1. This is a case stated by the Commissioner of Income Tax, Bengal, under the provisions of Section 66 of Act XI of 1922, and Section 51 of Act VII of 1918.
2. The Rogers Pratt Shellac Company is incorporated in the United States of America, with its headquarters in the city of New York. The Company have a branch office in Calcutta to buy gum, shellac and other Indian products, and a factory at Wyndhamgunj in the United Provinces. No sales are conducted in India by the Company; their transactions are limited to the purchase of shellac and other goods, some of which are purchased on account of a certain Gramophone Company which pay the Company a fixed percentage on the purchase plus expense, while the balance is sold in the open market.
3. Income-Tax was assessed for the years 1921-22, as also super-tax, and the tax was paid under protest on the 6th May, 1922.
4. They were similarly assessed for the year 1922-23, and the tax was paid on the 29th March, 1923, with a notice that ' they shall in all probability appeal against the assessment.' On the 27th June, 1923, they made an appeal to the Assistant Commissioner of Income-Tax against the assessment, and for refund of the amounts paid for income-tax and super-tax respectively for the year 1921-1922. A similar petition was made with regard to the assessment for the next year. The Commissioner of Income-Tax on the 13th October, 1923, however, confirmed the assessments. Thereafter the Commissioner of Income-Tax at the instance of the Company made a reference under Section 66 of Act XI of 1922, and Section 51 of Act VII of 1918, as stated above.
5. The reference was made under Act VII of 1918, as well as under Act XI of 1922, the reason being that the income-tax for 1921-22 was assessed and levied under Act VII of 1918, and that for 1922-23 under the new Act XI of 1922. The provisions of the two Acts are generally speaking, similar with certain exceptions.
6. Section 3 (1) of Act VII of 1918 lays down: ' Save as hereinafter provided, this Act shall apply to all income from whatever source it is derived if it accrues or arises, or is received in British India or is under the provisions of the Act deemed to accrue or arise or to be received in British India.'
7. By Section 5, certain classes of income are chargeable to income-tax, and they include ' income derived from business.'
8. Section 4 of Act XI of 1922, is similar to Section 3 of Act VII of 1918, except that it says that the Act shall apply to all income, profits or gains as described or comprised in Section 6. There is a Sub-section (2) added to Section 4 of the Act of 1922, which was not in the Act of 1918, which will be referred to later. Section 6 of Act XI of 1922 is also similar to Section 5 of Act VII of 1918, only that the word ' heads ' is used in the former instead of ' classes ' in the latter, and the item (IV) is described as ' business ' instead of ' income derived from business ' as in Act VII of 1918. Reading Sections 4 and 6 of Act XI of 1922 (Sections 3 and 5 of Act VII of 1918) together, all income derived from ' business ' (1) accruing, arising or received in British India or (2) deemed, under the provisions of the Act to accrue or arise or to be received in British India is taxable income.
9. Now it is admitted that no part of the Company's income accrued, arose or was received in British India, Section 33 (1) of the Act, however, provides that ' in the case of any person residing out of British India all profits or gains accruing or arising to such parson whether directly or indirectly through or from any business connexion in British India shall be deemed to be income accruing or arising within British India and shall be chargeable to income-tax in the name of the agent of any such person, and such agent shall be deemed, for all the purposes of this Act the assessee in respect of such income-tax,' The contention of the Government is that although the income neither actually accrued, arose nor was received in British India such income, as laid down in Section 33 (1) shall be deemed to be income accruing or arising within British India as it accrued or arose whether directly or indirectly through or from business connexion in British India. In other words, the charging section (Section 5) was enlarged by the provisions of Section 33 (1). On the other hand, it is contended on behalf of the Company that Section 33 (1) is merely what is called a ' machinery ' section enacted for the purpose of laying down the mode in which the tax is to be levied in the case of a non-resident person, and providing that in such a case his agent is to be deemed to be the assessee in respect of the income-tax.
10. Now, Sections 3 and 5 of the Act appear in Chap. I, which is headed ' taxable income.' Section 5 as stated above enumerates the classes of income chargeable to income-tax the ' (IV) ' class being 'income derived from business.' Chap, IV of the Act headed ' Liability in special cases' contains a group of sections which provide that in the case of minors, lunatics, etc., or persons whose properties are managed by others such as the Court of Wards, Administrator-General, etc. the income-tax would be levied and recoverable from the guardian, trustee, the Court of Wards, etc., as the case may be. There is no doubt that Section 31 and 32 are 'machinery' sections. Then comes Section 33 (1). the latter part of which lays down that a non-resident person shall be chargeable to income-tax in the name of the agent of any such person, and such agent shall be deemed to be for the purposes of the Act, the assessee in respect of such income-tax. This part of Section 33(1) therefore also is a 'machinery' section.
11. The question is whether the first part of the section is also a machinery section or a charging section. As already pointed out Section 3 provides that income not only accruing, arising or received in British India, but also income which under the provisions of the Act is 'deemed to accrue or arise or to be received in British India' is taxable income. The first part of Section 33 (1) lays down that income arising or accruing to a person residing out of British India whether directly or indirectly through or from any business connexion in British India shall be deemed to be income accruing or arising within British India. Taking the language literally, it seems that income accruing or arising to a non-resident person in certain cases though not actually accruing or arising within British India, shall be deemed to be income accruing or arising within British India and reading Section 33 (1) together with Sections 3 and 5 such income is liable to tax. This no doubt would extend far beyond what is recognized in England or had been recognized in British India previous to Act VII of 1918, as the territorial limit of taxation of income derived from business.
