Income of a resident but not ordinarily resident from a foreign business is taxable if controlled from the taxable territories; temporary absence of the proprietor doesn't shift control. Additionally, High Courts cannot decide questions of law not referred to them by the Tribunal.

Headnote:(A) Income-tax Act, 1922 - Section 4 - Resident but not ordinarily resident - Income from business controlled in the taxable territories - Apportionment of income - If a person is resident but not ordinarily resident, income accruing outside the taxable territories is taxable if derived from a business controlled within the taxable territories - Temporary absence of a proprietor from the headquarters of the business does not necessarily remove the control of the business from the taxable territories - Where the Tribunal and High Court have found as a fact that the business was controlled from within the taxable territories throughout the year, no question of apportionment of income on a time basis arises.

(B) Appeal - Scope of reference - A High Court cannot answer a question of law that was not referred to it by the Tribunal - New contentions regarding the timing of ascertainment of losses cannot be raised in appeal if they were not part of the referred question or dealt with by the Tribunal.

Facts of the case:
The assessee, a resident but not ordinarily resident, carried on a business outside the taxable territories. It was found that the business was controlled from within the taxable territories during the accounting year, although the proprietor was temporarily absent for a few months. The assessee sought apportionment of profits based on the period of control and claimed to set off losses from a previous year that were ascertained in the current accounting year.

Findings of Court:
The court upheld the findings of the Tribunal and High Court that the business was controlled from within the taxable territories throughout the year, making the entire income taxable. Regarding the set-off of losses, the court held that the High Court was correct in limiting its answer to the specific question referred by the Tribunal.

Issues: (1) Whether income from a foreign business should be apportioned on a time basis if the proprietor was temporarily absent from the country; (2) Whether the court could consider a claim for set-off of losses that was not specifically referred by the Tribunal.

Ratio Decidendi: Temporary absence of a proprietor from the headquarters of the business does not automatically shift the control of the business to another location. Furthermore, an appellate court cannot decide upon a question of law that has not been formally referred to it by the lower tribunal.

Result: Appeal dismissed.

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JUDGMENT

SUBBA RAO J.-This appeal by special leave is directed against the judgment of the High Court of Judicature at Bombay in Income-tax Reference No. 27 of 1959.

The assessee, B. R. Iranee, the proprietor of Messrs. C. M. Karanjia & Co., was carrying on business of export and import in Hong Kong. In March, 1941, he started a similar business in Bombay. He came to Bombay on June 29, 1941, from Hong Kong leaving an employee to look after his business there. During the year ending with December 31, 1946, he was a resident but not ordinarily resident of India within the meaning of the provisions of the Indian Income-tax Act. He was controlling the affairs of the Hong Kong business from Bombay during that year. But during the course of that year he went to Hong Kong on June 9, 1946, and returned to Bombay in September, 1946. For the assessment year 1947-48, the Income-tax Officer estimated his income from the Hong Kong business at Rs. 1,00,000, included the same in his assessment and assessed income-tax thereon. The assessee contended that the profits of the Hong Kong business were not taxable on the ground that he did not control that business from India and that, in any event, the losses suffered by him in respect of the Hong Kong business in 1941 should be set off against the said profits. The Income-tax Officer, by his order dated March 28, 1952, rejected the contentions of the assessee. On appeal, the Appellate Assistant Commissioner agreed with him. On a further appeal, the Income-tax Appellate Tribunal came to the same conclusion. At the instance of the legal representative of the assessee, the Tribunal, by its order dated March 6, 1959, referred the following question of law to the High Court:

" Whether, on the facts and in the circumstances of the case. the income of the assessee from the Hong Kong branch should be apportioned either on a time basis or in any other manner for the purpose of inclusion of the total income of the assessee. "

Further, at the instance of the assessee, the High Court directed the Tribunal to refer the following question:

Whether, on the facts and in the circumstances of the case, the Tribunal erred in law or misdirected itself in rejecting the assessee s claim to set off the alleged losses of 1941 of Hong Kong business against the income of the assessment year. "

The High Court answered both the questions in favour of the revenue and against the assessee. Hence, the present appeal.

Mr. S. P. Mehta, learned counsel for the appellant, raised before us the following two contentions : (1) the business in Hong Kong was controlled from India during the accounting year for 8 months only and, therefore, proportionate profits attributable to the rest of the year were not exigible to tax; and (2) the loss suffered by the assessee in his business in Hong Kong during the period 1941 to 1945 was ascertained only after the termination of the Second World War in 1946 and, therefore, the loss must be deemed to have been incurred by the assessee only during the accounting year.

To appreciate the first point, it is necessary to read the relevant part of section 4 of the Indian Income-tax Act, 1922, hereinafter called the Act. It reads:

" 4. (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which- ...

(b) if such person is resident in the taxable territories during such year,- ...

(ii) accrue or arise to him without the taxable territories during such year, or ...

(c) if such person is not resident in the taxable territories during such year, accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year : . . . .

Provided further that, in the case of a person not ordinarily resident in the taxable territories, income, profits and gains which accrue or arise to him without the taxable territories shall not be so included unless they are derived from a business controlled

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1965 Supreme(SC) 362

Income of a resident but not ordinarily resident from a foreign business is taxable if controlled from the taxable territories; temporary absence of the proprietor doesn't shift control. Additionally, High Courts cannot decide questions of law not referred to them by the Tribunal.

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