1953 Supreme(SC) 12

SUPREME COURT OF INDIA
30th January 1953
MAHAJAN, S.R. DAS, BOSE AND BHAGWATI, JJ.
Keshao Mills Ltd. - Appellant
Versus
Commr. of Income-tax, Bombay - Respondent.
Appeal No. 151 of 1951.
Advocates appeared
Shri R. J. Kolah and Shri N. A. Palkiwalla, Advocates, instructed by Shri Rajinder Narain, Agent-for Appellant; Shri C. K. Daphtary, Solicitor-General for India (Shri P. A. Mehta, Advocate, with him), instructed by Shri G. H. Rajadhyaksha, Agent-for Respondent.

Headnote:Section 4 (1) (a) - Non-resident-Accounts in mercantile system - Sale of goods manufactured in Indian State but sold in British India through agents - Receipt in British India-Applicability of S. 13 of the Act to nonresidents.

       The appellant was a company registered in the Baroda State (as it was before merger with India). It manufactured textile goods within the State and after the goods were manufactured they were sold by the Company ex-mills. The Company employed Messrs. Jagmohandas Raman Lal & Co., as guaranteed brokers. The firm guaranteed the sale price of goods sold by the company ex-mills to the purchasers from Ahmedabad and received commission as consideration for the guarantee and the work which it did for the company. The company was a non-resident and its accounts were maintained according to the mercantile system.

       In making the assesement on the company the following three amounts were considered for the purpose of determining the Companys liability to British Indian tax

       (a) sale proceeds recovered through the guaranteed brokers (b) Sale proceeds through British Indian Banks and Shroffs received by means of drafts or hundies drawn on by the Company : (0) sale proceeds received by cheques on British Indian Banks and Hundies on British Indian Shroffs and merchants, and collected by the Banks and Shroffs.

       Held: (per majority, J. Bose j. contra):

       (1) The monies were neither received by the Company nor could be deemed to have been received by it when the entries were made in the books of account at Petlad. They had merely accrued or arisen to it and so far as the receipt thereof is concerned they were first received by Messrs Jagmohandas Ramanlal and Co. or by the various banks or shroffs in British India through whom the railway receipts were negotiated. The first receipt of the moneys was, therefore, when they were paid as such by the n1erchants to Messrs. Jagmohandas Ramanlal & Co. or to the various banks and shroffs as above. What were paid by the. merchants to these Several parties were the sale proceeds of the goods which had been sold and delivered by the Company to them and they were received within the meaning of S. 4(1) (a) of the Act by these several parties on behalf of the Company in British India at the time when these payments were made by the merchants to them.

       (2) Mr. Kolah pressed into service the argument based on S. 13 of the Act that the mercantile system of accounting regularly adopted by the assessee was obligatory on the income-tax authorities for computation of his income. While agreeing generally with that submission in case of residents, we doubt whether that position would be available to a nonresident, who maintains his books on account outside British India according to the mercantile system. The section would only be relevant where the total profits of the assessee have to be computed, in which event he would be entitled to claim that they should be computed according to the system of accounts maintained by him. But the section would hardly be relevant where stray items of income are caught in taxable territories as received in taxable territories by a non-resident. The entries in• the present case were put in merely to prove that the sale proceeds were received outside British India where the entries were made. That contention, however, could not be sustained, as S. 4(1) (a) is concerned with cases of actual receipt and not with cases of paper receipts.

       "Having regard to the observations made above, we have come to the Conclusion that the High Court was right in holding that the two sums of Rs. 12,68,480/- and Rs. 4,40,878/- were the sale proceeds of the goods sold and delivered by the appellant to merchants in British India, that they were received by Messrs. Jagmohandas Ramanlal & Co. and by the banks and shroffs through whom the railway receipts were negotiated, on behalf of the appellants in British India, that they were liable to tax under S. 4 (1) (a) of the Act as having been received in British India on its behalf, that there is nothing either in the facts and circumstances of the case or in law why they should be exempted from such liability, that the answers given to the questions which were ultimately considered by the High Court were correct, and the appellant was rightly held liable for the tax on these two amounts subject to all just deductions, and allowances" (Per Bhagwati J.)1.

       1. Affirming A. I. R. 1950 Bom. 166.

       2. A.I.R. 1931 P. C. 165 applied,

       Per Bose J. (dissenting): In the case of accounts kept in the mercantile system the profit or loss at the end of the accounting year is based not on a difference between what was actually received and what was actually paid out, but on the difference between the right to receive and the liability to pay. The taxation in such cases is not on income, profits or gains which were received but on profits which "accrued or arose" to the assessee in the accounting year. This view excludes S. 4(1) (a) and this means that a resident is taxed in such cases under S. 4(1)(b) and a non resident under S. 4(1) (c).