12. On behalf of the company, we have been referred to certain English cases, and a case in the Madras High Court: The Board of Revenue v. The Madras Export Company A.I.R. 1923 Mad 422. In Sulley v. Attorney-General (1860) 5 H. and N. 711 an American firm carried on a business in New York which consisted in the resale there of goods purchased on their account in England. One of the partners who resided in Nottingham transacted the business of the firm in England which consisted of purchasing and shipping goods for exportation, but no money was received in England except from New York for purchasing the goods. The profits arose on the sale of the goods-at increased price in America. It was held that the firm did not exercise its trade in the United Kingdom so as to subject it to income-tax. Cockburn, C.J., observed 'wherever a merchant is established in the course of his operations his dealings must extend over various places, he buys in one place and sells in another. But he has one principal place in which he may be said to trade, viz., where his profits come home to him. That is, where he exercises his trade It would be very inconvenient if this was otherwise. If a man were liable to income tax in every country in which his agents are established, it would lead to great injustice. The argument for the Crown must be carried' to this extent, that merely buying goods in this country is a trade exercised here so as to subject the purchaser of the goods to income-tax.... It would be most impolitic thus to tax those who come here as customers. The subjects of a foreign states not resident here cannot be made amenable to our laws. How then are their profits to be made amenable to the fiscal' law? Simply by the provision that whosoever carries on the business and receives the profits here shall be assessed. But in the present case no profits are received by the firm, or exist in this country'
13. A similar view was taken by the House of Lords in Grainger and Son v. Gough (1896) A.C. 325, where it was held that a foreign merchant who canvasses through agents in the United Kingdom for orders for the sale of his merchandise to customers in the United Kingdom, doss not exercise a trade in the United Kingdom within the meaning of the Income Tax Acts, so long as all contracts for the sale and all deliveries of the merchandise-to customers are made in a foreign country. Lord Watson observed (at pages 340-341): ' There may in my opinion, be transactions by or on behalf of a foreign merchant in this country so intimately connected with his business abroad that without them it could not be successfully carried on, which are nevertheless insufficient to constitute an exercise of his trade within the meaning of Schedule D. In illustration of that view I may refer to Sully v. Attorney-General (1860) 5 H. and N. 711 which was decided in the Exchequer Chamber by no less than six very eminent Judges.'
14. The statutes under which the above cases were decided are the Income Tax Act, 1853 and the Income Tax Act, 1842. Chapter 34, Section 2, Schedule D of Act of 1853 imposes a duty 'for and in respect of the annual profits or gains arising or accruing to any person whatever, whether a subject of Her Majesty or not, although not resident within the United Kingdom from...any trader-exercised within the united kingdom', and Chapter 35, Section 41 of the Income Tax Act of 1842, provides 'any person not resident in the United Kingdom whether a subject of Her Majesty or not shall be chargeable in the name of --any factor, agent or receiver, having the receipt of any profits or gains arising as herein mentioned....'
15. It will be seen that under the English Acts, it is essential that the profits should arise from the exercise of the trade within the United Kingdom. In the Indian Acts (VII of 1918 and XI of 1922), however, in the case of any person residing out of British India all profits or gains accruing or arising to such person, whether directly or indirectly through or from any business connexion in British India, shall be deem-Jed to be income accruing or arising within British India. There is no such provision in the English Acts, and that distinguishes the English Acts and the cases decided thereunder from the Indian Acts.
16. In the case of Smidth v. Greenwood (1920) 3 K.B. 275 [on appeal (1921) 3 K.B. 583 and in the House of Lords (1922) 1 A.C. 417] the appellants were a Danish firm resident in Copenhagen manufacturing and dealing in cement making and other similar machinery which they exported all over the world. They had an office in London in charge of a qualified engineer who was their whole-time servant. He received enquiries for machinery such as the firm could supply, sent to Denmark particulars of the work which the machinery was required to do, including samples of materials to be dealt with, and when the machinery was supplied he was available to give the English purchaser the benefit of his experience in erecting it. The contracts between the firm and their customers were made in Copenhagen and the goods were shipped F.O.C. Copenhagen. It was held by Rowlatt, J., that the place where a trade was exercised, was the place where the transactions forming the alleged business were closed, in the case of a selling business by the sale of the commodity, and the profit thereby realized, and, that therefore the firm exercised their trade in Denmark and that they could not in respect of the same profits and gains exercise their trade elsewhere.
17. The question therefore, viz., whether the profits arose from the exercise of trade within the United Kingdom was the same as that decided in the other two cases cited above. But the provisions of Section 31, Sub-section 2 of the Finance Act (No. 2) of 1915, (5 and 6 Geo. Vic. 89) were also considered in Smidth & Co. v. Greenwood (1920) 3 K.B. 275. That section runs as follows:
A non-resident person shall be chargeable in respect of any profits or gains arising whether directly or indirectly through or from any branch factorship, agency, or receivership or management and shall be so chargeable under Section 41 of the Income-Tax Act, 1842, as amended by this section, in the name of the branch factor, agent, receiver or manager,
18. Rowlatt, J., observed:
The scope of this section is not very clear, but I am not prepared to hold that its effect is to bring into taxation profits made by non-residents from a trade not exercised in the United Kingdom. To make an extension in the scheme of taxation of that magnitude and importance the Court is entitled to look for words of clear and direct enactment.
