goods subsequently he was not the agent of Subramaniam. There was no finding at any stage that with reference to this turnover of Rs. 2,37,195 the relationship between Subramaniam and Vinayagam was that of principal and agent and not that of seller and purchaser. Quite obviously, in the proceedings to assess Vinayagam on his income, these were treated as purchases by him and the provisions of section 42(2) were applied. That statement of the case submitted by the Tribunal also proceeded on the basis that these goods had been purchased by Vinayagam. We shall deal later with the question whether in addition to the goods of the value of Rs. 2,37,195, Vinayagam handled any of the goods imported into India by Subramaniam in the relevant year of account that ended on March 31, 1950.
The material referred to in the remain report was the correspondence between Subramaniam and Vinayagam not only during the year of account 1949-50, but also before and after that period. There was ample material for the Tribunal to come to the conclusion, that Vinayagam, who admittedly had a business connection with Subramaniam, was also his agent. Once again we have to emphasise how much of Subramaniams business Vinayagam handled as his agent in the relevant year of account is a wholly different question.
We answer the first question in the affirmative and against the assessee.
The findings of the Tribunal relevant for answering the second question are as follows. In paragraph 2 of the statement of the case, the Tribunal recorded :
'He (Subramaniam) obtained import licences from the India Government and imported under such licences in his own name machinery, mill stores, etc., at Madras the other ports. He also imported similar good through East Asiatic Co., Madras. Some of these imports were taken delivery at Madras by Kulandavelu and Sarangapany, employees of the non-resident, where also sales were effected an cash received by them. It is not known how the imports through the other Indian ports were disposed of by the non-resident.'
In paragraph 10 of the statement of the case the Tribunal recorded :
'Their Lordships have been pleased to direct the Tribunal to set out in detail in this statement :
(1) the value estimated or ascertained of the goods which the assessee purchased from the non-resident aforesaid;
(2) the value estimated or ascertained of the goods which the assessee was said to have sold to third parties as the agent of the non-resident;
(3) the value estimated or ascertained of the goods which the non-resident imported at Madras or other ports within India, which were sold without any reference to the assessee.
It is humbly submitted and with respect that, as stated in paragraph 6 supra, the assessee did not offer any of the aforesaid materials at any time except for item (i) on the ground that he was not in possession thereof. The assessees counsel is still unable to produce the necessary data even at this stage.'
Admittedly Vinayagam handled goods of the value of Rs. 2,37,195 which had been imported into Madras by Subramaniam. With reference to these goods, however, Vinayagams claim was that he had purchased them outright from Subramaniam. That claim, as we have pointed out, was accepted and was the basis for assessing Vinayagam on his income and not he application of section 42(2). That claim was never negatived even in the proceedings to assess the income of Subramaniam, out of which this reference has arisen, proceedings taken against Vinayagam as the agent of Subramaniam. In paragraph 9 of the statement of the case the Tribunal referred to Rs. 2,37,195 as the amount representing the assessees purchases from the non-resident, Subramaniam. We have already set out the finding of the Tribunal recorded in paragraph 10 of the statement of the case. Therefore, with reference to this turnover of Rs. 2,37,195, we have to proceed on the basis, that the department and the Tribunal accepted the case of Vinayagam that he had purchased these goods from Subramaniam. When he subsequently sold these goods and realised the profits, whatever their real extent was, he sold them as his own goods and not for and on behalf of Subramaniam as his agent.
There was evidence referred to in paragraph 2 of the statement of the case that Subramaniam himself sold the goods at Madras through his employees, Kulandavelu and Sarangapany, with which obviously Vinayagam has nothing to do. There was no evidence that Vinayagam handled any of the other goods imported by Subramaniam, either those imported at ports other than Madras, or those imported at Madras through East Asiatic Co. and sold through Kulandavelu and Sarangapany. Thus there was no evidence that in the relevant year of account, even if Vinayagam continued to be the agent of Subramaniam, Vinayagam handled any goods of Subramaniam other than those Vinayagam had purchased outright for Rs. 2,37,195.
The question that arise are : (1) Can Vinayagam be taxed under section 42(1) on the profits of the sales of the value of Rs. 2,37,195 (2) Can Vinayagam be taxed under section 42(1) on the profits of the sales of the rest of the imports, the estimated value of which was Rs. 5 lakhs minus Rs. 2,37,195 ?
We are clearly of opinion that Vinayagam cannot be taxed twice over on the profits of the sales of the imported goods of the value of Rs. 2,37,195, one under section 42(2) and against under section 42(1). Before either statutory provision can be applied, there must proof of business connection between the non-resident, Subramaniam, and the resident, Vinayagam. Sections 42(1) and 42(2), however, are mutually exclusive in operation. The basis of the liability imposed on Vinayagam be recourse to section 42(2) was that the goods were had and that the income was his; only the true extent of that income had to be ascertained by applying the provision of section 42(2). The basis of the liability which section 42(1) imposes is that the income belongs to the non-resident. It is the non-residents income that has to be taxed. The resident agent is only the agent and he merely represents the non-resident principal even in the assessment proceedings : see Abdul Azeez Dawood Marzook v. Commissioner of Income-tax. Quite obviously the same income cannot be treated as the income of both the non-resident, Subramaniam, and the resident, Vinayagam.
