Gurdas Singh vs Commissioner of Income Tax

The income tax Appellate Tribunal, Delhi Bench, by its order dated the 29th June, 1961, has referred the following question of law for our opinion: "Whether the amount of Rs. 31,305 covered by the two drafts which the assessee had brought into the taxable territories during the previous year relevant for the assessment year 1948-49 was liable to tax under the Indian income tax Act, 1922, though the drafts were encashed on the 26th April, 1948, after the accounting period had closed?"

The facts are simple. The assessee left India some time in the year 1935 for New Zealand with his family. He stayed on and so worked there till the end of 1947 or the beginning of 1948. During his stay the assessee had earned some monies which he brought to this country by means of two drafts drawn by the New Zealand Bank on the Chartered Bank, Amritsar. One of the drafts was for Rs. 21,752 in the name of the assessee and the other was for Rs. 9,553 in the name of his wife. The assessee arrived in India on the 8th/ 9th March, 1948. The drafts were cashed on the 26th April, 1948. The department assessed the assessee u/s 4(1)(b)(iii) of the income tax Act, hereinafter referred to as the Act, for the assessment year 1948-49, the accounting period being the financial year ending 31st March, 1948. It is not necessary to go into the various contentions of the assessee raised before the department as we are only concerned with one of them. That contention is: Whether the aforesaid income can be treated as having been brought into India in the assessment year 1948-49? The claim of the assessee is that this income was brought into India in the subsequent year, i.e., the assessment year 1949-50. The basis for this argument is that as the drafts were cashed on the 26th April, 1948, i.e., during the accounting period of the subsequent year, the amount in question was only liable to be taxed in the subsequent year and not in the assessment year 1948-49. In other words, the short question that calls for determination is whether the amount in question was brought into the taxable territories when the assessee entered the same with the demand drafts in his pocket or when he cashed these drafts. The matter, though appears to be simple, is not free from difficulty.

The learned counsel for the assessee has raised the argument that the mere possession of the draft is not possession of money. It is merely a document to receive money. The assessee could have changed his mind and either gone back to New Zealand or may have desisted from getting the money from New Zealand to this country. His inaction in not bringing in the foreign exchange to this country may or may not have brought liability on him under the Foreign Exchange Regulation Act but it could not bring into play the provisions of section 4(1)(b)(iii) of the Act. It is only when the drafts were actually encashed that the money could be said to have been brought to India.

Learned counsel for the department, on the other hand, contends that the bringing in the drafts is tantamount to bringing in the money into the taxable territories. In any case it is contended that on principle there is no difference between a draft and a cheque and in law as the encashment of a cheque relates back to the date of the receipt of the cheque, similarly the encashment of the draft would really relate to the date of the receipt of the draft. And, in this view of the matter, the assessee was carrying the money constructively with himself when he entered India. For this contention, reliance has been placed on the decisions of the Supreme Court in COMMISSIONER OF Income Tax, BOMBAY SOUTH, BOMBAY Vs. OGALE GLASS WORKS LTD., and The Commissioner of Income Tax, Bombay Vs. Dharamdas Hargovindas,

Before examining these contentions, it will be proper to set out the relevant provisions of section 4(1)(b)(iii) of the Act. These are as follows:

"4. (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which...

(b) if such person is resident in the taxable territories during such year,...

(iii) having accrued or arisen to him without the taxable territories before the beginning of such year and after the 1st day of April, 1933, are brought into or received in the taxable territories by him during such year, or..."

The very fact that the legislature has used the words "received and brought in" would show that "receiving" is not the same thing as "bringing in".

So far as the present case is concerned, this distinction would be meaningless in view of the observations of Mr. Justice Wanchoo in Dharamdas Hargovandas''s case (supra). At page 433 of the report, while dealing with an argument raised by Mr. Pathak that the word "received" in clause (b)(iii) of the aforesaid section should receive the same interpretation as in clause (a) and, therefore, the receipt in clause (b)(iii) must also be the first receipt, their Lordships of the Supreme Court, while dealing with this argument, observed:

"These words (are received) however are not terms of art and in our opinion their meaning must receive colour from the context in which they are used. In the context of clause (a) these words could only refer to the first receipt; but it does not follow from this that in the context of clause (b)(iii) also they refer only to the first receipt."

