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1948 Supreme(SC) 9
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD UTHWATT, LORD DU PARCQ, LORD NORMAND, LORD OAKSEY AND SIR MADHAVAN NAIR.
WALLACE BROTHERS AND COMPANY, LIMITED - Appellant
Versus
COMMISSIONER OF INCOME TAX, BOMBAY CITY AND BOMBAY SUBURBAN DISTRICT - Respondents
On appeal from the Federal Court of India.
Decided On : Feb. 17. 1948.
Solicitors for appellant: Johnson, Jecks & Colclough.
Solicitor for respondent: Solicitor, High Commissioner for India.
A subordinate legislature can validly tax a company's foreign income if a sufficient territorial connexion exists. Deriving the majority of its income from the taxing territory constitutes such a connexion, justifying the company's treatment as a resident for taxation purposes for that year.
Headnote:(A) Indian Income-tax Act, 1922-1939 - Sections 3, 4, 4a and 64 - Government of India Act, 1935 - Sections 99 and 100 - Taxation of foreign income - Residence of a company - Territorial connexion - Validity of legislation - Extra-territorial operation - The power of a subordinate legislature to tax foreign income depends on the construction of the enabling statute and the existence of a sufficient territorial connexion between the person sought to be charged and the taxing country - Derivation of the major part of a company's income from a territory for a year constitutes a sufficient territorial connexion to justify the company being treated as resident for taxation purposes for that year, regardless of where its central control and management are situated.
(B) Partnership - Carrying on business - Section 64 of the Income-tax Act - A partner who takes no active part in the management of the firm's affairs is still considered to be carrying on business through the agency of other partners - The income tax officer of the area where the partnership business is situated has jurisdiction to make the assessment.
Facts of the case:
An appellant company, incorporated and controlled in a foreign country, was a sleeping partner in a firm carrying on business in the territory. In the previous year, the company's income derived from the territory exceeded its income derived from outside the territory. The company was assessed on its total world income based on a statutory definition of residence that included companies whose income within the territory exceeded their income without it. The company challenged the validity of these provisions as being extra-territorial and argued that the assessing officer lacked jurisdiction because the company took no active part in the partnership's management.
Findings of Court:
The legislation is not ultra vires as the derivation of the majority of income creates a sufficient territorial connexion to justify the tax. The assessment was made by the proper officer because the essence of partnership is mutual agency, meaning all partners carry on business at the place of business regardless of their active participation in management.
Issues: Whether the statutory provisions taxing a company's foreign income based on a definition of residence tied to the proportion of income derived within the territory are ultra vires the legislature due to extra-territorial operation, and whether the assessing officer had jurisdiction over a sleeping partner under the relevant tax provisions.
Ratio Decidendi: The power to impose "taxes on income" includes the power to tax foreign income provided there is a sufficient territorial connexion. For a company, which has only an economic existence, deriving the major portion of its income from a country is a legitimate basis for treating it as "rooted" there for that year, providing a connexion as solid as, or more pertinent than, the place of central control. Furthermore, since each partner is an agent of the others, a partner carries on business at the partnership's place of business even if they are a sleeping partner.
Result: Appeal dismissed.
Legal Category Hierarchy
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constitutional law
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legislative competence
- extra-territorial operation
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legislative competence
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taxation
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income tax
- non-resident taxation
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income tax
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commercial law
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partnership law
- sleeping partners
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partnership law
Judgement
Appeal (No. 65 of 1945), by leave of the Federal Court of India, from a judgment of that court (January 15, 1945) which affirmed the judgment of the High Court at Bombay in its original civil jurisdiction (July 22, 1943) on a case stated by the Income Tax Appellate Tribunal on questions of law arising out of the order of the Appellate Tribunal (March 21, 1942).
The following facts and statutory provisions are taken from the judgment of the Judicial Committee. Two questions were in issue in this appeal; first, the validity of certain provisions of the Indian Income-tax Act, 1922- 1939, by virtue of which there was made on the appellant company an assessment to income tax on income which included income arising without British India, and second, the jurisdiction of a particular income tax officer to make that assessment.
The directly relevant provisions of the Income-tax Act, 1922- 1939, were contained in ss. 3, 4, 4a and
64. Those, so far as it is necessary to state them, were as follow.
"3. Where any Act of the Central Legislature enacts that " income-tax shall be charged for any year at any rate or " rates tax at that rate or those rates shall be charged for "that year in accordance with, and subject to the provisions "of, this Act, in respect of the total income of the previous "year of every individual, Hindu undivided family, company " and local authority, and of every firm and other association "of persons or the partners of the firm or members of the "association individually."
"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—
" (a) are received or are deemed to be received in British " India in such year by or on behalf of such person, or
" (b) if such person is resident in British India during " such year— " (i.) accrue or arise or are deemed to accrue or arise " to him in British India during such year, or
" (ii.) accrue or arise to him without British India "during such year, or . ..." " 4a. For the purposes of this Act—
" (c) a company is resident in British India in any year " (a)if the control or management of its affairs is situated "wholly in British India in that year, or (b) if its income " arising in British India in that year exceeds its income " arising without British India in that year."
"64.—(1.) Where an assessee carries on a business, profession or vocation at any place, he shall be assessed by the " Income-tax Officer of the area in which that place is situate " or, where the business, profession or vocation is carried " on in more places than one, by the Income-tax Officer of " the area in which the principal place of his business, " profession or vocation is situate.”
The material facts were that the appellant company was incorporated in the United Kingdom and that the control and management of its affairs were situate exclusively in that country. It was a member of the firm of Wallace and Co., which carried on business in Bombay. The Income Tax Appellate Tribunal found as a fact that the appellant company was a " sleeping partner" in that firm, which was understood to mean that the appellant company took no part in the management of the firms affairs. In the year 1938- 1939— " the previous year " for the purposes of this case—the income of the appellant company arising in British India was Rs. 17,85,831, and its income arising without British India was Rs. 7,48,427. On February 12, 1941, the appellant company was assessed to tax for the assessment year 1939- 1940 on the whole of its income. That assessment was made by the additional income tax officer within whose district the firms place of business was situate. On those facts, which were to be found in the case stated by them, the tribunal referred the following questions of law to the High Court
" (i.) Whether in the circumstances found by the tribunal " in its order under s. 33, the assessee company was taxa
