P SUBRAMANIA CHETTY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) SUBRAMANIA Chetty, who resided in Pondicherry and carried on business there was a " non-resident " for purposes of assessment to income-tax in India. His divided brother, Vinayagam Chettiar, resided at Madras, where he had his own business, on the income from which he was assessed to tax. Though a non-resident, SUBRAMANIAm had business connections with the taxable territories. SUBRAMANIAm obtained licences from the Government of India to import machinery, mill stores, etc., into India. Such imports were made from abroad through Madras and other ports In the year of account that ended on March 31, 1950, Vinayagam claimed he had purchased from SUBRAMANIAm machinery, etc., imported by the latter into Madras to the value of Rs. 2, 37, 195. The gross profits on the sales of these imports effected subsequently by Vinayagam were estimated at 19 per cent. of the purchase price and Vinayagam was assessed on that basis and by recourse to section 42(2) of the Income Tax Act, 1961. The gross profits Vinayagam made on the sale of goods in the year of account purchased from others besides his brother, SUBRAMANIAm, were estimated at 12 per cent. The difference of 7 per cent. was based on the assumption that the purchase price of Rs. 2, 37, 195 claimed to have been paid to SUBRAMANIAm was inflated. As SUBRAMANIAm was a non-resident the provisions of section 42(2) wore applied and Vinayagam was assessed Independent of the assessment of Vinayagam on his income, proceedings were taken against him under section 43 of the Act. That there was a business connection between SUBRAMANIAm and Vinayagam was obvious. After notice to Vinayagam and after hearing his objections---his main plea was that the only business connection he had with his brother was that of a purchaser of the goods---the Income-tax Officer passed his order on September 14, 1950, declaring Vinayagam to be the agent of the non-resident principal, SUBRAMANIAmroceedings were then taken to assess Vinayagam as a statutory agent on the income of the non-resident, SUBRAMANIAm, which accrued to him in India in the year of account that ended with March 31, 1950. The assessee for these proceedings was described as " P. SUBRAMANIA Chetty, Pondicherry, by agent, P. Vinayagam Chettiar, Madras." The value of the goods imported by SUBRAMANIAm through Madras and the other ports during the year of account was estimated at Rs. 5 lakhs and the profits on the sale of all these imported goods effected in India were estimated at Rs. 50, 000. The total world income of SUBRAMANIAm was estimated at Rs. 1 lakh. On the entire income of Rs. 50, 000 that was held to have accrued to SUBRAMANIAm in India, Vinayagam was assessed to income-tax and super-tax The Assistant Commissioner, to whom the assessee appealed, confirmed the assessment. When Vinayagam appealed further to the Tribunal, it called for a further report from the Income-tax Officer and what was styled a remand report was submitted by the Income-tax Officer in due course. At that stage additional evidence was taken under the directions of the Tribunal to decide the question, whether the declaration under section 43 of the Act was correct. The Income-tax Officer also reported

(2.) THE Tribunal confirmed the declaration under section 43 of the Act, that Vinayagam was the agent of the non-resident, Subramaniam. THE Tribunal, however, deducted Rs. 16, 604 on which Vinayagam had already been assessed to tax under section 42(2) of the Act and confirmed the assessment on the balance of Rs. 50, 000, that is, Rs. 33, 396 Under the directions of this court the Tribunal referred the following questions under section 66(2) of the Act

(3.) WE are clearly of opinion that Vinayagam cannot be taxed twice over on the profits of the sales of the imported goods of the value of Rs. 2, 37, 195, once under section 42(2) and again under section 42(1). Before either statutory provision can be applied, there must be proof of business connection between the non-resident, Subramaniam, and the resident, Vinayagam. Sections 42(1) and 42(2), however, are mutually exclusive in operation. The basis of the liability imposed on Vinayagam by recourse to section 42(2), was that the goods were his and that the income was his only the true extent of that income had to be ascerotained by applying the provisions of section 42(2). The basis of the liability which section 42(1) imposes is that the income belongs to the non-resident. It is the non-resident's income that has to be taxed. The resident agent is only the agent and he merely represents the non-resident principal even in the assessment proceedings : see Abdul Azeez Dawood Marzook v. Commissioner of Income-tax. Quite obviously the same income cannot be treated as the income of both the non-resident, Subramaniam, and the resident, VinayagamThe learned counsel for the department pointed out that in the assessment of Vinayagam under section 42(2) only 7 per cent. had been taken into account and that the estimate of the income of Subramaniam in the proceedings under section 42(1) was 10 per cent, Rupees 16, 604 which represented 7 per cent. was excluded by the Tribunal and there could therefore be no question of taxing that income twice over.. Quantification of the profits at different levels, 7 per cent. and 10 per cent. is not the determining factor. The profits of the sales which accrued to Vinayagam as owner of the goods cannot be viewed as the income of Subramaniam who had ceased to be the owner of the goods and to whom the profits of the sales effected by Vinayagam could not and did not accrue. That basic feature remains unaltered by the fact that 7 per cent. was attributed to the business connection between Vinayagam and Subramaniam when section 42(2) was invoked and that the profits were subsequently estimated at 10 per cent. when the provisions, of section 42(1) were applied. Whether the first estimate of 7 per cent. or the later estimate of 10 per tent. was correct does not arise for consideration in deciding to whom did the profits accrue Vinayagam was not liable to be taxed under section 42(1) on the profits on the sales of the imports of the value of Rs. 2, 37, 195. The application of section 42(1) stood excluded because the profits did not accrue to Subramaniam and they were taxed as having accrued only to Vinayagam, though in taxing him recourse was had to section 42(2) The liability of Vinayagam to be taxed under section 42(1) on the profits of the sale of the goods valued at Rs. 2, 37, 195 can be viewed from another angle. The scope of section 42(1) was explained in Ramnarayan Rajmal v. Commissioner of Income-tax and the principle laid down in that case has been clearly brought out in the head-note itself