A. Lakshmanan, Madras vs The Commissioner of Income Tax, Madras

Srinivasan, J.

(1) The assessee left India for Fiji Islands in 1922. He remained there till 1948. During that period, he engaged himself as an employee for some

time and later had an independent business. He acquired certain properties, one of which was a house which he constructed in 1939. On his return

to India in 1948, he brought with him the cash that was available. Subsequently, through his friends and others at Fiji, the other assets left behind

were sold and the sale proceeds were remitted to India. Such remittances amounted to Rs. 9,300, Rs. 24,074 and about Rs. 31,000 in the

account years relevant to the assessment years 1949-50, 1951-52 and 1952-53. The Income Tax Officer started proceedings under S. 34 in the

view that these amounts brought into the taxable territories came out of the profits form business carried on in the Fiji Islands. The contention of the

assessee was that these amounts represented remittances out of capital. But this contention was repelled and assessments were made. An appeal

was taken to the Appellate Assistant Commissioner, before whom the assessee pleaded that it was impossible for him to furnish particulars of his

income from 1932 onwards. He claimed that he had converted the profits into capital assets and that what he brought into the taxable territories

was only the sale proceeds of such capital assets.

These contentions failed to find favour with the appellate authority, who thought that the mere investment of income for the time being in any asset

would alter the character of the income. While he accepted the fact that so long as the assessee resided in the Fiji Islands he kept the money in the

shape of property, he thought that when he decided to return to India, he converted the assets into cash. S He held accordingly that the alteration

did not destroy the character of the amount as income. On further appeal to the Tribunal, the assessee again reiterated his former contentions. He

pointed out that his return to India was due to unforeseen circumstances and that the purchases of real property and other assets in Fiji Islands

form out of his income could not be regarded as merely temporary investments, that these acquisitions were genuine and that when once the

income had been converted into capital, its subsequent re-conversion into money would not restore to in the original character of income. But the

Tribunal declined to accept this contention holding that the conversion into capital in the Fiji Islands was only of a ""passing nature"" there being no

effective capitalisation"" of the income.

(2) On the application of the assessee under S. 66(1) of the Indian Income Tax Act, being rejected, this Court directed the Tribunal to state a case

and submit the following question for the determination of this Court-

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in sustaining the assessment made on the assessee as

remittances to the taxable territories out of the business profits made by the assessee in Fiji Islands, 1949-50 Rs. 6,643 plus Rs. 2,675, 1951-52

Rs. 24,704 and 1952-53 Rs. 27,500 plus Rs. 3,551?

It is not disputed that the petitioner was employed in a firm between 1922 and 1931. Thereafter, he appears to have set up independent business

and carried it on till 1938, when he sold that business to Messrs. Indian Trading Co. He served that company as a manager till 1944. From 1944

onwards he worked as a receiver in another company. In 1939, he built a house at a cost of �1000. During his long stay in Fiji Islands for a

period of nearly a quarter of a century, he had acquired other assets. The Department did not care to ascertain what the nature of the assets were,

on what dates they were acquired and when they disposed of. But it seems to be implicitly recognised that these assets were of a nature which

were capable of being enjoyed by the owner and wee not in the shape of investments such as securities or stocks and shares. It does not also

appear to be disputed that but for the fact that the assessee''s mother was in her death bed, the assessee might not have returned to India. It is also

seen that in respect of the income of the assessee during the time he was abroad, there had been assessments in the usual course.

(3) Even on the statement of the facts, it seems to us that there is singularly little substance in the case of the department that there had been no

effective capitalisation of the income, or that the conversion of the profits into house properties and other assets in the Fiji Islands was only of a

passing nature. It is somewhat difficult to appreciate the argument that if the assessee had purchased moveable assets such as those normally

required for the purpose of ordinary livelihood or wasting assets of a similar nature, the department can still maintain that the sale of the those

assets would result in recovery of the profit or the income. We are also unable to understand what is meant by effective capitalisation of the

income. If the income is utilised in the purchase of assets, moveable or immovable, and the assessee enjoys the use of these for a considerable

length of time, is too much to infer that there was a real intention to convert the money into capital? We cannot see how any other inference can be

justifiably drawn from the circumstances of the case.