19. In the Court of appeal (5) Lord Stern-dale, M.R. observed:
Section 31 is only for the purpose of extending the operations of Section 41 of the Income Tax Act 1842. That section is not a charging section and only relates to the method of charging persons who are made chargeable under Schedule D. The duties mentioned in that section are the duties charged by Schedule D. It has been called only a machinery section i.e., section which provides a method of carrying out the charge imposed by Schedule D. I think this is its effect, and the expression 'machinery' has no doubt often been used, and is convenient but I think it has also often been used in a wider sense than was intended by those who first used it, and may be fallacious, and I prefer not to use it. Section 81, Sub-section 1; I think, clearly does nothing more than extend the method provided by Section 41 of carrying out the charge imposed by Schedule D, and it would be very strange if another sub-section of the same section imposed an entirely new charge not within the schedule at all. I agree with Rowlatt, J., that such a thing, if intended should be carried out with the greatest clearness, and that if a reasonable meaning can be given to the sub-section without producing that effect a meaning should be given. I think this meaning can be given to it by adopting the construction suggested by the respondents, namely, that it merely points out or, so to speak, sums up the effect of Section 41 of the Act of 1842 as extended by Section 31 of the Act of 1915, still keeping within the limits of the charge of Schedule D.
20. In the House of Lords (6) Lord Buck-master referring to Section 31 (2) of the Finance Act, 2 of 1915, observed:
The appellant argued that the effect of that sub-section is to extend the operation of Schedule D of the Act of 1853 and to render the respondent liable to be assessed for income-tax, even though upon the facts they did not exercise trade within the United Kingdom. I am unable to accept the argument that the sub-section has that effect. It is I think important to remember the rule, which the Courts ought to obey, that, where it is desired to impose a new burden by way of taxation, it is essential that this intention should be stated in plain terms. The Courts cannot assent to the view that if a section in a taxing statute is of doubtful and ambiguous meaning, it is possible out of that ambiguity to extract a new and added obligation not formerly cast upon the tax-payer. Sub- Suction 2 here is at the best a sub-section of an extremely doubtful character, and I think there is very great weight in the argument that has been placed before your Lordships by Sir William Finlay and Mr. Bremner that, as the original charging power of the earlier statutes was derived from their schedules, if it were desired to affect and alter the operation of those schedules some clearer and better reference should have been made to their terms than the obscure and indirect reference that must be found in the section under consideration.
21. The charging provisions of the English Income Tax Acts are to be found in the schedules, and Schedule D of the English Act of 1842 (5 and 6 Vic. C. 35 which is similar to that of the English Act of 1918) provides that tax under that schedule shall be charged in respect of
(a) the annual profits or gains arising, or accruing:
(i) to any person residing in Great-Britain from any kind of property whatever, whether situate in Great Britain or elsewhere, and
(ii) to any person residing in Great Britain from any profession, trade, employment, or vocation, whether the same shall be respectively carried on in Great Britain or elsewhere, and (iii) to any person whatever whether a subject of Her Majesty or not, although not resident within Great Britain from any property whatever in Great Britain, or from any profession, trade, employment or vocation exercised within Great Britain.
22. Section 41 of the same Act provided as follows:
And be it enacted that the trustee, guardian, tutor, curator or committee of any person being an infant, or married woman, lunatic, idiot or insane, and having the direction, control, or management of the property or concern of such infant, married woman, lunatic, idiot or insane person, whether such infant, married woman,, lunatic, idiot or insane person shall reside in Great Britain or not, shall be chargeable to the said duties in like manner and to the same amount as would be charged if such infant were of full age, or such married woman were sole, or such lunatic, idiot, or insane person were capable of acting for himself; and any person not resident in Great Britain, whether a subject of Her Majesty or not, shall be chargeable in the name of such trustee, guardian, tutor, curator, or committee, or of any factor, agent or receiver, having the receipt of any profits or gains arising as herein mentioned, and belonging to such person, in the like manner and to the like amount-as would be charged if such person were resident in Great Britain, and in the actual receipt thereof: and every such trustee, guardian, tutor, curator, committee, agent or receiver shall be answerable for the doing of all such acts, matters. and things as shall be required to be done by virtue of this Act in order to the assessing of any such person to the duties granted by this Act and; paying the same.
23. The Finance Act (No. 2) 1915, 5 & 6 Geo. V. C. 89, Section 31 lays down:
(1) Section forty-one of the Income-Tax, 1842 (which relates to the charge of Income-Tax in special cases) shall, so far as it relates to the taxation of non-residents be extended
(a) so as to make non-resident persons chargeable to income-tax in the name of any factor, agent or receiver; and
(b) so as to make non-resident persons so chargeable although the branch, factor, agent, receiver or manager may not have the receipt of the profits or gains of the non-resident.
(1) A non-resident person shall be charged in respect of any profits or gains arising whether directly or indirectly through or from any branch, factorship, agency, receivership or management, and shall be so chargeable under section forty-one of the Income-Tax Act, 1842 as amended by this section in the name of the branch, factor, agent, receiver or manager.
24. As pointed out by Lord Sterndale, M.R. in Smidth and Co. v. Greenwood (1921) 3 K.B. 583 the duties mentioned in Section 31 (of the English Finance Act, 1915) are the duties charged under Son. D (of the Income Tax Act of 1842) and Sub-section (2) of Section 31 does nothing more than extend the method provided by Section 41 of carrying out the charge imposed by Schedule D, and 'it would be very strange if another sub-section of the same section (Sub-section 2) imposed an entirely new charge not within the schedule at all...such a thing, if intended, should be carried out with the greatest clearness and that a reasonable meaning can be given to the sub-section without producing that effect, such a meaning should be given.' It appears from the last part of Schedule D of the In-coma Tax of 1842 that the profits or gains of a non-resident must arise from trade etc., exercised within the United Kingdom, and as Lord Sterndale, M.E. says it merely points out or, so to speak, sums up the effect of Section 41 of the Act of 1842 as extended by Section 31 of the Act of 1915 still keeping within the limits of the charge of Schedule D. In other words the liability to tax is controlled by Schedule D under which it is essential that the profits should accrue or arise from trade, etc., exercised within the United Kingdom, and that the territorial limits imposed by Schedule D cannot be taken to have been widened unless by clear words to that effect. It is contended by the learned Advocate-General that the Indian Income-Tax Act, VII of 1918 does not recognize the territorial limit. Under Section 3 of that Act income in certain cases for purposes of the Act shall be deemed to be profits accruing or arising or to be received in British India, which indicates that income in certain cases, though not actually accruing, arising nor received in British India, shall for the purposes of the Act be deemed to have accrued, arisen or been- received in British India. The Indian Act therefore differs from the English Act in this respect. Although, therefore, Section 31(1) of the Indian Act, VII of 1918 is similar to Section 31 of the English Finance Act, 1915, there is the distinction that in the former there are no such words as appear in the latter, viz., 'shall be deemed to be income accruing or arising within British India.'