While considering clause (b)(iii), their Lordships observed as follows:

"Let us see what clause (b)(iii) is meant to provide for. It will be noticed that clause (a), clause (b)(i) and (ii) and clause (c) deal only with income, etc., which has arisen in the previous year while clause (b)(iii) deals with a special class of cases where a person resident within the taxable territories had income, etc., accruing or arising to him without the taxable territories and which he did not bring into the taxable territories as and when it arose but does so many years later. In such a case it stands to reason that the income, etc., having arisen to such person, may be years before the previous year, must have been received by him outside the taxable territories; but it is urged that clause (b)(iii) does not speak of receipt outside the taxable territories but only speaks of income, etc., having accrued or arisen to him without the taxable territories and that it is possible that though the income, etc., might have accrued long ago it might not have been received even outside the taxable territories. This is theoretically possible; but in our opinion it is clear that when clause (b)(iii) speaks of income, etc., having accrued or arisen without the taxable territories it is implicit in it further that such income, etc., having accrued or arisen without the taxable territories had already been received there. Considering that clause (b)(iii) applies to all income having accrued or arisen after the first day of April, 1933 (that is more than 27 years ago now), it does not seem reasonable to hold that the words ''having accrued or arisen'' used in that clause have no reference to its receipt also outside the taxable territories. It seems to us therefore that what clause (b)(iii) provides is that if any income, etc., had arisen or accrued outside the taxable territories and had been received there some time before the previous year and if such income, etc., is brought into or received in the taxable territories by such person in the previous year it will be liable to be charged u/s 3. In the circumstances, looking to the special provision of clause (b)(iii) it would be reasonable to infer that what it contemplates is bringing into or receipt in the taxable territories in the previous year of income, etc., which had already accrued or arisen without the taxable territories earlier than the previous year and may have also been received there. Any other interpretation would really make that part of clause (b)(iii) which refers to ''received in the taxable territories '' more or less useless, for it is not likely that income having accrued or arisen outside the taxable territories before the previous year should not have been received also outside the taxable territories. Therefore, the reasonable interpretation of clause (b)(iii) is that if a person resident in the taxable territories has already received without the taxable territories any income, etc., accruing or arising to him without the taxable territories before the previous year brings that income into or receives that income in the taxable territories he would be chargeable to income tax u/s 3. Therefore, for the purpose of clause (b)(iii) the receiving in the taxable territories need not be the first receipt."

In the present case, either the money was received or was brought in and the only question that we are called upon to determine is: At what point of time it was received or brought in? On the analogy of the decision of the Supreme Court in Ogale Glass Works'' case (supra), the receiving in the present case would be during the assessment year 1948-49, though in fact the actual receipt was during the assessment year 1949-50. In Ogale Glass Works'' case (supra) the question was whether the delivery of a cheque was payment of money? It was held that the delivery of the cheque was conditional payment and as soon as the cheque is cashed the payment dates back to the receipt of the cheque. Mr. Justice Sarkar in Dharamdas Hargovandas''s case (supra) also dealt with it, on the alternative footing, namely, that "if the assessee did not ''receive'' the income in Bombay, it seems clear to me that he ''brought into'' Bombay that income". While dealing with this question the learned judge observed as follows:

"After that assessee received the income in Bhavnagar, it remained all the time under his control and that is why he could not receive it again: see Sundar Das v. Collector of Gujarat [1922] ILR 3 Lah. 349. An assessee might, however, change the shape of the income received. Section 4(1)(b)(iii) does not require that in order that income may be brought into the taxable territories it is necessary that the shape of the income should not have been changed since it was first received. Indeed, it has not been contended to the contrary. Sub-clause (iii) of section 4(1)(b) would have completely defeated itself if it required that the income had to be kept in the same shape in which it had been received. Whatever shape the income had assumed, the assessee had it with him all the time as income and for the purpose of sub-clause (iii), it could be brought into the taxable territories in that shape.

Now what the assessee had done with the income in this case was to put it with a party in Bhavnagar. The income then took the shape of a debt due to him. It became a right to receive money or money''s worth. When he had that debt discharged in Bombay, he must have had it brought into Bombay. Therefore, he had brought the income into Bombay.