(4) Mr. S. Ranganathan, learned counsel for the department, has referred to Walsh v. Randall, (1940) 23 Tax Cas 55. That was a case where the

appellant had two sources of income abroad, dividends on investments in India and his share of profits as a sleeping partner in a firm carrying on

business in Calcutta. The income from both the sources was paid into his bank account in Calcutta. Out of these amounts, he directed that a sum of

�10,000 should be forwarded to him in England in the shape of a draft for making a gift of to a hospital. Out of this amount, a portion was out of

income already charged to tax in the United Kingdom. The question was whether the remittance of the balance to the Untied Kingdom was a

remittance out of capital or out of income. The General Commissioners took the view that it was out of income, whether capitalised or not in India.

The point to note in this case is that the assessee was resident and ordinarily resident in the United Kingdom and he had obviously no intention of

creating nay permanent investments in India. Whether or not the income had been capitalised in India, there was always the animus of taking these

amounts to the United Kingdom. The learned Judge observed:

The fact is that if a man resides here, he cannot be investing for the time being his income abroad change its character vis-a-vis the Income Tax

collector.

What the position would have been if the assessee in that case had resided in India and had acquired assets of a different nature than by

investments with the banks and the like we cannot say. But the facts of this decision are certainly far different from those that we have to deal with.

(5) Another decision of the Privy Council relied upon the department is AIR 1940 36 (Privy Council) . In that case, the assessee received interest

on Government of India bonds, which interest was payable in England. They invested the income in the purchase of mill stores and machinery in

England and brought the articles to India and used them for the purpose of their mills. The question was whether this sum was income which was

brought to British India and there was no liability to Income Tax. This decision was affirmed by the Privy Council. The principle is amply illustrated

by the headnote, which reads thus:

If income arising or accruing without British India is spent or otherwise so dealt with that it ceases to be income instead of being brought into

British India, it is not chargeable under the Act merely because the thing upon which it has been expended or into which it has been turned is

subsequently brought here. But it is not necessary in order to attract tax that income received abroad should be brought to India in the exact form

in which it was received.

It, therefore, we understand the decision to mean that if the income has been expended, the income cases to exist but if the income is either brought

to India in specie or in a different form, it would still be income and would be assessable, the question to ask would then be, what was done with

the income that was received abroad? In the case before the Privy Council, it was not disputed that income was converted into a particular form

and that was what was brought to India. The Judicial Committee characterised as extravagant the contention that stores and machinery and with

whatever intention they might have been purchased, their arrival in India resulted in that income being brought to British India. They pointed out that

such a view could not be accepted and that he truth of the matter was that the assessee in such a case does not being any amount at all but had

spent it all abroad. This decision does not render much assistance in the circumstances of the present case.

(6) In S. Narayanaswami and Another Vs. Commissioner of Income Tax, Madras, , it was pointed out that unless there was a device by reason of

the alteration of the shape of the income to enable it to be brought into British India what was really capitalised could not be regarded as income.

In that case, out of accumulated profits earned in Trivandrum outside British India, the assessee purchased Mysore securities and kept them at

Trivandrum. In order to effect a change in the mode of investment, the securities were sold to a firm at Trivandrum. That firm entered into a

contract at Madras to sell those securities to a broker at Bombay. The Mysore securities were brought to Madras and then forwarded to Bombay.

The assessees were credited with the sale proceeds of the Mysore securities. The Income Tax department claimed that here was a remittance to

British India of unassessed foreign profits. This Court took the view that the securities represented capital, as the accumulated foreign profits had

been so capitalised when the securities were purchased. There was no device to bring any money for use in British India but only a substitution of

securities. Accordingly, there was only a remittance of capital.

(7) Giving the matter careful attention we are satisfied that he undisputed facts in the present case can lead to only one conclusions. The assessee

had capitalised whatever surplus income was in his hands. The view of the Tribunal that such capitalisation was not effective or it was only of

passing nature is entirely opposed to the facts proved. There was no material upon which the Tribunal could reach such a conclusion. Though there

may exist cases where a such capitalisation is only a ruse to overcome the tax liability, in the present case, we see no vitiating feature of that kind.

The receipt of these moneys in our opinion represented only the receipt of capital and not of income. The question is answered in favour of the

assessee, who will be entitled to his costs. Counsel''s fee Rs. 250.

(8) Question answered