Harakchand Makanji and Co. vs Commissioner of Income Tax, Bombay

Chagla, C.J.

[1] The assessee has been held to be an agent of Harkisondas Khushal who is a person residing in Port Sudan. It appears that in S. Y. 1999, which is the previous year for the assessment year 1944-45, the assessee shipped to Port Sudan to his foreign principal goods of the value of RS. 16,65,708. In the course of the shipment, goods of the value of Rs. 3,09,420 which were carried on S. S. Rekmani were totally lost as the ship was sunk. The Tribunal has determined the result of the business transaction in the following manner. It has calculated the net profit on the goods sent to Port Sudan at the rate of 15 per cent. It has deducted Rs. 3,09,420 from Rs. 16,65,708 and on the balance at the rate of 15 per cent, the resulting amount is RS. 2,03,445. This is the result of goods sent from British India being sold in Port Sudan. Against that the Tribunal has set off the loss of RS. 3,09,420 caused to the foreign principal by the goods on S.S. Rehmani being lost, and, therefore, the Tribunal has arrived at a net loss of Rs. 1,05,975.

[2] In our opinion, the method adopted by the Tribunal in assessing the profit or loss is the proper method. Mr. Narayan has argued that whereas they should have ascertained the profit at RS. 2,03,445 they should have treated the loss of RS. 1,05,975 as having accrued in British India, and, therefore, according to him whereas the profit should have been apportioned u/s 42 (3) the loss should not have been apportioned but the whole loss should have been treated as having taken place in the taxable territories. In our opinion, the approach made to this question by Mr. Narayan is not correct. The scheme of Section 42 is that the income of the foreign principal which accrues to him by a business connection in the taxable territories is an artificial income which is to be taxed u/s 42 (1). Once a business connection is established, the income which accrues or arises by reason of that business connection is taxable u/s 42 (1). It is only after that income is determined or if there is a loss that loss is determined, then the stage arises for apportioning the profit or loss u/s 42 (3). No question of apportionment arises in the first instance when the profit or loss has to be ascertained u/s 42 (l). For that purpose, the whole of the income or the loss of the foreign principal must be considered as his income within the meaning of Section 42 (l). Therefore, in determining the loss of RS. 1,05,975 the Tribunal were acting properly as required by Section 42, (l). But having done so, they took the view that the loss of Rs. 1,05,975 could not be apportioned u/s 42 (3). The Tribunal has given no reason why the loss cannot be apportioned. Turning to Section 42 (3) it is clear that when you find a business of which all the operations are not carried out in the taxable territories, then the profits and gains have to be apportioned and the profits and gains of the assessee are only those which can be reasonably attributable to that part of the operations which are carried out in the taxable territories. It is clear that "profits and gains" as used in this sub-section mean not only profits made by the business, but it means the total result of a particular business, so that if in place of profits and gains there are losses, they are as much to be apportioned as the profits of the business. Now, the loss should be apportioned between the taxable territories and Port Sudan is a matter for the Tribunal to decide.

[3] The final question raised on this reference is whether the loss as apportioned can be set off u/s 24 (2). The Tribunal has taken the view that the loss cannot be so set off. Here also, with respect to the Tribunal, it is difficult to understand why Section 24 (2) does not apply to the case of the assessee. Turning to Section 42 (l), once the statutory agent is assessed to tax in respect of the income of the foreign principal, the statutory agent is to be deemed to be for all the purposes of this Act the assessee in respect of such Income Tax. One of the purposes of the Act is to allow the assessee a set-off u/s 24 under given circumstances. Therefore, if the statutory agent is an assessee, he has the same right as any other assessee under the Act. There seems to be no reason why the assessee should be deprived of his right to set off u/s 24 (2).

[4] The answer to question 1 will, therefore, be in the affirmative in the first part. Question 2 in the affirmative. Question 3 in the affirmative to the extent of loss being apportioned u/s 42 (3). No orders as to costs.

[5] Answered accordingly.