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Judgment
Satyanarayana Rao, J.—The following question was referred to us by the Income Tax Appellate Tribunal, Madras Bench:
Whether on the facts and circumstances of this case the finding of the Bench that the appellant is at resident within the meaning of Section 4-A (b),
Income Tax Act is tenable in law?
The assessee is a Hindu undivided family whose manager is Rajah Kandimalla Venkatarama Narasimha Rao Bahadur, the Zamindar of
Aswaraopet. He is a permanent resident of Aswaraopet in the Nizam''s State. For the accounting year 1938-89 he was asked to pay Income Tax
on a total income of Rs. 14,630 which consisted of Rs. 180 being interest accrued in money-lending business. Out of Rs. 19,000 being the net sale
proceeds of paddy, net grazing fees and net sale proceeds of tobacco, allowing the statutory deduction of as. 4500, the balance of Rs. 14,500
was treated as income from sources other than agricultural income from outside British India to which the interest from money-lending business
was added thus making a total income of Rs. 14,630. The assessment was made on the basis that the undivided family is resident in British India.
This position was contested by the assessee before the Income Tax authorities and the Appellate Tribunal, but he was unsuccessful in his
contention.
The present Section 4 A, Income Tax Act was inserted by Section 5, Income Tax Amendment Act, 1939 and Clause (b) of that section, which
is the relevant section for the purpose of this case, reads as follows:
A Hindu undivided family, firm or other association of persons is resident in British India unless the control and management of its affairs is situated
wholly without British India."" It is common ground that the control and management of the affairs must be during the accounting period though it is
not so expressly stated in the section. The expression ""control and management"" implies the direction of the affairs of the family or the brain of the
management of the family affairs. The use of the word ''situated'' in the section implies that the location of the control and management must be at a
place without British India. From the use of the word ""wholly"" it must be inferred that if the seat of control and management is in more than one
place at least one of which is in British India, then the control and management of the affairs of the undivided family would not be wholly without
British India, and the undivided family must be treated as resident in British India within the meaning of the section. This is practically the meaning
that was given to the section by Patanjali Sastri J. in COMMISSIONER OF Income Tax, MADRAS Vs. V. V. R. N. M. SUBBIAH
CHETTIAR., the learned Judge observes:
''Control and management'' signifies in the present context, the controlling and directive power, ''the head and brain'' as it is sometimes called, and
''situated'' implies the functioning of such power at a particular place with some degree of permanence, while ''wholly'' would seem to recognise the
possibility of the seat of such power being divided between two distinct and separated places. Clause (b) accordingly requires that the power of
control and direction of the affairs of the family or firm should not have a seat of operation in British India. I find nothing in that clause to support
the view that the acts of control and management exercised in British India by the person having the power of control should extend to the whole
affairs of the family or firm in order to make it ''resident'' in British India. On the other hand, the insistence on the situation rather than exercise of
the control and management makes it difficult to accept the suggestion that an isolated or casual act of management and control exercised in British
India by a karta who lives abroad is sufficient to bring the family within Section 4 A (b).
It is not every casual act of management or looking after in British India of a matter relating to the family that would locate the control and
management of the undivided family in British India. Management implies continuous looking after an affair of the family, not an occasional looking
after the affair of the family. It implies some degree of permanence and the presence of the manager in British India so as to make it practically a
seat of the control or management of the affairs of the undivided family in British India. Prom this point of view, stray acts or occasional visits for
something connected with the property of the family would not by reason of the presence of the manager in connection with such matters in British
India bring the control and management into British India. The section itself was introduced in 1939, that is during the accounting period, and it is
for that reason that we find that the Income Tax Officer in dealing with the question, as will be presently pointed out, misdirected him-self regarding
the interpretation of the section as there was no light thrown upon the section by any decided cases at that time.
