BURUGU NAGAYYA Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) This is a reference made by the Income-tax Appellate Tribunal under Section 66(1) of the Indian Income-tax Act at the instance of the assessee and the question referred is: Whether in the circumstances of the case, the provisions of Section 42(3) are applicable to the profits on the sale of gold effected in British India by the assessee, a non-resident Hindu undivided family, in such manner as to override the provisions of Section 4(1)(c) and render only such portion of such profits assessable as are attributable to operations carried out in British India.

(2.) We may say at the outset that the frame of the question struck us at first sight as being not quite happy in view of the reference therein to Section 42(3) overriding the provisions of Section 4(1)(c). But after having heard the arguments we feel convinced that the question, for the reasons we shall state later, has been rightly framed.

(3.) The applicant is a non-resident and he has been carrying on business in gold and silver in Secunderabad outside British India. He used to purchase gold at Secunderabad and to sell the major portion of it at Bombay through brokers in that line. The rest of it used to be sold in Hyderabad itself, a small portion of it being sold locally at Secunderabad. The Bombay brokers with whom the assessee was in touch would telegraphically intimate to the assessee the current prices of gold in Bombay and thereupon advices would be sent from Secunderabad notifying to them the quantity of gold that would be available for sale at those rates. Soon thereafter gold would be sent to Bombay through a representative of the assessee who would get it assayed in the mint and give the same to the broker who after selling it paid the sale proceeds to the assessee's agent. Upon these facts the contention raised on behalf of the assessee was that the source of the business was in Hyderabad and that the purchases and other activities were also in Hyderabad. What was done in British India consisted only in the delivery of the gold and the receipt of the price. The assessment relates to the year 1941 - 1942 and during the accounting period the total turnover of gold was Rs. 11,20,119 and out of this the sales at Bombay to British Indian buyers were for Rs. 6,68,666 yielding a profit of Rs. 7,346. The Income-tax Officer assessed the said profits to tax on the basis of the same having accrued or arisen in British India, since the profits accrued from the sale of gold in Bombay. On appeal before the Appellate Assistant Commissioner, it was contended that the sales took place in Secunderabad where orders were placed and the prices were fixed at that place under the contract. Upon those premises it was argued that the profits from these sales did not accrue or arise in British India. An alternative suggestion was also made before the Appellate Assistant Commissioner that the appellant being a non-resident was only trading with British India and not in British India and that consequently profits attributable to transactions in British India fell to be taxed under Section 42(3) on the basis of allocation of operations. These contentions were rejected by the Appellate Assistant Commissioner and an appeal was brought against this order before the Income-tax Appellate Tribunal. There also the same two contentions were raised, but the assessee gave up before the Tribunal the first contention, namely, that the profit from the Bombay sales of Rs. 7,346 did not accrue or arise in British India. He confined himself to the second contention relating to the applicability of Section 42 (3). The Tribunal did not accept this contention and dismissed the appeal. An application was made before the Tribunal under Section 66 and in that application the two questions that were sought to be referred were the following: (i) Whether on the facts of the case, the sales effected to the Bombay commission merchants took place in British India or at Secunderabad and whether the Income was income earned in British India and governed by Section 4(1) of the Act, or (ii) Whether the profits derived from the sales made from Secunderabad to commission agents in British India are profits or gains deemed to have accrued or arisen in British India within the meaning of Section 42(1) and assessable under Sub-section (3) of Section 42.