BANERJEE J. - The following questions of law have been referred to us for opinion.
'(1) Whether, on the facts and in the circumstances of this case, the amount of Rs. 3,43,138 received by the assessee was derived from a source of category of transaction mentioned in item 5(g) of the schedule to the Agreement for the Avoidance of Double Taxation on Income between India and Pakistan ?'
(2) If the answer to the above question be in the negative, then whether the aforesaid sum fell under item 9 of the schedule to the aforesaid Agreement ?'
The circumstance under which the aforesaid two question come up for our consideration are hereinafter stated in brief. The assessee, Bangle River Service Company Limited, was, at the material time, carrying on the business of playing of river boats. The assessment year with which we are concerned in this reference is 1947-48, corresponding to the calendar year 1946, which is the accounting year. At a period of time when there had been no partition of India, certain vessels belonging to the assessee were requisitioned by the then Government of India 'on charter basis'. It appears from the chart annexed to the statement of case that five vessels belonging to the assessee were requisitioned, in the year 1941, and seven other were requisitioned in the year 1945. The first lot of 5 vessels requisitioned in Calcutta and were all derequisitioned, also in Calcutta, in the year 1947. The other seven vassals requisitioned, also at Narayangunj and were derequisitioned, also at Narayangunj, in the year 1947. We are, however, in this Difficult position that we do not have the order of requisition on our records and we do not know under which particular of requisition had been made although we are inclined to think that such requisition may have been made under the provision of the Defence of India Rules, which were in operation at that time Also, we do not have the document of charter party on our records and do not know the terms thereof. Normally, for requisition of property compensation is payable. We would have proceeded on the basis that the sum of money that was being paid to the assessee on account of the requisition, was compensation but the case proceeded on the basis that the money paid to the assessee was either vessel hire or vessel rent and may be treated as income. In the absence of the orders of requisition made and the charter, in which the agreement between the parties for user of the vessels by the Government was included, no contention was raised before us that the money received by the assessee would not be income being compensation paid for requisition of property. We make this position clear at the outset, in order to emphasised upon the very narrow limits within which the arguments advanced both on behalf of the revenue and the assessee were encompassed.
At the point of time when the assessment was taking place partition of British India and Pakistan had already taken place. It is well-known that the partition of India brought many problems in its wake. One such problem was the problem of double taxation for businessmen, who used to carry on business in both the geographical localities which ultimately became India and Pakistan. In order to solve their difficulties, there was an agreement between the then Dominions of India and Pakistan known as the Agreement for Avoidance of Double Taxation in India and Pakistan. It is necessary for use to refer to certain portions of that Agreement which was notified on December 10, 1947 :
'In exercise of the powers conferred by section 49AA of the Indian Income-tax Act, 1922 (XI of 1922), section 11A of the Excess Profit Tax Act, 1940 (XV of 1940), and section 18A of the Business Profits Tax Act, 1947 (XXI of 1947), as adapted by the India (Adaptation of Income-tax, Profit Tax and Revenue Recovery Acts) Order, 1947, the Central Government is pleased to direct that all provisions of the annexed agreement for the avoidance of double taxation income, profit and gains under the said Acts which has been concluded between India and Pakistan shall be given effect to in the Dominion of India.
Whereas the Government of the Dominion of India and the Government of the Dominion of Pakistan desire to conclude an Agreement for the avoidance of double taxation of income chargeable in the two Dominions in accordance with their respective laws :
Now, therefore, the said two Government do hereby agree as follows :
Article IV. - Each Dominion shall make assessment in the ordinary way under its own laws; and where either Dominion under the operation of its laws charges any income from the sources or categories of transactions specified to column I of the Schedule to this Agreement (hereinafter referred to as the Schedule) in excess of the amount calculated according to the percentage specified in columns 2 and 3 thereof, that Dominion shall allow an abatement equal to the lower amount of tax payable on such excess in their Dominion as provided for in Article VI.