25. The Madras High Court in the case of the Board of Revenue v. The Madras Export Company A.I.R. 1923 Mad. 422 which in its facts is similar to the present case, as followed the English case of Smidth v. Greenwood (1920) 3 K.B. 275. It has held that Section 33 (1) of the Indian Income Tax Act did not create a new category of income which could be charged under the Act in addition to incomes mentioned under Section 5 as chargeable under the Act, but that Section 33 (1) merely provided a machinery by which non-resident foreigners (amongst others) trading in British India or having business connexion in British India could be taxed on income derived by them in British India. But the learned Judges do not appear to have noticed the difference between the Indian Act and the English Act in so far as the former lays down that certain profits, though not arising or accruing in British India, shall be deemed to arise or accrue in British India.
26. There are several matters however which have to be considered and which have been urged on behalf of the company. The first is the position of Section 33 in the Act. As stated above it comes under Chap. IV headed 'Liability in special cases.' It is to be observed that Sections 31 and 32 dealing with certain special cases (such as guardians of persons under disability, trustees, agents, or Court of Wards, etc., merely lay down that the tax is to be levied upon and recoverable from certain persons, while Section 33 (1) provides that with regard to non-resident persons, income in certain cases shall be deemed to be income accruing or arising within British India. The provision would perhaps most appropriately come in after Section 4 (2) of the Act XI of 1922 which deals with the converse case:
Profits and gains of a business accruing or arising without British India to a person resident in British India shall be deemed to be profits and gains of the year in which they are received or brought into British India 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.
27. Section 3 of Act VII of 1918 which comes under Chapter I headed 'Taxable income' expressly lays down that the Act shall apply not only to income accruing, arising or received in British India, but also to such income which under the provisions of this Act is ' deemed to accrue, arise or to be received in British India. ' That section contemplates some provisions in the Act according to which income though not actually accruing or arising in British India shall be deemed to have so accrued or arisen, and if a section in the subsequent part of the Act clearly lays down in what cases it shall be so deemed, such provisions must be taken as incorporated in Section 3 which deals with ' Taxable income,' and the mere fact that such provision could have been more appropriately placed in some other part of the Act, cannot take away its effect, if the meaning of the provision is clear.
28. Section 7 and 11 of Act XI of 1922 show that income arising out of British India may' in some cases, be deemed chargeable with tax. The first head of taxable income under Section 6 is ' Salaries' and Section 7 (2) lays down: ' Any income which would be chargeable under this head if paid in British India shall be deemed to be so chargeable if paid to a British subject or any servant of His Majesty in any part of India by Government or by a local authority established by the Governor-General in Council. ' The 5th head is ' Professional Earning' and Section 11 (3) provides that ' Professional fees paid in any part of India to a person ordinarily resident in British India shall be deemed to be profits or gains chargeable under this head.' It may be said that Sections 7 and 11 appear under Chapter III headed 'Taxable income,' and Sections 7 and 11, along with others, lay down in detail what would some under the 'heads' of income I to VI in Section 6. That is so, and we refer to these sections merely as illustrations of cases in which the income, though not arising in British India, shall be deemed to be chargeable with tax.
29. The next point for consideration is that Section 33(1) speaks of profits or gains through or from any business connexion in British India, whereas Section 5 merely mentions, ' Income from business '. If by the expression ' business connexion ' in Section 33 (1) was meant something different from ' business ' in Section 5, then it would be going beyond the classes of income which alone according to Section 5 are chargeable to income-tax. Section 6 of Act XI of 1922 uses the word ' heads ' instead of ' classes.' The former expression seems to have been substituted to make it more comprehensive; we think the same thing was meant by the two expressions ' business ' and ' business connexion,' and for this reason, even if Section 33 (1) be taken as a ' machinery ' section, as contended on behalf of the company the agent cannot be charged with income-tax nor can the agent be deemed the assessee in respect of the income-tax, unless the principal is chargeable.
30. The principal is chargeable with tax upon income from ' business,' and unless the expression ' business connexion ' in Section 33 (1) was used in the same sense as 'business' in Section 5, the principal cannot be charged, and a fortiori the agent cannot be charged with the tax. The section accordingly, even as a machinery section, would be useless.
31. The English Finance Act (No. 2) of 1915, Section 31 (2) uses the words ' through or from any branch, factorship, agency, receivership or management' and the comprehensive expression ' business connexion' was probably used in the Indian Act to cover all those words.
32. Then it is pointed out that the word ' property' in Section 42 (1) (which was not in the previous Act VII of 1918) indicates the section could not but be a ' machinery ' section. It is contended that the profits of 'property ' in British India must accrue or arise in British India and the fact that the profits of ' property' also shall in some cases be deemed to be profits accruing or arising in British India indicates that the section was merely intended to provide for the method in which the tax was to be realized.
