S. Kanagasabapathi Pillai and Others vs Commissioner of Income Tax, Madras

Veeraswami, J.

(1) The assessee, at the relevant time, was a working partner in the firm of V.T.V. Dharmaperumal Pillai, which carried on business at No. 72

Fourth Cross St. Colombo. He was also a partner in another firm, S.K. Kanagasabapathi Pillai and Co., having its head office at Dindigul and

branch offices at Tuticorin and Colombo. He has been assessed in the status of an individual and as a resident and ordinary resident. For the

assessment year 1955-56 corresponding to the accounting year ended February 1, 1955, he was assessed on a total income which included Rs.

10253, as foreign income after deducting the statutory allowance under the Third Proviso to Sec. 4(1) of the Income Tax Act 1922. The total

foreign income consisted of Rs. 2400 as salary and the balance, as working share of the assessee''s of profits. In the firm of V.T.V.

Dharmaperumal Pillai, the Income Tax Officer noticed that a sum of Rs. 15,000 had been credited to the assessee''s personal account in the books

of the Tuticorin branch of S.K. Kanagasabapathi Pillai and Co., by debit to the Colombo branch account, which was traced to a credit entry for

that sum received from V.T.V. Dharmaperumal Pillai and Co., through the other firm at Colombo. This was taken to be a remittance on the view

that it was an accretion to the assessee''s balance arising out of the debit in the books of V.T.V. Dharmaperumal Pillai and Co. Nevertheless, as

there was a large accumulation of taxed profits referable to a period prior to the accounting year, the computation of the foreign income for the

assessment year was restricted to Rs. 10253, after deducting the statutory allowance. it is thus clear that the assessment of the foreign income was

on accrual basis under Sec. 4(1)(b)(ii), the Income Tax Officer being of the view that the assessee would be entitled to the benefit of the third

proviso. The proceedings before the Appellate Assist. Commr. of Income Tax as well as the Tribunal, however, concentrated on the question

whether, in view of the book entries, there was a remittance of Rs. 15000 of the assessee''s foreign income to India during the assessment year.

The Appellate Assistant Commissioner, with whom the Tribunal concurred, found that the effect of the book entries was that the assessee acquired

a right to draw the sum of Rs. 15000 in India against a loan given by him at Colombo, and he having thus secured the right to draw the amount in

India from S.K. Kanagasabapathi Pillai and Co., at his own will, at Tuticorin, this was a remittance. The Tribunal added that his was not a case of

mere book entries treated as remittance, but a clear-cut case of transfer of assets of India. It was of the view that so far as this remittance was

concerned, it was not different from a clear-cut case of transfer of a foreign bank account of an assessee to a branch of the Bank in India. The

Tribunal made its order on 17-8-1957 dismissing the assessee''s appeal. On 28-12-1956, as is seen from the statement of the case submitted to

this Court, there was an order under Sec. 35, the effect of which was the whole of Rupees 14753 was treated as fully remitted and the statutory

allowance that had been granted was withdrawn. It does not appear, in fact, the Tribunal says so, that this fact was brought to its notice while it

disposed of the appeal. At the instance of the assessee, the following question has been, u/s 66(2), referred to this Court:--

Whether on the facts and in the circumstances of the case, there was material to sustain the finding of the Tribunal that the amount of Rs. 15000

constituted a remittance of profits to India made by the assessee in the relevant year of account"".

(2) In our view, the question so framed does not precisely bring out the real point in issue. In fact, it is nobody''s case that the assessee, during the

according year, made a foreign profit of Rs. 15000. As we mentioned, the entire basis of the assessment was under Sec. 4(1)(b)(ii). This was but

right, as the assessee''s system of account was mercantile. This was the basis also on which he had been assessed in the previous years, and in

each of the years he was granted statutory allowance under the third proviso to Sec. 4(1). On what basis the original order of the Income Tax

Officer granting such allowance for the assessment year in question was revised under Sec. 35, is not clear. But we are of the view that so far as

Rs. 10253 that was brought to tax by the Income Tax Officer is concerned, there can be no doubt that the charge should in any case be sustained

on the accrual basis. The controversy, therefore, must necessarily centre round the grant of the statutory allowance. We would, therefore,

reformulate the question for our consideration as under:

Whether on the facts and in the circumstances of the case, the sum of Rs. 4500 originally allowed as statutory deduction was liable to be included

in the total foreign income chargeable to tax?

On that question, counsel for the assessee has first addressed himself to the point as to whether at all there was a remittance. On 30-4-1954, in the

day book of S.K. Kanagasabapathi Pillai and Co., Colombo, there was a credit in favour of the assessee through V.T.V. Dharmaperumal and

Co., with a sum of Rs. 15000. On the same day, there was a debit against V.T.V. in the name of S.K. Kanagasabapathi Pillai and Co., of a sum

of Rs. 15000. On 31-1-1955, a sum of Rs. 15000 was debited in the Colombo day book of S. K. Kanagasabapathi Pillai & Co., in favour of its

branch at Tuticorin, and this was credited in the Tuticorin accounts in favour of the assessee. The assessee would appear to have contended before

the Revenue at different stages as well as the Tribunal that these entries were but book adjustments and eventually had no significance and that

there was actually or constructively no remittance at all of any foreign income of the assessee to India during the assessment year. This view of the

entries has not been accepted by the Department as well as the Tribunal, and as we think, quite rightly. That the credit in favour of the assessee

from V.T.V. Dharmaperumal and Co., was a real one, can admit of no doubt as seen from the fact that S.K. Kanagasabapathih Pillai and Co., as

distinguished from the assessee as an individual, made use of it by debiting it against V.T.V. So far as the assessee was concerned, there was no

question of adjustment in the account, and the real position was that ultimately the credit of Rs. 15000 in his favour in the Colombo books of S. K.