Article VI. - (a) For the purposes of the abatement to be allowed under Article IV or V, the tax payable in each Dominion on the excess or the doubly taxed income, as the case may be, shall be such proportion of the tax payable in each Dominion as the excess or the doubly taxed income bears to the total income of the assessee in each Dominion.
(See Article IV)
Source of income or nature of transaction from which income is derived.
Percentage of income which each Dominion is entitled to charge under the Agreement
2 1 3
5. Income from 'business' or 'other sources' :
(g) Transport (Ships, Air, Road).
100 per cent. By the Dominion in which the traffic originates.
Nil by the other.
9. Any income derived from a source or category of transactions not mentioned in any of the foregoing items of this Schedule.
100 per cent. By the Dominion in which the income actually accrues or arises.
Nil by the other.
It appears from the statement of case that the assessee earned Rs. 3,43,138 in Calcutta and Rs. 7,296 in Narayangunj (Pakistan). The Income - Tax Officer held that the vessel hire rent to the tune of Rs. 3,43,138 was income earned in the Indian Dominion and Rs. 7,296 amounted to income earned in Pakistan and assessed the income accordingly. In so doing, he applied the provisions of item 9 of the Schedule to the Agreement for Avoidance of Double Taxation in India and Pakistan hereinbefore quoted. The assessee disputed that the aforesaid sum of Rs. 3,43,138 received in India (since partitioned) was an income exclusively received in India and claimed that the income must be deemed to be covered by item 5(g) of the Schedule to the Agreement and be taxed accordingly. This contention did not appeal to the Income-tax Officer and he taxed the income in accordance with the provisions of item 9 of the Agreement.
Aggrieved by the order, the assessee appealed before the Appellate Assistant Commissioner, who affirmed this part of the assessment order of the Income-tax Officer with the following observation :
'... The appellant urges that the vessel hire earned by the assessee-company should be taken in the same category as fright and the allocation of the inter-Dominion share should have been made accordingly. I find, however, that the vessels were requisitioned by the Government of India and the vessel hire arose and accrued in India and the assessee can adduce no evidence to prove that any expenses were paid by the assessee-company and debited to the profit and loss account. Hence, I find that the allocation made by the Income-tax Officer is quite correct.'
Thereupon, the assessee took an appeal before the Income-tax Appellate Tribunal which differed both from the Income-tax Officer and the Appellate Assistant Commissioner, on the following grounds :
'During this period, the Government requisitioned boats on the charter basis. The payment on account of charter was upon the tonnage of goods carried. The assessee received Rs. 3,43,138 in the Indian Dominion (since partitioned) and Rs. 7,296 in Pakistan (since partitioned). The Income-tax Officer held that so far as the amount of Rs. 3,43,138 was concerned, it was an income exclusively received in India and was not covered by item 5 (g) of the Schedule to the Agreement for Avoidance of Double Taxation in India and Pakistan. The Appellate Assistant Commissioner concurred with this view. It was argued before us that there was no material to hold that the chartered boats were hired exclusively from Indian port of the income was also in the nature of freight earned by the assessee and should come under the head of 5(g) of aforesaid agreement.
In our opinion, this argument has some force. The goods were transported through these boats either on the basis of fright payable to the assessee according to the weight and nature of goods or on the basis of agreement of charter by which freight was paid by weight. In our opinion, in makes no difference that the hire receipt on account of charter was on a different footing and it could be very well classed under the head of fright. In this view of the matter, we consider that it should come under the head 5(g) of the Schedule to the Agreement and be referable to income from transport as given under the same Schedule. In this view of the matter we direct that the Income-tax Officer will revise the assessment in accordance with the directions given in this order.'
The Commissioner of Income-tax thereupon obtained reference of the two questions of law hereinbefore quoted to this court for opinion.