In the course of the argument before us reference was made to a few decisions bearing upon the interpretation of the section. The case mostly
relied on is the decision in COMMISSIONER OF Income Tax, MADRAS Vs. V. V. R. N. M. SUBBIAH CHETTIAR., . In that case an
undivided family owned property in British India and the karta lived in Ceylon with his wife and children and carried on business in partnership with
a stranger from the year 1928. The partnership was dissolved in 1930 and the joint family conducted that business in Colombo since that date. The
family owned an ancestral family house at a place in British India which was in the occupation of assessee''s mother, and whenever the karta visited
British India he stayed with the mother. He also owned property in British India in respect of which he was also assessed to income tax. For the
assessment years 1940-41 and 1941-42, in addition to the income of the family properties the income derived from the Ceylon business was also
added and he was called upon to pay Income Tax on that basis on the ground that the family was resident in British India. The assessee was able
to satisfy the Appellate Tribunal that the family was not resident in British India, but that decision was reversed by this Court. In the judgment of the
learned Chief Justice reference was made to the earlier decisions of this Court, but no definite principle is enunciated by the learned Judge to give
guidance regarding the interpretation of the section, The matter was disposed of by the learned Judge on the facts found, namely, that the karta
was attending to some litigation during the accounting period in respect of the property of the family and was also attending to the assessment of
the property tax by the Income Tax authorities with reference to the properties in British India. In addition to these two circumstances, there were
also entries in the diary maintained by the karta which showed that between 7th April 1941 and 29th March 1942 the karta visited British India on
seven occasions and spent about 101 days in British India. These visits were utilised in attending to the litigation pertaining to the family properties.
There were also subsequent visits on different occasions to British India, but these were in connection with Income Tax matters when he bad also
to interview the Inspecting Assistant Commissioner of Income Tax. On these facts, the learned Judge drew the inference that the control and
management of some of the family affairs was in British India and that therefore the assesses was resident in British India. On the facts as found
there does not seem to be any difficulty in coming to the conclusion that the control and management of some of the affairs of the family was in
British India, and particularly as there was an ancestral house in which the karta lived whenever he visited British India. The affair of a family means
not merely attending to particular acts such as defending or filing suits, but something in the nature of a series of acts such as the controlling of a
business or looking after the sales and purchase of properties and allied matters.
The other learned Judge after adverting to the import of the section as stated above considered that the facts of that particular case justified the
inference that the management and control of the affairs of the undivided family were not wholly without British India and that the Income Tax
Appellate Tribunal approached the case from a wrong angle. This case as already stated is helpful in that it throws light on the interpretation of the
section, particularly the judgment of Patanjali Sastri J,
Of the earlier cases, the case COMMISSIONER OF Income Tax, MADRAS Vs. GANGABISHAN MOHANLAL., , was a case in which a
joint family had its residence in Secunderabad outside British India, but carried on business at Guntur and Bombay through agents. During the
accounting year, the assessee was no doubt resident in Secunderabad but paid visits to Guntur and stayed there for two days. It was found that
during his stay he did not exercise any acts of management and control of the business at Guntur and therefore It was held that the undivided family
was not resident in British India to any extent and was not liable to be assessed on that footing. The importance of this decision is that mere
location of a business is not enough but there should be actual management and control of a business carried on at a particular place is order to
make that place a place of residence within the meaning of the section.
The other decision of this Court is the one in Commissioner of Income Tax, Madras v. Shanmugham Rubber Estate, Kaulalampur, I. L. R.
(1946) Mad. 162: A. I. R. 1945 Mad. 366. The decision in that case also turned on the peculiar facts found. There was a partnership firm for the
purpose of acquiring and working a rubber plantation in Malacca known as the Shanmugham Rubber Estate. Under the terms of the partnership
deed two of the partners were entitled in rotation to control the business of the partnership. In the year of account 1940-41 one of the controlling
partners lived at Karaikudi in this Presidency, while the other lived in the native state of Pudukottah. The question was whether the firm was
resident in British India within the meaning of Section 4-A (b) of the Act, as part of the control was exercised by one of the partners, who resided
in British India. The view taken by the Appellate Assistant Commissioner and the Tribunal was that the firm was not resident in British India. But
this finding was not accepted by this Court. It was found by the learned Judges in the course of the judgment that the partner who lived in British
India was giving instructions and was directing and controlling the business by correspondence with the agent and therefore it was held that the
control and management of the business was not wholly outside British India. It is not a case of a stray act or an act which he was forced to attend
to by reason of the circumstances, but the partner voluntarily decided to live in British India and from there to control the business which he was
entitled to do under the terms of the partner, ship deed. There will be no difficulty in such a case in coming to the conclusion that the control was
divided between British India and elsewhere.
There is a decision of the Bombay High Court in BHIMJI R. NAIK Vs. COMMISSIONER OF Income Tax, BOMBAY., . In that case, the
de jure manager was living in British India, though the business was carried on in Africa. The test that was laid down by the learned Judges was
that the control and management required by the section must be the control and management in fact and not merely the right to control and the
right to give directions. In other words, it must be de facto control and management and not merely de jure. This is also the view of this Court as
expressed in COMMISSIONER OF Income Tax, MADRAS Vs. GANGABISHAN MOHANLAL., . These two decisions are authorities for
holding that what is required is actual exercise of the control and management of an affair of the family such as a business or other dealings or
transactions relating to the family.
