RUPAJEE RATANCHAND Vs. COMMISSIONER OF INCOME TAX MADRAS

JUDGEMENT

(1.) Rao, C.J. (1) The Income Tax Appellate Tribunal referred the following two questions under S. 66 (1) of the Income Tax Act to the Madras High Court, viz., "1. Whether the loss to the Residents arising from the forward contracts entered into by them with the Non-residents is a profit accruing or arising to the Non-resident in British India within the meaning of S. 4 (1) ? 2. Whether the residents are bound to deduct tax under the provisions of S. 18 (3-A) on the amounts paid by them, to the non-residents?

(2.) After the constitution of the Andhra High Court, the said Reference has been transferred to this Court.

(3.) The facts which gave rise to the reference may be stated thus : The assessees who are residents of British India (hereinafter referred to as residents) entered into certain speculative contracts of forward purchase and sale of groundnut oil, kernel and turmeric with M/s. Rupchand Chhabildas and Co., a firm at Sangli, a Native State (hereinafter referred to as non-resident). The nonresidents are pucca adatia merchants of Sangli. There were 20 contracts between the resident and non-resident between 25.10.1941 and 4.8.1947. The mode of business followed by them was as follows : The non-residents would send out from time to time market reports in respect of certain commodities to the residents at Kurnool. Whenever the residents considered the quotation so sent to be favourable, they gave telegraphic instruction to the non-residents to but or sell for a particular Vaida. The purchase and sales were effected by the non-residents at the rate prevailing at the time of the contracts.The non-residents bought or sold al the case may be and sent telegraphic intimation to the residents, together with the rates and Vaida date. Though it is stated that the resident sent regular contracts to the non-residents for acceptance, the latter denied it and there is nothing on record to show that any such contracts were sent. The non-residents in their turn entered into similar contracts with another merchant at Sangli to purchase or sell an equal quantity at the same rate to cover the contract with the resident. The non-residents also took an advance from the residents to cover any possible losses that might occur in future, and the residents sent advances periodically whenever the initial advances sent by them were exhausted. The residents never took or gave delivery of the goods on the Vaida date. Sometimes, they even determined the contracts before the Vaida date. After the contract wa determined or after the Vaida date arrived, the non-residents after setting or determining the contract, intimated the result by means of a letter to the residents.The transactions ended in a profit to the non-residents. Though usually the residents made pay ments to the non-residents by means of Demand Drafts and sometimes by hundies, there is no evidence on record to show how they were paid to the non-residents in the instant case. The net profits got by the non-residents during 1947/1948 were Rs. 2,450.00. During the assessment year 1948-49, the Income Tax Officer treated the residents as assessees under S. 18 (7), Income Tax Act and required them to pay tax amounting to Rs. 795-5-0 on the said amount. The residents unsuccessfully filed an appeal against that order to the Appellate Assistant Commissioner, and a further appeal to the Income Tax Appellate Tribunal, Madras. At the instance of the residents, the Income Tax Appellate Tribunal referred the aforesaid two questions for this Courts decision.