Commissioner of Income Tax vs N.K. Jain

This reference has been made u/s 256(1) of the Income Tax Act, 1961, and pertains to the assessment year 1974-75. The facts, as found by the Tribunal and as stated in the statement of the case, are as under :

"The assessed is non-resident carrying on business in readymade garments in Japan. He has an arrangement with a commission agent in India to purchase readymade garments on his behalf and to export them to him. The agent also purchases dress material on the instructions of the assessed and gets it stitched into garments through tailoring establishments in India and exports such garments also to the assessed. The assessed was registered with the Handloom Export Promotion Council as a merchant exporter.

The Income Tax Officer was of the view that income should be deemed to accrue or arise to the non-resident in India in respect of the operation involving the purchase of material and its manufacture into readymade garments before they are exported to him. On behalf of the assessed, it was contended that his case was covered by clause (b) of the Explanation to section 9(1)(i) of the Income Tax Act, according to which, in the case of a non-resident, no income shall be deemed to accrue or arise in India to him, through or from operations which are confined to the purchase of goods in India for the purpose of export. The Income Tax Officer did not accept this plea, as according to him, the provisions of clause (a) of the Explanation to section 9(1)(i) would apply to a case where the non-resident gets goods manufactured in India. The total sales of the assessed during the year amounted to Rs. 42,92,037 out of which sales of garments which were got manufactured in India through the agent amounted to Rs. 10,17,767. The Income Tax Officer apportioned the net income of the assessed from the profit deemed to accrue or arise in India at Rs. 2,17,942 which he brought to tax.

The assessed appealed to the Appellate Assistant Commissioner and pointed out that the operation of purchasing material in India and getting it converted into garments constituted an operation for the purchase of goods in India for the purpose of export, within the meaning of clause (b) of the Explanation to section 9(1)(i) and that the assessed being a non-resident, no income could be deemed to have accrued or arisen from that activity. It was also argued that the proviso to clause (b) of the Explanation to section 9(1)(i) which was on the statute prior to April 1, 1964, and which limited the exemption under that clause on the satisfaction of the condition that the non-resident had no office or agency in India for the purpose of purchasing goods for export and the goods were not subjected to any kind of manufacturing process before being exported from India, stood deleted with effect from April 1, 1964. The effect of the removal of this proviso, it was argued, was that even if the non-resident maintained an office in India for the purpose of purchase of goods or even if some manufacturing operations were carried out in respect of such goods meant for export, no income would be deemed to accrue or arise from the purchase operations. After considering the submissions on behalf of the assessed, the Appellate Assistant Commissioner found force therein and held that the assessed was not liable to be taxed on any income deemed to accrue or arise from such operations."

The Department then filed an appeal to the Income Tax Appellate Tribunal. The said appeal was dismissed by the Tribunal who held that in view of the provisions of clause (b) of the Explanation to section 9(1)(i) of the Income Tax Act and also taking note of the fact that the proviso to the said section which had existed, had been deleted with effect from April 1, 1964, the assessed was not liable to be taxed on any income deemed to accrue or arise from the conversion of materials purchased by him for the purpose of export.

At the instance of the Department, the Tribunal has stated the case and referred the following question of law to this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessed''s case is covered by clause (b) of the Explanation to section 9(1) (i) and not by clause (a) thereof ?"

Prior to April 1, 1964, there was a proviso inserted in section 9(1)(i) of the Income Tax Act, 1961. While clause (b) of the Explanation to section 9(1)(i) provided that in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purchase of export, the said proviso, however, stipulated "provided that the non-resident has no office or agency in India for the purpose and the goods are not subjected to any kind of manufacturing process before being exported from India." The effect of the proviso obviously was that the operation of clause (b) of the Explanation to section 9(1)(i) became restricted. The deletion of the proviso obviously was with a view to encourage exports and this was followed by Circular No. 20 dated July 7, 1964, issued by the Central Board of Direct Taxes which purported to explain the effect of the removal of the said proviso. In the said Circular, it was, inter alia, stated that "any non-resident will not be liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident has an officer or agency in India for the purpose, or the goods are subjected by him to any manufacturing process before being exported from India."

It appears to us that the case of the assessed was clearly covered by clause (b) of the Explanation to section 9(1)(i) on the facts as found by the Tribunal. In the relevant assessment year, it was immaterial whether the assessed had an agent or an office in India or whether he carried out any manufacturing process here. The assessed was entitled to the exemption from the operation of section 9(1)(i) as long as it could be assured that his case was covered by the aforesaid circular. In other words, no income shall be deemed to accrue or arise in India to a non-resident which accrued through or from operations which were confined to the purchase of goods in India for the purpose of export. The finding of fact of the Tribunal being that the assessed was carrying on the business of readymade garments and that his arrangement was only to purchase the readymade garments through an agent clearly entitled the assessed to the benefit of clause (b) of the Explanation to section 9(1)(i).

The Tribunal was, Therefore, right in coming to the conclusion that the said provision of law applied to the present case. We accordingly answer the question of law in the affirmative and in favor of the assessed.

There will be no order as to costs.