The Income Tax Officer in the present case did not pay sufficient attention to the language of Section 4-A (b) of the Act. He held that the
evidence adduced in the case, namely, that the karta was visiting British India off and on in recent years in connection with civil suits filed by or
against him and that his second son was maintaining a dwelling house at Ellore since 1935 in connection with his children''s education, was not
conclusive; but the fact that from 1929-30 he was assessed on the basis that he was a resident in British India was sufficient to conclude that even
under the present sections the undivided family was resident in British India. The law before 1939 was different as there was no definition of a
resident before the introduction of the present section in 1939. Various factors were taken into consideration in arriving at the conclusion whether
in a given case a person is a resident in British India or not; but that test will not hold good u/s 4 A (b). The conclusion therefore of the Income tax
Officer is vitiated by this fundamental defect. One would have expected that the matter would have received better attention by the Appellate
Assistant Commissioner. But he again did not consider the facts as required by the section. In an assessment order relating to this very assessee for
the subsequent year 1942-43, he seems to have considered the question and therefore he thought that his conclusion in that case would justify the
conclusion in this case relating to the accounting year 1938-39. What the law requires however is the control and management of the affairs in the
accounting period and not in any subsequent or earlier accounting period. He seems to have thought that ordinary residence of a family does not
vary from year to year as u/s 4-A (b) it is only the general control and management of the family affairs that is contemplated and not management
of the affairs of any particular year. This view is certainly wrong. Therefore, neither the Income Tax Offices nor the Appellate Assistant
Commissioner ad-dressed themselves to the question which they were called noon to decide under the section and based their conclusion on
matters which are wholly irrelevant for the purpose of the decision. No doubt in the order of the Appellate Tribunal specific reference is made to
the language of Section 4-A (b) and to the requirement of that section. The Tribunal stated in para. 5 of the order that the appellant is the manager
of a Hindu undivided family and owns properties in British India. There is no doubt about this fact and there is also the additional circumstance that
this family has got its permanent residence or ancestral family house at Aswaraopet in the Nizam''s state. They then proceeded to observe that the
appellant ""does money-lending in British India and borrows money here."" From the evidence given by the assessee it would be seen that 90 per
cent, of his money-lending business is to residents in Hyderabad and if by the expression money-lending in British India is meant that the assesaee
lent money to persons resident in British India it would be correct; but the assumption that the money-lending business was in British India does not
seem to be warranted by anything on record.
The Tribunal next found that suits have to be filed by the assessee for recovery of amounts due and sometimes in connection with his dealings. It
has not been stated in the order whether these suits were suits which were pending or which were instituted in the accounting year or were
instituted before or later. In the deposition of the assessee all that be says is that in the current year, meaning the year in which he gave evidence,
1941, he had suits at Ellore. There is therefore nothing on record to justify the conclusion that the assessee was attending to suits in the accounting
year at any place in British India. We do not also know the nature of the suits, whether they related to the joint family properties or money-lending
business; and merely because he attend-ed to certain suits in British India, even if it be true, it cannot be assumed that those suits had anything to
do with the affairs of the family. It is from these facts and also from the finding of the Commissioner of Income Tax, who investigated the point
relating to the latter years, i. e., 1940 41, 1941-42 and 1942-43 and came to the conclusion that the management of the properties was in British
India, the Appellate Tribunal thought that the inference that the appellant had control and management of the business in British India was justified.
Here again, the crucial mistake committed by the Appellate Tribunal is, in not concentrating attention to the fundamental question whether in the
accounting period there was anything to show that the karta actually exercised control and management of any of the affairs of the family in British
India either from Ellore or elsewhere. To base the conclusion on the finding of the Commissioner in the three latter years and to conclude therefrom
that even in 1988-89 the assessee was managing the properties in British India is not warranted. Whatever might have happened in the subsequent
years, it cannot be inferred from that fact or from the conclusion of the Commissioner in the subsequent years that in the prior years also the
assesses was resident in British India within the meaning of the section.