Suppose he had received the income in the shape of coins and had kept it in his safe at Bhavnagar and brought the coins into Bombay. There would have been no doubt that he had brought the income into Bombay. Suppose again, he had put the income originally received by him at Bhavnagar in a bank there and then he obtained a draft from the bank payable in Bombay and brought the draft from Bhavnagar to Bombay and cashed it there. Again, there would be little doubt that he had, by this process, brought the income into Bombay. It is well known that though income in income tax law is generally contemplated in terms of money, it may be conceived in other forms. In fact anything which represents and produces money and is treated as such by businessmen, would be income: see per Lord Lindley in Gresham Life Assurance Society Ltd. v. Bishop [1902] AC 287, 296 and per Lord Halsbury L.C. in Tennant v. Smith [1892] AC 150, 156. If the bringing of the bank draft would be bringing of income, I am unable to see why the bringing of a right to receive the money would not be bringing of income when that right has been exercised and turned into money''s worth. Such a right would be based on a promise by the debtor to pay and, though verbal, would be considered by businessmen to represent money. The assessee in Bombay used that right and obtained money''s worth. He accepted the Bhavnagar concern''s cheque in Bombay, gave it a pro tanto discharge for the debt owing by it to him. He used the cheque in acquiring a new asset, namely, a promise by the Bombay concern to pay money. Therefore, in my view, the respondent-assessee was liable u/s 4(1)(b)(iii) to be taxed on the amount of the cheque as income which he had brought into the taxable territories."

Lord Lindley in Gresham Life Assurance Ltd. v. Bishop [1902] AC 287, 296 observed as follows:

"...that a sum of money may be received in more ways than one, e.g., by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by businessmen."

It cannot be disputed that a bank draft is a bill of exchange: see the definition of bill of exchange in section 5 of the Negotiable Instruments Act. Mr. Bhashyam in his Treatise on the Negotiable Instruments Act, ninth edition, at page 413, observed:

"A bank''s draft is a bill of exchange drawn by one bank upon another, and the relationship of the holder of the draft and any prior party, such as the bank, is that of a creditor and a debtor."

The bank draft virtually is a convenient mode of carrying money from one place to another and its production before the bank on which it is drawn produces the coin. The following observations of S. Evelyn Thomas and Maurice Megrah on Banker and Customer, fifth edition, may usefully be quoted:

"Bankers'' drafts provide a convenient and safe means of transmitting funds being frequently applied for by customers or other persons who wish to send a remittance that is as good as cash or bank notes, but free from any great risk of loss. A banker''s draft has the advantage over a money order that it can be issued for any amount and that it is fully a negotiable instrument (unless transfer is restricted by making it payable to a named person only)."

To the similar effect are the observations of the Full Bench of the Lahore High Court in AIR 1945 213 (Lahore) , which are as under:

"Ordinarily, a bank cannot stop payment of a draft unless there is some doubt as to the identity of the person presenting it as being or properly representing the person in whose favour it is drawn....

The only question with regard to which the bank has to satisfy itself is that of the title of the person presenting the draft."

In the present case, therefore, on either basis, namely, that the money was received in the taxable territories, the receipt or the bringing in would be when the assessee entered the taxable territory with the drafts in his pocket. This is the view that the Appellate Tribunal has taken and we see no error in that view.

The learned counsel for the assessee relied upon Forbes v. Scottish Provident Institution [1895] 3 Tax Cas. 443, Gresham Life Assurance Society v. Bishop 1, Hall v. Marians [1935] 19 Tax Cas. 582, Wild v. King Smith [1941] 24 Tax Cas. 8 AR. PL. SP. MANICKAM CHETTIAR Vs. COMMISSIONER OF INCOME TAX, MADRAS., , Commissioner of income tax v. Ahmedabad Advance Mills Ltd. [1938] 6 ITR 3, (1939) 7 ITR 160 , Keshav Mills Ltd. Vs. Commissioner of Income Tax, Bombay, and Ogale Glass Works'' case (supra). None of these cases is of any assistance to the learned counsel. It is admitted by him that there is no case directly dealing with the point involved. The result, therefore, is that the question referred to us is answered in the affirmative. However, in view of the difficult nature of the question involved and in the circumstances of the case there will be no order as to costs.