33. The word 'property' seems to have bean taken from the English Act, though the expression does not appear to have been considered in the English cases cited above. It is possible to conceive of cases where a property may be situate in British India and the profits thereof may accrue or arise out of British India.
34. The English Income Tax Acts lay down a territorial limit. The Indian Act II of 1886 followed the English Law, but in Act VII of 1918 and Act XI of 1922, the Indian Legislature appears to have gone beyond that limit. Whether that is politic and whether it contravenes the comity of nations, it is not for us to consider. We have to construe the Act, and having regard to the essential difference in language between the English and Indian Acts upon the point under consideration, we are unable to follow the English authorities decided with reference to the English statutes, or the Madras case referred to above. We accordingly hold that the company are liable to pay income-tax having regard to the 'provisions of Section 33 (1) read with Sections 3 and 5 of Act VII of 1918 and Section 42(1) read with Sections 4 and 6 of Act XI of 1922.
35. So far as the factory at Wyndhamgunj is concerned, it clearly comes within the Act. Admittedly there is a manufacturing branch of the company at that place, and under Section 2, Clause (3) of Act VII of 1918, business' includes among other things any 'manufacture.' The income therefore from such manufacture would be income from 'business,' and as such taxable under Sections 3 and 5 of the Act.
36. We make no order as to costs.
37. I have read the judgment just now delivered by my learned brother Chatterjea, J. and I entirely agree in the conclusions he has arrived at. In view, however, of the importance of the questions involved I desire to make some further observations.
38. Before dealing with the cases decided under the English statutes to which our attention has been drawn, I propose first of all to deal with the relevant provisions of the Indian Acts. For this purpose, it is not very material to advert to the provisions of Act II of 1886, or the enactments which preceded the same or the subsequent amendments incorporated into the said Act by Act V of 1916 and Act XI of 1922. A perusal of the several enactments makes it clear that the Income Tax Act of 1918 (Act VII of 1918) effected a radical change in the scheme and scope of operation of this branch of law. The Act of 1918 professes to be a consolidating and amending statute: on any point specifically dealt with in the Act the law is to be ascertained by interpreting the language used in the statute in its natural meaning, uninfluenced by considerations derived from the previous state of the law: Administrator-General v. Premlal (1895) 22 Cal. 788 Norendra v. Kamalbasini (1896) 23 Cal. 563 and Ramados v. Amarchand & Co. A.I.R. 1916 P.C. 7. Reference to the previous state of the law would be permissible for the purpose of aiding in the construction of a new statute if any provision therein is of doubtful import: Bank of England v. Vagliano Bros (1891) A.C. 107; Robinson v. Canadian Pacific Ry. (1892) A.C. 481; Morsey Docks v. Cameron (1864) 11 H.L.C. 443. I propose therefore to deal with the questions which arise on this Reference primarily in the light of the provisions of Act VII of 1918. The question as to what change, if any, was effected by Act XI of 1922 will be considered later.
39. Reading Section 3 (1) and Section 5 of that Act it would appear quite clearly that the Legislature expressly enacted that, save as otherwise provided by the Act, all income that is to say, salaries, interest on securities, income derived from house property, income derived from business, professional earnings, and income derived from other sources is chargeable to income-tax provided it accrues or arises or is received in British India, or is under the provisions of the Act, deemed to accrue or arise or to be received in British India.
40. The section is divided into two parts: the first part deals with a reality, i.e., where the income accrues or is received in British India; the second part deals with a legal fiction, i.e., where the income is deemed to accrue or arise or be received in British India. A close examination of the provisions of the Act discloses that the fiction does not purport to transform something unreal into real; the income is there; it has accrued, or arisen or been received; the fiction only fixes the place where it is to be deemed as having accrued arisen or been received, and the fiction is resorted to in order to make some person other than the beneficiary liable.
41. There is no provision in the Act under which income is deemed to be received in British India. There is only one provision, and that is contained in Section 33 (1) under which income is deemed to accrue or arise in British India. Beading Section 3 (1) and 33 (1) together it would appear that it is income which really accrues or arises or is received in British India that is liable to tax; by a fiction some kinds of income which accrues or arises to a person not resident in British India is deemed to accrue or arise in British India (ignoring the aspect that it accrues or arises to a person outside British India) for the purpose of realizing the same from an agent resident in British India. All these kinds of income however are such as may be said to have accrued or arisen at different places in British India by reason of its having been the direct or indirect result of some business connexion there or out-Bide British India where the ultimate transactions producing the profits or gains took place-but under the Act they are deemed to have accrued or arisen in British India so as to be taxable under the Act and recoverable by making some-person in British India responsible for its payment. To appreciate correctly the exact significance of these sections a detailed examination of some of the provisions of the Act is necessary.
42. First of all, turning to Section 3 (1) of the Act, we find the word ' income' used there. Now, what is income? The term is nowhere defined in the Act. The definitions of ' agricultural income ' and ' total income' as contained in Section 2 afford very little assistance in determining what is meant by income. In the absence of a statutory definition, we must take its ordinary dictionary meaning; ' that which comes in as the periodical produce of one's work, business, lands or investments, considered in reference to its amount and commonly expressed in terms of money; annual or periodical receipts accruing to a person or corporation ' (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. 'Accrues' 'arises' and 'is received,' are three distinct terms. So far as receiving of income is concerned, there can be no difficulty; it conveys a clear and definite meaning and I can think of no expression which makes its meaning, plainer than the word 'receiving' itself.