Mr. B. L. Pal, learned counsel for the Revenue, did not dispute that, prior to the time when the vessels were requisitioned, the assessee was carrying on business of transport by vessels. The assessee was earning fright for such transport. If the vessels had not been requisitioned, fright earned by the assessee might have been taxed cent. per cent. by the Dominion in which the traffic originated and nil by the other Dominion, under the provision of item 5(g) of the Schedule to the Agreement. The requisition, in his submission, made all the difference. The hire which the assessee was earning, for such requisition, did not fall under 5(g) but fell under the residuary article, namely, article 9 of the Schedule to the Agreement. In support of this contention he invited our attention to a Scotch decision in Sutherland v. Commissioners of Island Revenue, in which the facts were as hereinafter stated. The appellant Sutherland, was the managing owner of a steam drifter which was, until December 15, 1915, engaged in herring fishing. At that date the boat was compulsorily taken over by the Admiralty on hire and assessment of excess profits duty was made for the period ended March, 1916, in respect of profit of the boat including sums received from the Admiralty in respect of hire. The appellant contended that under the hiring, a new and entirely different business was commenced, or alternatively, that the payments made by the Admiralty represented compensation for the stoppage of business. This argument was repelled by the Lord President (Strathclyde) with the following observation :
'The appellant plausibly contends that this his fishing industry was brought to an end by the intervention of the Admiralty and that the hiring by the Admiralty subsequently must be viewed as compensation to him for the stoppage of his business. That is the arguments set out in the stated case, but it was more plausible contended by his causal that when the charter-party was effected the fishing trade came to an abrupt termination and that, under the hiring, a new and entirely different business was commenced, and hence that there was no pre-war standard available on which to base the charge of excess profits duty. And I did not understand it to be disputed that, if the fishing industry came to an end and an entirely new and distinct industry was commenced by hiring under this charter-party, then the Crowns claim for duty would fail. But I am not disposed to view the case in that light.
When the appellant acquired this ship, he acquired her as an instrument or, as the Lord Advocate phrased it, commercial asset, susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant and profit earned he was carrying on the same business, even although alteration were necessary on the vessel for the changed purpose, provided that each of these uses was one for which she as a ship was adapted. It is true in a sense that fishing is a different industry from mine-sleeping, or trading, or patrolling, or watching a gap in boom, or the like, but viewed from the standpoint of the shipowner, they are the same business because in each his vessel, if she earns profits, is employed for gain. It is the same piece of machinery, or implements, or commercial asset which is used to acquire profit. In short the business is that of the employment of a ship for gain in ordinary ship owning business. In other words, if this drifter were put to a purpose for which she as a ship is suitable, then whatever alteration might be necessary in order to adapt her for that use, if she earns profit therein, these profits are, I think, assessable to the excess profits tax.'
It is difficult to appreciate how the case relied upon by Mr. Pal helps him in his argument. If, in spite of the requisition of the vessels, the assessee was carrying on the same trade or business, then the requisition did not altar the nature of the same trade or business, then the requisition did not altar the nature of the business of the assessee. Admittedly, the business of the assessee prior to requisition was transport by ship. Income from such business admittedly came under item 5(g) of the Schedule to the Agreement for Avoidance of Double Taxation in India and Pakistan. There is no dispute on this point. If even after requisition, the assessee was carrying on the same business, there is no reason why the income should not continue to be governed by the same item. Mr. Pal, however, contended that the decision helped him to this extent that the user to which the vessels were put were different user, that is to say, different from the business of transportation. According to him, the different user to which the vessels were put made all the difference. He emphasised upon the explanation of Southerlands case by the Supreme court in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. :
'We, however, are in respectful agreement with the observations of Lord President Strathclyde in Sutherland v. Commissioner of Island Revenue that commercial asset susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant, the profit earned was a user of the asset of the same business. A mere substituted use of the commercial asset does not change or alter the nature of that asset. Whatever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income being immaterial.'