The learned counsel for the department pointed out that in the assessment of Vinayagam under section 42(2) only 7 per cent. had been taken into account and that the estimate of the income of Subramaniam in the proceedings under section 42(1) was 10 per cent. Rupees 16,604 which represented 7 per cent. was excluded by the Tribunal and there could therefore be no question of taxing than income twice over. Quantification of the profits at different levels, 7 per cent. and 10 per cent., in not the determining factor. The profits of the sales which accrued to Vinayagam as owner of the goods cannot be viewed as the income of Subramaniam who had ceased to be the owner of the goods and to whom the profits of the sales effected by Vinayagam could not and did not accrue. That basic feature remains unaltered by the fact that 7 per cent. was attributed to the business connection between Vinayagam and Subramaniam when section 42(2) was invoked and that the profits were subsequently estimated at 10 per cent. when the provisions of section 42(1) were applied. Whether the first estimate of 7 per cent. or the later estimate of 10 per cent. was correct does not arise for consideration in deciding to whom did the profits accrue.
Vinayagam was not liable to be taxed under section 42(1) on the profits on the sales of the imports of the value of Rs. 2,37,195. The applications of section 42(1) stood excluded because the profits did not accrue to Subramaniam and they were taxed as having accordingly to Vinayagam, though in taxing him recourse was had to section 42(2).
The liability of Vinayagam to be taxed under section 42(1) on the profits of the sale of the goods valued at Rs. 2,37,195 can be viewed from another angle. The scope of section 42(1) was explained in Ramnarayan Rajmal v. Commissioner of Income-tax and the principle laid down in that case has been clearly brought out in the head-note itself :
'Under section 42...... an agent of a non-resident is liable to be charged only on income accruing to the non-resident through details with him and not in respect of all income earned by the non-resident under the various heads in section 42, with which he, as an agent, has no concern at all.
If the income-tax authorities choose to tax a non resident in the name of his agent then in respect of each agency the re must a be a separate assessment because each agent in a separate assessee and treated as an assessee for all purposes under the Act.'
With reference to the sale of these goods Vinayagam was not the agent of Subramaniam. Quite independent of the feature that Vinayagam was the owner, on the short ground that when the goods were sold by Vinayagam they had ceased to belong to Subramaniam, and that there could therefore be no question of Vinayagam being the agent of Subramaniam for the sale of these goods, we have to hold that Vinayagam was not liable to be taxed on the profits of these sales under section 42(1). The decisive factor should be, was Subramaniam the owner of the goods when they were sold by Vinayagam Subramaniam was not the owner. In effecting these sales Vinayagam was not the gent of Subramaniam. The profits of the sales did not accrue to Subramaniam. Neither Subramaniam nor Vinayagam as the agent of Subramaniam could be taxed under section 42(1) on the profits the did not accrue to Subramaniam.
The next question is, was Vinayagam liable to be taxed on the profits of the sales of the other goods imported by Subramaniam, the estimated value of which has to be taken as Rs. 5 lakhs minus Rs. 2,37,195. Assuming that these goods were sold in India as goods belonging to the imported, Subramaniam, there was no finding that Vinayagam had anything to do with those sales. Despite the declaration under section 43, the liability of Vinayagam under section 42(1) can be enforced only with reference to the transactions affected by Vinayagam as the agent of the non-resident and not on the basis of the sales effected through other agencies employed by the non-resident. We find ourselves in respectful and entire agreement with the reasoning and conclusion of Chagla C.J. in Ramnarayan Rajmal v. Commissioner of Income-tax. That decision was referred to by a Devision Bench of this court in Abdul Azeez Dawood Marzook v. Commissioner of Income-tax. But there was not necessity then to apply these principles.
Thus the position is that of the goods of the estimated value of Rs. 5 lakhs, which Subramaniam imported into India in the year of account, Vinayagam no doubt sold goods of the value of Rs. 2,37,195, but in effecting these sales Vinayagam was not the agent of Subramaniam. The goods belonged to Vinayagam himself as he had purchased them from Subramaniam. Neither what Vinayagams real purchase price was nor what his real profits were has any bearing on the question, was the agent of Subramaniam when Vinayagam sold the goods; he was not. The rest of the goods no doubt belonged to Subramaniam, but Vinayagam had nothing to do with their sales. On the profits of neuter set of transactions, nor any portion thereof, could Vinayagam have been taxed under section 42(1) of the Act. Vinayagam was no doubt an agent of Subramaniam - the declaration under section 43 stands - but in the year of account he was not shown to have transacted any business in his capacity as the agent of Subramaniam.
With reference to the second of the questions referred to this court, the real issue to be decided is not whether the arithmetical computation of Rs. 33,396 was correct. The real question is whether Vinayagam was liable to be taxed on any sum by the application of the provisions of section 42(1). That question we answer in the negative and in favour of the assessee. Thus on no portion of the estimated income of Subramaniam, Rs. 50,000, was Vinayagam liable to be taxed. As the assessee has succeeded in avoiding the tax liability in its entirety, he will be entitled to the costs of this reference. Counsels fee Rs. 250.
Reference answered accordingly.