Kanagasabapathi Pillai and Co., was transferred to its Tuticorin branch account to his credit. The Tribunal was, therefore, right that although no

cash actually was transmitted, the effect of the credit entry in favour of the assessee in the Tuticorin branch account was that he had the right to

operate upon it and draw the entire amount covered by the credit entry at Tuticorin. ""Remittance"" is an elastic word and is not a term of art. It is

not merely where cash or value in kind physically passes or is transferred, there is a remittance. Even where there is transfer by credit entries in the

books of account, and the credit entry so transferred is such that the person in whose favour it is made has a right to operate upon and draw the

amount, there is remittance. Counsel for the Revenue attempted to distinguish between actual remittance and constructive remittance. In the

circumstances of this case, we need not go into this question. All that is necessary to say is that a transfer by book entries, without actual cash

being handled, may as much result in remittance as by the physical transfer of cash. This proposition is supported by authority. The Commissioner

of Income Tax Vs. A.T.K.P.L.S.P. Subramaniam Chettiar, , decided by a Full Bench of this Court held that credit entries made on account of

interest due by debtors in foreign places to the assessee must be treated as payments though that interest was not actually paid in British India. This

decision was approved by the Supreme Court in Indermani Jatia Vs. Commissioner of Income Tax, Uttar Pradesh, . In taking that view, the

Supreme Court observed:

This decision The Commissioner of Income Tax Vs. A.T.K.P.L.S.P. Subramaniam Chettiar, , would show that the effect of making a credit entry

in the interest amount would be to treat that amount as income or profits received by the assessee or treated by him as received for the purposes of

the tax provided the assessee keeps the accounts according to the mercantile method of book-keeping"".

(3) The same view prevailed in The Commissioner of Income Tax, Bombay Vs. Dharamdas Hargovindas, , Sarkar J., expressed his opinion:--

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"".

Earlier, the same learned Judge stated:--

In fact, anything which represents and produces money and is treated as such by businessmen, would be income"".

In this case, the effect of the credit entry made in the Tuticorin branch in favour of the assessee was, he had the right to operate on it and receive

the entire cash, and that is, in our opinion, a receipt.

(4) But we do not see how the receipt of Rs. 15000 will, in any way, assist the Revenue so fare as the third proviso to S. 4(1) is concerned,

Section 4 is not a charging section. That only relates to computation of total income chargeable to tax. When the assessment, as we already

mentioned, of the foreign income was admittedly on accrual basis, and this is not disputed by learned counsel for the Revenue, we do not see how

the receipt will enable the Revenue to include it in the chargeable total foreign income. The Revenue could only bring it to tax on the basis of

receipt. But that is not the case here. The receipt, in the circumstances, will have only relevance in the context of the assessment on the accrual

basis to the grant of statutory allowance under the third proviso. The proviso says that if the foreign income, profits and gains which accrue or arise

to an ordinary resident in India without the taxable territories is more than the amount brought into the taxable territories in the relevant year, they

shall not be included in the assessment of the income of such year, as so much of the excess as does not exceed Rs. 4500. If the remittance

exceeds the foreign income, profits and gains, obviously no question of granting statutory allowance can arise, for the allowance is in respect of the

foreign income not remitted. But, for the Revenue, the receipt of Rs. 15000 has been pressed into service in order to deny the assessee the benefit

of the third proviso. We do not think that the stand taken by the Revenue can be sustained. It may be noticed that the credit entry in the Tuticorin

branch account in favour of the assessee was made only 1-2-1955, which was not, therefore, in the accounting year. This itself would disentitle the

Revenue from relying on the receipt and denying the application of the third proviso. In our view, the amount brought into the taxable territories for

the purposes of the third proviso should be an amount referable to the income, profits and gains which accrue or arise during the accounting year

without taxable territories. There is also another reason which may stand in the way of the Revenue''s contention in regard to the third proviso. In

the statement of the case, the Tribunal has stated that the assessee had a total taxed foreign income unremitted prior to the accounting year,

amounting to Rs. 36,565, upto the assessment year 1954-55. If, therefore, there are two funds both representing foreign income, profits and gains,

one of which has already suffered tax and the other has not, and there was a remittance during the accounting year, of a certain sum the source for

which there is no indication there is, in our opinion, a presumption that the remittance should have been from the fund which has already suffered

tax. This presumption, as was pointed out in M. S. M. M. MEYYAPPA CHETTIAR Vs. THE COMMISSIONER OF Income Tax,

MADRAS., , is no doubt, a rebuttable one. But no attempt has been made by the Revenue to rebut it, nor is there anything in the record before us

to countervail the presumption. On this view, the revenue cannot rely on the receipt of Rs. 15000 to exclude the assessee from the statutory

allowance he is entitled to under the third proviso to Sec. 4(1).

(5) We answer the question as reframed by us in favour of the assessee with costs. Counsel''s fee Rs. 250.

(6) Answered accordingly.