We are again unable to find any support to the argument advanced by Mr. Pal from the Supreme Court decision cited by him. It may be that, prior to the requisition of vessels, the assessee used to enter into private contracts with different parties and under such contract transport their goods. The requisition brought about this change in the business that the assessee was no longer able to enter into such private contracts. The vessels, after requisition, had to be used entirely for the purpose of transport, for which the requisitioning assessee became entitled only to such income as the terms of the charter with the Government entitled him. This, in our opinion, did not introduce any change in the nature of the business, so as to take the business of the assessee out of the description given in item 5(g) of the Schedule to the Agreement and fit it in with the residuary item in article 9 thereof. A source of income namely the business which the assessee used to carry on prior to the requisition and which source admittedly fell under item 5(g) of the Agreement did not become a different source because there was change of customer. Mr. Pal made a last attempt to establish his proposition that, although the business might be the same the source was different. What he intended to argue was that it was the source of income which should be looked into and not the identity of business. He submitted that the source of the income of the assessee in the business, prior to the requisition, was the earning of fright under private contracts for carriage of goods. After requisition the source became receipt of hire for the requisitioned vessels submitted that the source of the income of the assessee in the business, prior to the requisition, was the earning of fright under private contracts for carriage of goods. After requisition the source became receipt of hire for the requisitioned vessels. He submitted that the source under item 5(g) of the Agreement was limited to fright earned by private contract for transport by ship. Under the order of requisition the source was hire of the vessels requisitioned under a charter, which was a different source. He drew our attention to a decision of the Privy Council in Liquidator, Rhodesia Metals Ltd. (In liquidation) v. Taxes Commissioner :
'Source means not a legal concept but something which a practical man would regard as a real source of income the ascertaining of the actual sources is a practical hard matter of fact.'
He submitted that nationally the business might be the same business but as a result of the requisition, the source of the come considerably changed and no practical man would regard the real source of income as income from the transportation business, when, in reality, the income was earned in the shape of hire under an order of requisition. In our opinion, the distinction sought to be established by Mr. B. L. Pal is somewhat thin. The context in which the above observation was made by the Privy Council was like this appellant-company was incorporated in England, and its principal place of business was in that country. It acquired certain mining claims in Rhodesia by a contract made in England. Later, it net into voluntary liquidation and sold its whole undertaking to another company, also incorporated in England, making a considerable profit. This later agreement was also made in England. The sole business of the appellant-company was the purchase and development of immovable property in Rhodesia. It was assessed to the income-tax in respect of the sum of Pounds 1,46,000 land contested the assessment on the grounds, (i) that the amount of Pounds 1,46,000 was of a capital nature, and (ii) that it was not received, and did not accrued, from a source within Southern Rhodesia. The assessment was made under the provisions of the Ordinance of Southern Rhodesia, which proceeded, inter alia, that tax payable on 'the total amount other than receipts proved by the tax-payer to be of a capital nature, received by or accrued to or in favour of any person in any year..... from any source within the territory....' In that context, the Privy Council held that the amount of Pounds 1,46,000 was income and not capital; and further that the amount was received from a source within Southern Rhodesia, namely, the mining claims which the company had acquired and developed there. We are of the opinion that the context in which the aforesaid observation was made by the Privy Council is different and need not have inspire Mr. Pal in advancing the argument that he did before us. In the instant case, as we have already observed, we are under certain disadvantage for paucity of materials. We do not know under which Act the requisition was made. We do not know the terms on which requisition was made. Neither the order of requisition nor the charter which provided for payment of 'hire' after requisition is before us. Whether the assessee was plying the vessels as before but only for a single customer, namely, the Government, and was earning such freight under the nomenclature 'hire', as it used to do previously we do not know. Therefore, we are not in a position to uphold the argument of Mr. B. L. Pal that the source must be deemed to be a completely different source of income, which misfitted with the income covered by item 5(g) of the Schedule to the Agreement. On the materials before us and regard being had to the nature of the argument advanced before the Tribunal, we are of the opinion that the Tribunal was not wrong in arriving at the conclusion that the goods used to be transported by these boats either on the basis of freights payable to the assessee according to weight and nature of the goods or on the basis of agreement of charter by which also freight was paid by weight. This made no difference and the hire received on account of the charter was not different from the description of income under items 5(g) of the Agreement. In the result, we answer question No. (1) in the affirmative. In view of our affirmative answer to question No. 1, question No. (2) need not be answered. The assessee is entitled to costs of this reference.
MASUD J. - I agree.