43. The words 'accrue' and 'arise' also are? not defined in the Act. The ordinary dictionary meanings of those words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three-expressions 'accrues,' 'arises' and 'is received' having been used in the section, strictly speaking, 'accrues' should not be taken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage, while the word ' arises,' means comes into existence of notice or presents itself. The former connotes the idea of a growth or accumulation, the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases.
44. It is clear, however as, pointed out by Pry, L. J., in Colquhoun v. Brooks (1888) 21 Q.B.D. 52 this part of the decision not having been affected by the reversal of the decision by the House of Lords (1889) 14 A.C. 493 that both the words are used in contradiction to the word ' receive ' and indicate a right to receive. They represent a stage anterior to the point of time when the income be-comes receivable and connote a character of the income which is more or less inchoate.
45. One other matter need be noted in connexion with the section. What is sought to be taxed must be income, and it cannot be taxed unless it has arrived at a stage when it can be called ' income.' In order to determine whether it is taxable under the Act the place where it has accrued or has arisen or has been received has got to be ascertained. The section ignores the person and only takes into account the place where the income accrues, arises or is received. Income may accrue at one place, arise at another and be received at a third. Again it may accrue or arise in respect of or out of something situated at one place but accrue or arise to a person at a different place.
46. To apply the provisions of Sections 3 (1) and 5 aforesaid to concrete cases, six different classes of cases will have to be taken into account: viz., where the income accrues in British India, where it is deemed to accrue in British India, where it arises in British India, where it is deemed to arise in British India, where it is received in British India and where it is deemed to be received in British India. Upon the plain meaning of the two sections aforesaid in all the above classes of cases the income, provided it comes within one or other of the classes of income, mentioned in Section 5 and is not otherwise saved or excepted by the Act is chargeable to tax. Once an income is found to exist it will have to be examined whether it has accrued or arisen or been received in British India. If so, it is chargeable. If not, the provisions of the Act will have to be looked into to find whether there is any provision under which it is deemed to accrue or arise or to be received in British' India.
47. Now of the six classes of cases aforesaid the last two may be dealt with in very few words. If the income is received in British India no matter wherever it may have arisen or accrued, that is to say, if it is received by a resident in British India from sources that lie outside, it is taxable. If it is income derived from an outside source and is received outside British India by a person resident in British India it is chargeable if this receipt outside is deemed under the Act to be receipt within British India,
48. The Act does not expressly say what income received by a person outside British India shall be deemed to be received in British India, so as to be chargeable to tax by the operation of Section 3 (1). So far as receipt outside British India is concerned there are two instances where such receipt has been made chargeable. The Act by Section 10, Sub-section (3) has made provision for a particular case of this nature by enacting that professional fees paid in any part of India to a person ordinarily resident in British India shall be deemed to be income chargeable under the head of professional earnings. By Section 6, Sub-section (2), any income which would be chargeable under the head of salaries if paid in British India shall be deemed to be so chargeable if paid to a British subject or any subject or any servant of His Majesty in any part of India by Government or by a local authority established by the Governor-General in Council. I have not been able to discover any other provision in the Act by which income which is received outside British India land which neither accrues nor arises in British India nor is deemed by Act to accrue or arise in British India) has been made chargeable. Both these cases how-aver are cases where the imposition may be justified by the consideration that in one the income has accrued to a person who is ordinarily a resident of British India and in the other it has accrued or arisen to a British subject or a servant of His Majesty and has been paid out of the British India Exchequer and has so accrued or arisen in British India.
49. To turn, then, to the first four classes of cases, for the sake of brevity and convenience they may be dealt with as really of two kinds-the distinction between 'accruing' and 'arising' being left out of account for the moment. Taking the cases of a resident and a non-resident separately in. connexion with the accruing or arising of income as aforesaid, the position is this: If income accrues or arises in British India either to a resident or a non-resident it is chargeable; for, as already observed Section 3 does not make any distinction between residents and non-residents.
50. In the case of a non-resident such or so much of his income as arises or accrues to him whether directly or indirectly from any business connexion in British India, is under Section 33 (1) to be deemed to accrue or arise in British India, and is so chargeable under the Indian Income-Tax Act. It will be seen from the very nature of the cases contemplated by the section that no Income which does not represent profits or gains, not accruing or arising in a point of fact within British India has been made chargeable by this section, nor is a non-resident made liable by this section, as he is already liable by reason of Section 3 of the Act. The profits or gains made chargeable are profits or gains which have accrued or arisen within British India. Section 33 (1) therefore in my opinion does not go beyond Section 3 in any respect; it really makes no income chargeable which is not chargeable under Section 3; it imposes no liability on a non-resident which is not imposed by Section 3; it merely explains what kind of income, in fact, arising or accruing in British India to a resident outside is to be deemed as arising or accruing in British India for the purpose of the Act and provides for a method of realization, namely by assessing the agent and holding him liable for the payment of the tax. It is interesting to note that whereas in Section 3 (1) it is the income that is charged to tax, in Section 33 (1) the 'profit' or 'gains' are deemed to be the income so liable, indicating that only so much of the income as represent that profit or gains derived under conditions specified in the section are so deemed.
51. The section, as I read it, only means that the non-resident assessee is to be made liable to tax for such profits or gains which accrue or arise to him directly or indirectly through or from any business connexion within British India. He may have received the income outside British India; it may have accrued or arisen to him when he was outside British India; but the same or such part of it as may be taken to be profits or gains accruing or arising through such connexion is to be deemed as income accruing or arising in British India and so chargeable to tax.
