1. Export commission payable to a non-resident agent credited to their account in India due to exchange control restrictions — Taxability under Section 4(1)(a) of the Income-tax Act. (Para 1 , 2 )
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1962 Supreme(SC) 8
SUPREME COURT OF INDIA
16th January, 1962
B.P. SINHA, C.J.I., J.L. KAPUR, M. HIDAYATULLAH, J.C. SHAH AND J.R. MUDHOLKAR, JJ.
P. V. Raghava Reddi and another, Appellants
Versus
Commissioner of Income-tax, Madras (now Andhra Pradesh), Respondent.
Civil Appeals Nos. 325 and 326 of 1960.
Advocates appeared
M/s. R. Ganapathy Iyer and R. Thiagarajan, Advocates-and Mr. G. Gopalkrishnan. Advocate of M/s. Gagrat and Co. for Appellants Mr. H.N. Sanyal Additional Solicitor-General of India and Mr. K. N. Rajagopal Sastri Senior Advocate (Mr. P. D. Menon, Advocate, with them), for Respondent.
Important Points
Income received in India by a non-resident is taxable under Section 4(1)(a) regardless of where it accrued. Crediting funds to a non-resident's account under an agreement to hold them at their disposal constitutes "receipt" of income in the taxable territories.
Subject
Tax Law - Income Tax
Act Referred
Headnote
(A) Income-tax Act - Section 4(1)(a) and Section 4(1)(c) - Receipt vs. Accrual - Income received in the taxable territories by or on behalf of a non-resident is taxable under Section 4(1)(a), regardless of whether it accrued or arose outside the taxable territories. These clauses are independent and disjunctive; the test for Section 4(1)(a) is receipt, and it cannot be subjected to the limitation that the income must also accrue or arise in the taxable territories. (Paras 7, 8)
(B) Income-tax Act - Section 42 and Section 43 - Statutory Agent - A person having a business connection with a non-resident person can be appointed as a statutory agent and is vicariously liable for the tax on income deemed to arise in the taxable territories. (Paras 4, 5)
(C) Nature of Receipt - Debt vs. Deposit - Where an agreement provides that amounts due to a non-resident be credited to their account in the books of the payer and held according to the non-resident's instructions, the character of the money changes from a debt to a deposit. Such credited amounts are held for and on behalf of the non-resident and are considered "received" by them in the taxable territories. (Para 9)
Facts of the case:
An assessee firm exported goods and engaged a non-resident company as its agent. Due to exchange control restrictions, commissions due to the non-resident agent could not be remitted. Under the agreement, the firm credited these amounts to the agent's account in its books, holding them until instructions were received. The tax authorities treated the firm as a statutory agent and assessed tax on these amounts as income received in the taxable territories.
Findings of Court:
The court found that the amounts credited to the non-resident company's account were received by the company in the taxable territories. The firm acted as a statutory agent, and the income was taxable under the general provision regarding receipt of income, as the money was held as a deposit for the non-resident.
Issues: Whether commission credited to a non-resident company's account in the books of a firm constitutes "receipt" of income in the taxable territories under Section 4(1)(a), and whether such receipt is taxable even if the income accrued outside the taxable territories.
Ratio Decidendi: Sections 4(1)(a) and 4(1)(c) are disjunctive; receipt in the taxable territories is a sufficient ground for taxability regardless of where the income accrued. Furthermore, when money is credited to a non-resident's account per an agreement to be held at their disposal, it ceases to be a debt and becomes a deposit held on their behalf, thus constituting "receipt" in the taxable territories.
Result: Appeals dismissed.
(B) Income-tax Act - Section 42 and Section 43 - Statutory Agent - A person having a business connection with a non-resident person can be appointed as a statutory agent and is vicariously liable for the tax on income deemed to arise in the taxable territories. (Paras 4, 5)
(C) Nature of Receipt - Debt vs. Deposit - Where an agreement provides that amounts due to a non-resident be credited to their account in the books of the payer and held according to the non-resident's instructions, the character of the money changes from a debt to a deposit. Such credited amounts are held for and on behalf of the non-resident and are considered "received" by them in the taxable territories. (Para 9)
Facts of the case:
An assessee firm exported goods and engaged a non-resident company as its agent. Due to exchange control restrictions, commissions due to the non-resident agent could not be remitted. Under the agreement, the firm credited these amounts to the agent's account in its books, holding them until instructions were received. The tax authorities treated the firm as a statutory agent and assessed tax on these amounts as income received in the taxable territories.
Findings of Court:
The court found that the amounts credited to the non-resident company's account were received by the company in the taxable territories. The firm acted as a statutory agent, and the income was taxable under the general provision regarding receipt of income, as the money was held as a deposit for the non-resident.
Issues: Whether commission credited to a non-resident company's account in the books of a firm constitutes "receipt" of income in the taxable territories under Section 4(1)(a), and whether such receipt is taxable even if the income accrued outside the taxable territories.
Ratio Decidendi: Sections 4(1)(a) and 4(1)(c) are disjunctive; receipt in the taxable territories is a sufficient ground for taxability regardless of where the income accrued. Furthermore, when money is credited to a non-resident's account per an agreement to be held at their disposal, it ceases to be a debt and becomes a deposit held on their behalf, thus constituting "receipt" in the taxable territories.
Result: Appeals dismissed.
