1. The point referred to us for decision is (1) whether there was any evidence before the Commissioner of Income Tax on which he could find that the $ 30.000 remitted from Ipoh to Madras during the year of assessment was remitted not in discharge of the debt owed by the Ipoh branch to the assessee but as the latter's share of the profits and (2) whether the sum of $ 48,460, $793, $ 12,225, $ 1,806 and $ 604 amounting in all to $ 52,888 can, be held to be income derived from business and are not merely accretions of capital?
2. The facts are shortly these. There was a firm in Madras and a firm in Ipoh carrying on money lending business. The partners were the same. During the course of the dealings, moneys were due by the Ipoh firm to the Madras firm. The Ipoh firm was making profits in the accounting year 1925-26, the year of assessment being 1926-27. In the accounting year sums were remitted out of the Ipoh profits to the Madras firm, which in the Madras accounts were appropriated to wipe off the debt due to the Madras firm. The partner in the Madras firm who was also a partner in the Ipoh firm wrote a letter to the agent of the Ipoh firm on March 26, 1926, the material portions of which run as follows:
As the debt due by us (Ipoh) to Madras has mostly been discharged it will not be convenient to send moneys to Madras and debit it. You may subject to the exigencies of the business there ascertain the income for the year ending Panguni 30th Krodhana (12th April, 1926) and agreeably thereto debit the Headquarters in the sum of $ 30,000 on Sena's account and in $ 30.000 on ft. M's account and to credit Madras therewith.
3. According to this letter a credit entry was made in the Ipoh accounts but not in the Madras accounts in the year of accounting. The assessee has been taxed on this $ 30,000 on the ground that it comes under Section 4, Clause (2) of the Income Tax Act. Section 4, Clause (2) runs as follows: 'Profits and gains of business accruing or arising without British India to a person resident in British India (shall if they are received in or brought into British India be deemed to have accrued or arisen in British India and to be profits and gains of the year in which they are so received or brought) notwithstanding the fact that they did not so accrue or arise in that year provided that they are so received or brought in within three years of the end of the year in which, they accrued or arose.' There is an explanation which is not necessary to consider for the purpose of this case. The effect of Section 4, Clause (2) is that so far as the firm outside British India is concerned even though there may be a partner in British India he is not liable to pay income tax on profits except in so far as any portion of the profits are brought into British India within the year of accounting.
4. What happened in this case was that moneys were sent from Ipoh to Madras and these were credited in the Madras firm's books. The net result was that the amount which Ipoh owed Madras was wiped out leaving a balance. There is no suggestion anywhere in the records that when these moneys were sent to the Madras firm they were credited in the Madras firm's books as profits received by each partner individually. Prima facie the Ipoh firm owed the Madras firm large sums of money and receipts were credited in the Madras partnership account. The assessee admits that the Madras firm will be taxable. In fact the assessee does not deny that this amount will be taxable as profits remitted to the firm and that it ought to be included in the next year's accounts. The Madras firm will be taxable irrespective of any drawings of the partners and that will be the ordinary state of affairs in the case of firms which are assessable under the Act.
5. Next as regards the applicant in the present case it is sought to make him liable for a portion of the money remitted to the Madras firm and the only ground on which he can be so taxed would be on the evidence of the letter referred to above. It is not suggested that any moneys actually came into Madras in pursuance of that letter during the year of taxation. The Income Tax Officer did not treat this letter as showing that any amount was received by the petitioner from Ipoh. It is used as evidence that the petitioner must have received the profits earned outside British India and they were debited in the firm's books. It is nobody's case that the entries in the firm's books were a mere blind for the purpose of enabling one partner to draw out the profits earned outside British India, and thereby escape taxation. There is no question of any fraud suggested in any of the orders of the Income Tax Officers. What is said that this letter evidences a receipt of $ 30,000 by the assessee. We do not think that that letter shows anything of the sort. That letter was written asking the Ipoh agent to look into the accounts ascertain the income for the year and debit the Headquarters in the sum of $ 30,000 on Sena's account and $ 30,000 in R, M's account and to credit Madras therewith. This does not show that the entire profits for the year ascertained and that the $ 30,000 represented the profits remitted to the partner during the year of account. Where a partner draws moneys in the course of his business that will be taken into consideration at the end of the year and if there are any over drawings by one partner they will be debited to the account of that partner or set off against his profits and because a partner draws some moneys during the year of account it cannot be said at once that that represents his share of the profits. Section 4 (2) is for the purpose of ascertaining the profits of a partner got from business carried on outside British India, and when such profits come into British India that will be taken into consideration in assessing him. If a firm received such profits from another firm it is the firm that should be taxed,
6. Further there is no evidence in this case that this letter showed either by itself or coupled with the other facts that any moneys remitted to the Madras firm during the course of that year were really remittances made to the assessee, and that it was sent to the Madras firm for the purpose of making the assessee escape liability to taxation. The reference is 'Is there was any evidence on which we can find that the $ 80,000 remitted from Ipoh to Madras during the year of assessment was remitted not in discharge of the debt owed by the Ipoh branch to the assessee but the latter's share of the profits.' When the remittances were made they were all credited and debited in the firm's accounts and were for the discharge of the debt owed by the Ipoh firm and under these circumstances we do not see any legal evidence to make the assessee liable for any drawing which he has made and which has been put down as in discharge of the debt owed by the Ipoh firm. In these circumstances we answer the first question in the negative. Then as regards the second question, moneys realised by the sale of certain immoveable properties, the finding of the Income Tax Officer is that these transactions took place as a matter of fact in the course of the business, that the properties were taken over with the intention of selling them and that the profits derived from the transaction as a whole including the sales was as much a profit of the firm's business as that derived from its other money lending transactions. The firm got these properties in discharge of debts due to it, re-sold the properties at a profit and the Income Tax Authorities consider this as a profit derived from its business.
7. It is argued by Mr. K.S. Krishnaswamy lyengar that the firm's business was only money lending and no profit realised by the sale of the properties got in satisfaction of the debts due to the firm can be said to be profit made in the course of the firm's business and so it is not liable to be taxed. Reference is made to 5 Taxed Oases 426. We do not think that any general rule can be laid down in these cases. One has to see what is the course of dealing and though the business is labelled as money lending business, if, as a matter of fact, the profits were generally got by taking lands in satisfaction of debts due and selling them for profits later on, such profits must, no doubt, be considered as derived from such business and cannot escape taxation by saying that the profits have nothing to do with the business of the firm which was merely money lending. The finding of the Income Tax Authorities is that the profits represented the profits of the business and are not as was contended, accretions of the capital. Further this case is analogous to that of a pawn broker who lends out moneys on articles received as pledges which he sells in satisfaction of the amount due to him and realises profits. It cannot be said that the profits realised from such sales do not amount to profits derived in the course of the business.
8. In these circumstances we cannot say that the profits realised from the sale of the properties got by the firm in satisfaction of debts due to it were not got in the course of its business and that they were accretions of the capital. These were really profits which accrued in the course of the business and are thus taxable.
9. The petitioner is entitled to costs which we fix at Rs. 250 on each of the petitions. The advance paid by him of Rs. 100 will be refunded.
In O.P. No. 169 of 1928.
10. Our order on point No. 2 in the above case holds good in this also and we dismiss it, The assessee will pay Rs. 250 as costs of the Commissioner.