Viewed from any point, in my opinion, the finding of the Appellate Tribunal cannot be accepted as it is not supported by any evidence on
record and the findings, such as they are, are arrived at by not considering the crucial question which under the section it is incumbent upon them to
consider in order to arrive at the conclusion whether the assessee is or is not resident in British India. They ought to have confined their attention to
and considered the question whether during the accounting period there was any material to justify the inference that there was control and
management of the affairs of the family to any extent in British India.
Assuming for a moment that there were suits in the accounting period and also assuming that they related to some property belonging to the
family, stray visits of the assessee would not constitute control and management of the affairs of the family in the sense in which it is used in the
section. The test to be applied is the one which has already been stated and to be found in the judgment of Patanjali Sastri J., in
COMMISSIONER OF Income Tax, MADRAS Vs. V. V. R. N. M. SUBBIAH CHETTIAR., . Applying that test I think that the inference that
the control and management of the affairs of this undivided family is in British India is not justified.
For these reasons, I am of opinion that the question referred to us should be answered in the negative and in favour of the assesses. The
assessee is entitled to his costs, which I fix at Rs. 250.
Viswanatha Sastri J.--I agree. For the assessment year 1939-40 the revenue authority has assessed a joint Hindu family represented by its
manager as a resident in British India during the year of account 1938-89. The assesses disputed the legality of the assessment on the ground that
the family was non-resident during the relevant period. It is common ground that the ancestral and permanent home of the family is at Aswaraopet
in Hyderabad State, and that the manager of the family, Sri K. V. Narasimha Rao, is a permanent resident of that place. The family owns lands in
Hyderabad State from which the bulk of its income during the year of account has been derived. The family also owns 6 villages in the Godavari
and Krishna Districts of the Madras Presidency, the income from which is collected by a local agent and sent to the manager of the family at
Aswaraopet. It also appears from the evidence that the family has large investments of money mainly in the shape of mortgages, but in the year of
account only a sum of Rs. 130 has been realised as interest owing to the inability or reluctance of the borrowers to pay even the interest due. Sum
of the investments were in India, the borrowers being landholders. The manager of the family is stated to have paid occasional visits to Ellore to
conduct or defend some suits and also to contest the levy of Income Tax upon the family as a resident. A house or rather a portion of a house was
taken on lease at Ellore by one of the junior members of the family to enable one of his sons to be educated in a local school. It appears that the
family had been assessed to Income Tax since 1929, and has also been assessed to Income Tax subsequent to the year of assessment with which
we are now concerned.
Now the question of residence must be determined with reference to each year, and the finding as to residence in the previous years, if indeed
there was such a finding, would not warrant the assumption that when the proceedings for assessment for the year 1939-40 were started, the
assessee was resident in British India in the year of account. The tax-payer''s chargeability in each year of charge constitutes a separate issue,
though the facts on which the question has to be decided may form one continuous story. In the present case there is a further difficulty in the way
of treating the assessment for the previous year as a relevant consideration. Section 4-A (b) on which the liability to assessment in the present case
rests was enacted in 1939 by the Amending Act VII [7] of 1939, It is true, as pointed out by Mr. Rama Rao Sahib, and by the Appellate
Assistant Commissioner of Income Tax, that the words ""in any year"" found in Section 4 A (c) with reference to the residence of companies is not
found in Section 4-A (b) with reference to the residence of firms, undivided Hindu families and association of parsons. In my opinion, this omission
has not the effect of making a firm, undivided Hindu family or association of persons once a resident always a resident and liable to Income Tax on
the basis of residence for all time to come.
Section 4-A (b) makes the place of residence of a joint Hindu family depend upon the place of control and management of its affairs and
further provides that it is only if the control and management is wholly situated outside British India that the family can be classed as a non-resident.
