RAJAGOPALAN J. - The reference under section 66(2) of the Act, that was directed in C. M. P. No. 7015 of 1956, was itself necessitated during the course of the arguments into R. C. No. 26 of 1953, when an alternative contention of the assessee had to be dealt with to dispose of the controversy between the parties which constituted the subject matter of R. C. No. 26 of 1953. To comply with the directions given in C. M. P. No. 7015 of 1956 a statement of the case has been submitted which has been separately numbered as R. C. No. 73 of 1957 but the questions that arise both in R. C. Nos. 26 of 1953 and 73 of 1957 relate to the same set of assessment proceedings and, as we said, they are really alternative positions to be considered before the questions at issue between the assessee and the department are ultimately disposed of.
It is rather unfortunate that the specific findings required have not been recorded in the statement of the case submitted in R. C. No. 73 of 1957. The department filed T. C. M. P. No. 41 of 1959 to call upon the Appellate Tribunal to submit a further statement of the case with reference to the questions which they were directed to refer to this court in C. M. P. No. 7015 of 1956. Learned counsel for the assessee took time for consideration and eventually represented that the assessee was not opposing the application to call for a further statement of the case.
The scope of the enquiry which was expected of the Tribunal, on the basis of which findings had to be incorporated in the statement in the case, is indicated in the affidavit filed in T. C. M. P. No. 41 of 1959, a copy of which will be forwarded to the Tribunal. Apparently, the Tribunal was of the view that, since the question that was referred in R. C. No. 73 of 1957 had not been argued before the Tribunal at the stage of the appeal, the Tribunal could not, and should not, record any specific findings for the disposal of the question referred to this court for decision. That view is erroneous. Material for recording specific findings was apparently already before the Tribunal. If that material is not complete the Tribunal will afford an opportunity both to the department and to the assessee to place all the available material, so that the questions at issue can be satisfactorily disposed of.
Learned counsel for the department specifically wanted an enquiry into the question, whether the funds were remitted to the head office of the firm at Madras only to enable the head office of the firm to carry on its business. That the moneys belonged to the individual partners would still be a factor, but an equally relevant factor would be whether the sale of the securities held by each of the two partners was only to see that the firm had funds at Madras at that stage to carry on its business. That aspect also will have to be considered in full by the Tribunal in submitting the further statement of the case called for.
Learned counsel for the assessee points out that these proceedings, which relate to the assessment year 1949-50, have been pending long enough. The Tribunal will submit the further statement of the case within six weeks from the date of receipt of the records by the Tribunal.
In R. C. Nos. 26 of 1953 and 73 of 1957, the assessee was Mr. Narayanswami, one of the two partners of Messrs. Chitra and Co., Madras. The assessee in R. C. Nos. 36 of 1953 and 17 of 1957 is Mr. Subramanian, the other partner. The questions that arise for determination in R. C. Nos. 36 of 1953 and 17 of 1957 are virtually similar to those this court has to consider in R. C. Nos. 26 of 1953 and 73 of 1957. In these two references also, R. C. Nos. 36 of 1953 and 17 of 1957, the statement of the case submitted in R. C. No. 17 of 1957 is incomplete, and on that basis this court cannot answer the questions arising in R. C. Nos. 36 of 1953 and 17 of 1957. The department has filed T. C. M. P. No. 42 of 1959 to direct the Tribunal to submit a further statement of the case in R. C. No. 17 of 1957, which at this stage is not opposed by the assessee.
As we said, the position in these cases is similar to that we have to consider in R. C. Nos. 26 of 1953 and 73 of 1957. In calling for a further statement of the case in R. C. No. 73 of 1957 we have outlined the scope of the enquiry and the need for further findings. In this case also, R. C. No. 17 of 1957, there will be a direction calling upon the Tribunal to submit a further statement of the case. It should be needless to set out over again what we set out in our order with reference to R. C. No. 73 of 1957. In this case also the further statement of the case should be submitted within six weeks from the date of receipt of the record by the Tribunal.
(After the return of the statement from the Tribunal, this reference coming on for hearing, the court delivered the following judgment) :
RAJAGOPALAN J. - Mr. Narayanaswami and Mr. Subramanian were partners in Swastik and Company till May, 1946. Thereafter they traded in partnership under the name of Chitra and Company. Chitra and Co., 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 and Co., on August 6, 1947, under what was styled a brokers contract. It was common ground that facilities for purchase and sale of securities were better at Madras, where the firm had its head office. On August 7, 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 August 8, 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 August 21, 1947, and they were in due coursed forwarded to the buyer at Bombay. Each of the partners was credited with the sale proceeds of the Mysore bonds on August 23, 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. Subramanian.
In the proceedings to assess each of the partners in the assessment year 1949-50, the Income-tax Officer held that these transaction constituted remittances of unassessed 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.
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 Tribunals 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. C. 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 remittance 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. Subramanian, in R. C. Nos. 36 of 1953 and 17 of 1957.
After the reference had been heard in part, further statements of the cases were called for by this court by its order dated October 21, 1959, and those statements have been submitted.
The relevant findings of facts as they now stand may thus be summarised. The firm, Chitra and 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 reinvesting 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 assessee.
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 brokers 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 by them. If, however, the firm acted only as a broker, the bonds would have continued to be the property of the partners where 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 August 7, 1947, and August 8, 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. Learned counsel for the department referred us to the judgment of Wrottesley J. in Walsh v. Randall and contended that it should not be viewed as a case of capitalisation of accumulated profits. The facts in Walshs case 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 and that is authority binding on us. Even if the bonds belonged to the partners, the assessees, when they were 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 moneys 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 correctness 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.
Learned counsel for the department invited us to refrain from answering the reference 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 reference 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 was a remittance of capital. Though that will be enough to give relief to the assessee in these proceedings, we propose to answer the reference under section 66(1) of the Act for the sake of completeness.
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 concludes the issue, and that even if there was a remittance by the assessees themselves, the remittances were of capital.
Our answer to the reference under section 66(1) of the Act in R. C. Nos. 26 and 36 of 1953 is in the negative and in favour of the assessee.
Each of the assessees will be entitled to costs but only to one set of counsels fee : Counsels fee Rs. 250.
References answered in the negative.