52. In my opinion, in such cases it will have to be ascertained by the taxing authorities what profits or gains (out of the income made by such a person) accrued or arose to such person, directly or indirectly, through or from any business connexion in British India. This to my mind is the plain interpretation of the statute. The accrual or arising of income to a person is different to my mind from the receipt of the income by him; and the overlooking of I this distinction in my opinion creates at confusion and makes the interpretation difficult.
53. The argument that Section 33 (1) is only a 'Machinery Section' and should not be treated as a 'charging section' loses all its force in the light of this interpretation. As already observed the charging section in the Act is Section 3. Section 33 (1) does not mean to travel beyond Section 3. Its position in chapter IV is not altogether undeserved as it really imposes a liability on the agent as a special case. The drafting of the section however is not free from defects.
54. We are not concerned with the policy of the legislature or the question whether the statutes infringe any principles regarded sacred by the comity of nations. But at the same time, I do not see how the above interpretation will lead to unreasonableness or absurdity as it would only charge to tax profits or gains which may be attributable to business connexion in British India. It is obvious, that if they are attributable to such connexion there is no reason why they should not be legitimately charged to tax. It is sufficient to say that the imposition of a tax under circumstances such as these would not in any way militate against the well-known principle that the power of taxation of any state is, of necessity, limited to persons, property or business within its territorial jurisdiction.
55. This brings us to the next question as to what is meant by 'business connexion.' By Section 4 of the Act 'income derived from business' is liable to tax. It has been argued that unless the income which is now sought to be charged amounts to income derived from business, it would not be chargeable under Section 3 (1); and that Section 33 (1) by enacting that profits and gains accruing or arising directly or indirectly through or from business connexion with British India professes to make something chargeable which is not chargeable under Section 3 read with Section 5. The answer to this argument however is that Section 5, Clause (VI) includes 'income from all other sources' and by Section 11 'income derived from all other sources' include income and profits of every kind and from every source to which the Act applies if not included under any of the preceding heads, i.e. (I) to (V). But even if it be argued that income derived from all other sources may not refer to income of this description-a question with regard to which I do not wish to pronounce any definite opinion-I do not see why 'profits and gains from business connexion' should not be included in the general expression 'income derived from business' which is used in Section 5. The expression, it must be admitted, is dangerously vague and it is much to be regretted that in a fiscal enactment a more precise expression has not been used. The meaning, however, does not admit of much doubt: for the context shows that it is such gains or profits as may be calculated to have been made as being that part of the income of the nonresident which is attributable to the connexion he has with a business in British India. The word 'business' is one of' large and indefinite import and connotes something which occupies attention and labour of a person for the purpose of profit. The word means almost anything which is an occupation or a duty requiring attention as distinguished from sport or pleasure and is used in the sense of an occupation continuously carried on for the purpose of profits: Smith v. Anderson (1880) 15 Ch. D. 273; Bolls v. Miller (1884) 27 Ch. D. 71; Re Marina Steam Turbine Co. (1920) 1. K.B. 193. A concern by reason of which one can be said to have connexion with such an occupation is business connexion.
56. Act XI of 1922 emphasises the distinction between 'income' and 'profit' or 'gains' by introducing profits and gains in Section 4 which is the charging section corresponding to Section 3 of Act VII of 1918 and instead of the expression 'classes of income and income derived from business' in Section 5 of the latter Act, speaks of 'Heads of Income, profits and gains' and 'Business' in Section 6; In Section 42 of Act XI of 1922 we find the words 'business connexion or property' in the place of the words 'business connexion' in the corresponding Section 33 (1) of Act VII of 1918. These amendments cast the net wider, by including profits or gains arising or accruing from property as well. It is not inconceivable as to how a non-resident can have profits or gains accrued to him through or from property in British India, e.g., if a property in British India is lot out or the value of property in British India is increased and profits or gains accrue or arise but accrue or arise to a non-resident, Section 42 (1) will bring these profits and gains within the Act, they being deemed to have accrued or arisen within British India. Such profits or gains accrue in British India where the property is situate though they may acquire only a tangible shape where they are actually received. A further amendment in the shape of the introduction of a sub-section, viz., Sub-section (2) together with an explanation as to what is or is not to be deemed to be received into British India is also noticeable.
57. Turning now to the English Statutes in Colquhoun v. Brooks (1888) 21 Q.B.D. 52, Lord Herschell observed: 'The Income Tax Acts themselves impose a territorial limit; either that from which the taxable in-coma is derived must be situate in the United Kingdom or the person whose income is to be taxed must be resident there.' This fundamental principle of the English statutes does not appear in Act VII of 1918 or Act XI of 1922. The question of residence does not arise nor any territorial limits are recognized by 'one charging sections of the said Acts. Under the Income-Tax Act, 1842 (5 and 6 Via. C. 35) and the Income-Tax Act, 1853, (16 & 17 Vic, C. 34) the duty is charged upon annual profits and gains in the nature of income from whatever source derived and is imposed under Section 5, Schedules A to E inclusive, which are framed to include all such sources of income. Schedule D, the operation of which is limited to the classes of income not charged under any other Schedule charges to tax income 'for and in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom from any kind of property whatever, whether situate in the United Kingdom or elsewhere and for and in respects of the annual profits or gains arising or accruing to any person residing in She United Kingdom, from any profession, trade employment or vocation, whether the same shall be respectively carried on in the United Kingdom or elsewhere' 'And for and in respect of annual profits or gains arising or accruing to any person whatever, whether a subject of Her Majesty or not although not resident within the United Kingdom, from any property whatever in the United Kingdom or any profession, trade, employment or vocation exercised within the United Kingdom.' In the case of a non-resident, therefore, the question would arise as to whether the profits or gains have arisen or accrued to him from any trade exercised within the United Kingdom.
