1. Mr. Narayanaswami and Mr. Subramaniam were partners in Swastik & Company till May, 1946. Thereafter they traded in partnership under the name of Chitra & Company. Chitra & Company, a firm of stock-brokers, had its head office at Madras and a branch at Trivandrum. Out of the profits earned and accumulated at Trivandrum in Travancore, which was outside British India which then constituted the taxable territories, and which profits were therefore not assessed, each of the partners purchased Mysore securities which were held at Trivandrum. They desired to change the investment to Travancore Securities. Each of them sold the Mysore securities to the firm Chitra & Company on 6th August, 1947, under what was styled a broker's contract. It was common ground that facilities for purchases and sale of securities were better at Madras, where the firm had its head office. On 7th August, 1947, the firm entered into a contract at Madras to sell those Mysore securities to a broker in Bombay at the very price at which the firm had bought the shares from the partners. On 8th August, 1947, the firm entered into contracts to purchase Travancore securities of the same face value as the Mysore securities that had been sold. The Mysore bonds themselves were sent from Trivandrum later and were taken delivery of by the firm at Madras on 21st August, 1947, and they were in due course forwarded to the buyer at Bombay. Each of the partners was credited with the sale proceeds of the Mysore bonds on 23rd August, 1947, in the books of the firm at Trivandrum. The necessary entries were also apparently made when the amount was utilised for the purchase of Travancore bonds. The amounts were Rs. 37,006 in the case of Mr. Narayanaswami and Rs. 32,652 in the case of Mr. Subramaniam.
2. In the proceedings to assess each of the partners in the assessment year 1949-50, the Income-tax Officer held that these transactions constituted remittances of un-assessed profits to British India and he assessed these amounts to tax on that basis. The Appellate Assistant Commissioner upheld the claims of the assessees and allowed their appeals. The further appeals preferred by the Department were allowed by the Tribunal, which agreed with the Income-tax Officer and held that the amounts were taxable as remittances in the hands of each of these two assessees.
3. In the case of one of the assessees, Mr. Narayanaswami, the Tribunal referred under Section 66(1) the following question:
Whether there was material for the Tribunal's finding that the real effect of the transactions put through was to bring about a remittance to the assessee of his foreign profits to the extent of Rs. 37,006 assessable under Section 4(1)(b)(iii)? (R.G. No. 26 of 1953).
Under the directions of this Court a further question was referred under Section 66 (2) of the Act which ran:
Whether in the circumstances of the case, even if the amount of Rs. 37,006 was a remittannce to the assessee, such a remittance did not amount to remittance of capital? (R.C. No. 73 of 1957).
Identical questions were referred with reference to the other assessee Mr. Subramaniam in R.C. Nos. 36 of 1953 and 17 of 1957.
4. After the references had been heard in part, further statements of the cases were called for by this Court by its order, dated 21st October, 1959, and those statements have been submitted.
5. The relevant findings of facts as they now stand may thus be summarised. The firm Chitra & Company did not utilise the sale proceeds of the Mysore bonds for its business. The sales of those bonds were only for the purpose of re-investing in Travancore securities and the purchases were almost contemporaneous with the sales of the Mysore bonds. The sale and purchase of these securities effected through the Madras firm did not constitute a device on the part of the assessees to remit moneys to Madras for use for business purposes of either the firm or the assessees.
6. In form, the Mysore bonds were sold by the assessees to the firm, of which they were partners, at Trivandrum under what were characterised as broker's contracts. If it was a sale to the firm, the title to the bonds vested in the firm thereafter and their subsequent despatch to Madras could not, in any event, be viewed as a remittance of the unassessed foreign profits of the partners and by them. If, however, the firm acted only as a broker, the bonds would have continued to be the property of the partners when they were received at Madras. We shall examine the position on that basis. Even in that contingency, the consignment of the Mysore bonds to Madras for sale and for reinvestment of the sale proceeds in the substituted securities--the contracts for sale and purchase had already been concluded on 7th August, 1947 and 8th August, 1947--cannot be viewed as a remittance at all; much less can it be viewed as a remittance of unassessed profits. The contention of the learned Counsel for the assessee, that the accumulated unassessed profits held at Trivandrum had been capitalised when they were invested in the purchase of Mysore bonds, is well-founded and is supported by authority : see Commissioner of Income-tax v. Muhammad Ismail Rowther : 8ITR150(Mad) . Learned Counsel for the Department referred us to the judgment of Wrottesley, J, in Walsh v. Randall (1940) 23 T.C. 55, and contended that it should not be viewed as a case of capitalisation of accumulated profits. The facts in Walsh's case (1940) 23 T.C. 55, were not similar to what we have to consider now. In that case, it should be remembered, what was ultimately brought into Britain, the taxable territory, was money. In our opinion, the case of the assessees falls within the scope of the rule laid down in Commissioner of Income-tax v. Muhammad Ismail Rowther : 8ITR150(Mad) , and that is authority binding on us. Even if the bonds belonged to the partners, the assessees, when they were brought to Madras, and even if that constituted a remittance, what was brought into Madras was capital and not assessable income. Apart from that, it should be clear that bringing in Mysore bonds into the taxable territories cannot be viewed as a remittance of money or money's worth, whether the money represented income or capital. It is true that the bonds were brought to Madras for sale, but the sale proceeds were to be reinvested in another type of capital investment, Travancore securities. That emphasises the corectness of the ultimate finding of the Tribunal, that there was no device to bring in money for use in British India there was only a substitution of securities, which were ultimately held outside British India.
7. Learned Counsel for the Department invited us to refrain from answering the references in R.C. Nos. 26 and 36 of 1953 which were under Section 66(1) of the Act, if we upheld the claim of the assessees in the references under Section 66 (2) of the Act and came to the conclusion, that even if bringing in Mysore bonds constituted a remittance, it was a remittance of capital. Though that will be enough to give relief to the assessees in these proceedings, we propose to answer the references under Section 66(1) of the Act also for the sake of completeness.
8. Our answer to the reference under Section 66 (2) of the Act in R.C. Nos. 17 and 73 of 1957 is that Commissioner of Income-tax v. Muhammad Ismail Rowther : 8ITR150(Mad) , concludes the issue, and that even if there was a remittance by the assessees themselves, the remittances were of capital.
9. Our answer to the references under Section 66(1) of the Act in R.G. Nos. 26 and 36 of 1953 is in the negative and in favour of the assessees.
10. Each of the assessees will be entitled to costs but only to one set of counsel's fee. Counsel's fee Rs. 250.