Legal Category Hierarchy
Advocates:
G.GOPALAKRISHNAN, GAGRAT JANEDRA LAL, H.N.SANYAL, K.N.RAJAGOPAL SASTRI, P.D.MENON, R.Ganapathy Iyer, R.THIAGARAJAN
G.GOPALAKRISHNAN, GAGRAT JANEDRA LAL, H.N.SANYAL, K.N.RAJAGOPAL SASTRI, P.D.MENON, R.Ganapathy Iyer, R.THIAGARAJAN
Table of Contents
2. Whether income accrued abroad is taxable upon receipt in India under Section 4(1)(a) and whether crediting an account constitutes receipt by a non-resident. (Para 2 , 6 )
3. Section 4(1)(a) and 4(1)(c) are independent; receipt in India attracts tax regardless of accrual location; crediting an account as a deposit constitutes receipt. (Para 7 , 8 , 9 )
4. Receipt of income in taxable territories by a non-resident attracts tax under Section 4(1)(a) independently of whether the income accrued or arose outside. (Para 7 , 8 )
5. Appeals dismissed; High Court decision upholding the taxability of the commission amounts affirmed. (Para 10 )
6. Are the provisions regarding receipt of income in India and accrual of income for non-residents interdependent?
No, Section 4(1)(a) and Section 4(1)(c) are independent and can be read disjunctively. Receipt of income in India attracts tax regardless of whether the income accrued or arose within or outside the taxable territories. (Para 7 , 8 )
7. Does crediting an amount to a non-resident's account in the books of an agent constitute receipt of income in India?
Yes, if the agreement provides that the agent holds the credited amounts as a deposit for the non-resident's disposal, the character of the money changes from a debt to a deposit, constituting receipt on behalf of the non-resident. (Para 9 )
8. When is a person deemed a statutory agent for a non-resident under the Income-tax Act?
A person is deemed a statutory agent if they have a business connection with a non-resident or if the non-resident receives income through them, provided the Income-tax Officer serves a notice of intention. (Para 4 , 5 )
Judgment
HIDAYATULLAH, J.: The appellant is a firm at Gudur (Andhra Pradesh), which was doing business in Mica under the name and style of the Continental Export and Import Company. During the years of account, 1948-49 and 1949-50 (corresponding to the assessment years, 1949-50 and 1950-51), the assessee firm exported Mica to Japan. Mica was not directly exportable to Japanese buyers during these years, as Japan was under military occupation, but to a State Organisation called Boeki-Cho (Board of Trade). To negotiate for orders and to handle its other affairs in Japan in connection therewith the assessee firm engaged SanEi Trading Co. Ltd., Tokyo, as its agents. The Japanese Company was admittedly a non-resident Company. Two agreements were entered into by the assessee firm and the Japanese Company, the first for the quarter, July to September 1948, during which period a commission of 4 per cent. on the gross sale proceeds was payable to the Japanese Company,and the second, for an indefinite period, with the commission reduced to 2 per cent.
2. During the years of account, the amount of commission due to the Japanese Company was respectively Rs. 26,254-9-1 and Rs. 11,272-8-8. These amounts (included in the price of Mica exported) were received by the assessee firm in India, but due to the restrictions imposed by the Exchange Control laws, they could not be sent to the Japanese Company. The agreements between the assessee firm an the Japanese Company, therefore, provided for this contingency by the inclusion of the following term :
"In view of the difficulties in this country, it is requested that the first party credits all these amounts to the account of the second party with them without remitting the same until definite instructions are received by the first party."
During the two account years, a total amount of Rs. 13,3l9-l2A was paid to the Japanese Company either directly or through others, to whom the assessee firm was instructed by the Japanese Company to pay the amount. The Income-tax authorities treated the assessee firm as the statutory agent of the Japanese Company, and assessed tax on the two amounts in the respective years of assessment. The order of the Income-tax officer was confirmed on appeal; but the Tribunal set aside the order on the ground that the income to the Japanese Company had accrued or arisen in Japan and could not be said to have been received by the Japanese Company in the taxable territories, since S. 4(1)(a) was subordinate to S. 4 (1)(c). The Tribunal thus concluded :
"The reference in Section 4(1)(a) to income received in India can, in our opinion, refer only to the situation more specifically provided for in section 4(1)(b) as sub-section (a) provides a general cover for both the immediately following sub-sections (b) and (c). Section 4(1)(a) cannot therefore by itself add a new liability to non-residents, the extent of which is clearly delimited under section A(1)(c) of the Act to only incomes that accrue to them within the taxable territories. To read any further in section 4(1)(a) will totally nullify the effects of section 4(1)(c).
Income that has accrued once abroad cannot by any means accrue again in India. If such income is later remitted to India and received by or on behalf of such nonresidents in India such subsequent receipt cannot be chargeable under the Act."
The assessment was, therefore, ordered to be cancelled. The Commissioner of Income-tax, however, obtained a reference to the High Court of Madras on the question :
"Whether the aforesaid sum of Rs. 26,255-0-0 and Rs. 11,272-0-0 being selling commission credited to the aforesaid nonresident company s account in the books of the assessee are chargeable in the hands of the assessee under S. 4(1)(a) for the assessment years 1949-50 and 1950-51?"
3. The High Court answered the question against the assessee firm. The High Court observed that the learned advocate for the assessee firm "confessed his inability to support the decision