58. In Sully v. The Attorney-General (1860) 5 H. and N. 711 it was held that wherever a merchant is established, in the course of his operations his dealings must extend over various places; he buys in one place and sells in another but he has one principal place in which he may be said to trade viz., where his profits come home to him, and that is where he exercises his trade. In the Indian statute the question where the trade is exercised does not come in at all.
59. In Gainger & Son v. Gough (1896) A.C. 325 it was held that a foreign merchant who canvasses through agents in the United Kingdom for orders for the sale of his merchandise to customers in the United Kingdom, does not exercise a trade in the United Kingdom within the meaning of the Income-Tax Acts, so long as all contracts for the sale and all deliveries of the merchandise to customers are made in a foreign country. Lord Herschall in that case observed that there is a broad distinction between trading with a country, and carrying on a trade within a country. Lord Watson observed that there may be transactions by or on behalf of a foreign merchant in one country so intimately connected with his business abroad that without them it cannot be sufficiently carried on, which are nevertheless insufficient to constitute an exercise of the trade within that country within the meaning of Schedule D. Lord Watson further want on to observe referring to the case of Sulley v. Attorney-General (1860) 5 H. and N. 711 as follows:
The learned Judges recognised the principle that purchasing of stock in this country with the view of trading in it elsewhere, does not of itself constitute, an exercise of that trade in the United Kingdom when that department of the business from which profits as gains are directly realized is carried on in another country.
60. These observations indicate that profits or gains may accrue or arise to a non-resident or may be realized or received by him in respect of business in a country which does not amount to exercise of trade in that country, and that such profits or gains may arise directly or indirectly.
61. The English statutes by using the words 'from any trade exercised within the United Kingdom' left such profits or gains free, while the Indian Acts using a different phraseology in their charging sections included them. By the terms of Section 33(1) of Act VII of 1918 and Section 42(1) of Act XI of 1922 they are to be deemed to have accrued or arisen in British India for the purpose of making the resident agent responsible for the tax. Section 41 of the Act of 1842 may be read as follows: Any person not resident in the United Kingdom, whether a subject of Her Majesty or not, shall be chageable in the name of any factor, agent or receiver having the receipts of any profits or gains arising as herein mentioned.
62. By Section 31, Sub-section 2 of the Finance Act (No. 2) of 1915: 'A non-resident person shall be chargeable in respect of any profits or gains arising, whether directly or indirectly, through or from any branch, factorship, agency, receivership or management and shall be so chargeable under Section 41 of the Income Tax Act, 1842 as amended by this section, in the name of the branch, factor, agent, receiver or manager.
63. In Smidth & Co. v. Greenwood (1922) 1 A.C. 417 the House of Lords affirmed the decision of Rowlatt, J., in Smidth & Co. v. Greenwood (1920) 3 K.B. 275, and of the Court of appeal (1921) 3 K.B. 583. In that case it was held by the Court of appeal that the sub-section was not a charging sub-section but that it merely summed up the effect of Section 41 of the Act of 1842 as extended by Sub-section 1 of Section 31 of the Act of 1915, still keeping within the limits of Schedule D, and it was observed that to hold otherwise would be to hold that such an important alteration has been made in the basis of taxation as the abolition of the condition of exercise of trade within the United Kingdom before a person not there resident can be taxed. 'To take the latter course', Lord Sterndale observed, 'would be to violate the well known canon of construction of taxing Acts that no one is to be taxed except by express words.' The Indian Law does not proceed upon the basis of such a condition but upon the taxability of the income regarded from the point of view of the place where it accrues, arises or is received or is deemed to accrue, arise or be received under the Act. I am unable to assent to the view taken by the Madras High Court in the case of The Board of Revenue v. The Madras Export Company A.I.R. 1923 Mad 422; for it seems to me that the learned Judges in that case proceeded upon the supposition that the legislature intended no change from the earlier statutes which to a large extent were modelled on the English statutes. That there is now a substantial difference is clear, and has been recognised in the cases, amongst others, of Board of Revenue v. Ramanadhan Chetty (1919) 43 Mad. 75 and In re Aurangabad Mills A.I.R. 1921 Bom. 159 and In re A. John & Co. (1920) 43 All. 139.
64. An objection has bean urged that to include income, which did not arise or accrue in British India to a non-resident of British India, would be to make not actual but 'notional' income chargeable. The taxability of 'notional' income is an idea not foreign to the Act; for by Section 8 of the Act bona fide annual value of property has bean made assessable as being income which has accrued to the property, though it may not have actually arisen from it. It is notional in the sense that its quantum has to be determined by calculation but it is real in the sense that it has actually accrued.
65. In my opinion therefore the answers to the questions submitted for our decision should be in the affirmative.
66. The question as to how the profits or gains attributable to business connexion in British India have to be calculated or ascertained is not a matter within the scope of this Reference. The Board of Inland Revenue in the Exercise of the powers conferred by Section 59 of the Indian Income-Tax Act (XI of 1922) have framed certain rules of which Rule 33 runs as follows:
In any case in which the Income Tax Officer is of opinion that the actual amount of the income, profits or gains accruing or arising to any person residing out of British India whether directly or indirectly through or from any business connexion in British India cannot be ascertained, the amount of such income, profits or gains for the purpose of assessment to income-tax may be calculated on such percentage of the turnover so accruing or arising as the Income Tax Officer may consider to be reasonable, or an amount which boars the same proportion to the total profits of the business of such person (such profits being computed in accordance with the provisions of the Indian Income Tax Act), as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income-Tax Officer may deem suitable.
67. The Rule is drawn from the English statutes and its sufficiency or validity is not a matter for our consideration in this Reference.
68. I agree.