To some extent, firms, undivided Hindu families, and associations of persons were assimilated to the position of companies with this important
difference that in the case of companies the control and management of their affairs must be situated wholly in India to make them resident. Even
so, the tests and principles which had been laid down by the English Courts to find out the place of control and management of companies would
also be useful in finding out the place of control and management in the case of firms, undivided families and associations of individuals. This would
be so, especially when regard is had to the history of legislation since 1922. A company, wherever it may be incorporated, is deemed to reside for
purposes of income tax, at the place from which the effective control and management of its operations is exercised, the place of incorporation
being a relevant but not the decisive factor. Numerous decisions of the English Courts including those of the House of Lords have held that if the
ultimate management, centre and control of the business, the head and brain of the trading adventure, the head and seat and directing power or the
central management and control, as it has been variously described, is in a particular place, that is the place where the company resides for the
purposes of assessment to Income Tax. The fact that the physical operations from which the profits are ultimately derived are carried on in a
particular place is not the test of residence of a company. Shortly stated, for purposes of Income Tax a company resides where its real business is
carried on and its real business is carried on where the central management and control actually abide. The Indian Legislature that enacted Act XI
[11] of 1922 did not define the term ""residence"" with reference to companies, firms and association of persons, Though there was no definition,
Courts in this country generally followed the principles evolved by the English Courts in determining the residence of a company, firm or
association of persons. It is unnecessary to refer to the decisions on this point in view of the subsequent change in the enactment. So far as
undivided Hindu families are concerned, the view once held by this Court that an undivided family resided for Income Tax purposes at all the
places where any of the members of the family happened to reside and not merely at the place where the management and control of the family
affairs and business abided, is no longer tenable in view of Section 4-A (b) of the Act. u/s 4-A (b) the test of residence in the case of firms and
undivided Hindu families is not the presence of the partners or the manager of the family at a particular place or on particular occasions or the
receipt of the copies of the accounts of the business conducted abroad in a particular place, but the test is whether, in fact and in truth, the control
and management of the affairs and business of the firm or the family is exercised at a place in India either by the partner or the manager of the
undivided Hindu family. That this is the test has been laid down by this Court in COMMISSIONER OF Income Tax, MADRAS Vs. PR. PL.
PALANIAPPA CHETTIAR., and The Commissioner of Income Tax Vs. Gangabishan Mohanlal, and by the Bombay High Court in BHIMJI R.
NAIK Vs. COMMISSIONER OF Income Tax, BOMBAY., . The decisions in MESSRE S V M MOHAMED JAMALUDDEEN AND
BROS Vs. COMMISSIONER OF Income Tax., and Commissioner of Income tax v. Shanmugham Rubber Estates, Kaulalampur, I. L. R.
(1946) Mad. 162 A. I. R. 1945 Mad. 366 were cases where the supervision of the partnership business was exercised, or could effectively be
exercised by one of two partners who was resident in British India. Therefore in those cases the control and management of the business could not
be said to have been situated wholly outside British India. These decisions however, are no authority for the proposition that mere temporary visits
of a partner or the karta of a joint Hindu family to a place where the business of the firm or the family is carried on would be sufficient to constitute
the firm or the joint Hindu family a resident of that place. The question of the residence of individual partners or members of a joint Hindu family is
immaterial in considering whether the firm or family is a resident for the purposes of Income Tax, unless such individuals also exercise control and
management over the family affairs and business or the firm''s affairs at the place of their residence.
Mr. Rama Rao Sahib placed strong reliance on a recent decision of this Court in COMMISSIONER OF Income Tax, MADRAS Vs. V. V.
R. N. M. SUBBIAH CHETTIAR., . With the correctness of the decision on its own facts we are not concerned. I may, however, respectfully
adopt the test of residence in the case of firms and joint Hindu families laid down by Patanjali Sastri J. in the passage quoted in the judgment of my
learned brother. Even so, I do not see my way to hold that the manager of a joint Hindu family permanently residing in Hyderabad State who is
obliged to come to India to attend to the hearing of some suits in which he is involved either as plaintiff or as defendant, or to attend to an Income
Tax enquiry regarding the assessment of the family as a resident to which he stoutly objects or to pay a visit to his relations on occasions, thereby
drags the joint Hindu family into the wide net of Section 4-A (b), Income Tax Act.
Section 4 A (b) by the use of the expression ""situated"" with reference to ""the control and management"" contemplates a place or locality where
the control and management is exercised with some degree of permanence and stability. The words ""wholly outside"" in Section 4-A (b) which
qualify the exercise of control and management evidently proceed on the doctrine enunciated in Swedish Central Railway Co. v. Thompson, 1925
A. C. 495 : 94 L. J. K. B. 527 with reference to companies and contemplates the possibility of control and management abiding in more than one
place in the case of firms, association of persons and joint Hindu families as in the case of companies. But even so, I venture to think that there
must be actual control and management--whether the control is total or partial--of the family business and affairs exercised from a particular place
in British India in order to constitute that place the residence of the joint Hindu family. Occasional or sporadic visits of a non-resident Karta to the
place where the family business is carried on in India or casual directions given in respect of the business while on such visits would be insufficient
to make the joint family a resident in British India.
With these observations I agree in the conclusion reached by my learned brother and in his answer to the reference as well as his direction
regarding costs.