Talipatigala Estate vs Commissioner of Income Tax

Viswanatha Sastri, J.—In R. C. No. 55 of 1946 two questions have been referred to this Court for our opinion:

(1) Whether in the circumstances of the case and on evidence and correspondence produced, the firm of Talipatigala Estate could be held to be

controlled and managed in British India and is therefore resident and ordinarily resident in British India u/s 4A,Indian Income Tax Act?

(2) Whether the proceedings u/s 34 could be initiated against a firm which was not assessed previously when one of the partners of the firm had

been individually assessed on his share in the firm?

In R. C. No. 59 of 1946 it is first of the two questions above stated that has been referred to us for our opinion.

The facts common to both these references ate these. Talipatigala, a rubber Estate in Ceylon, was purchased by three persons some years ago

and during the relevant period was owned by two of the original purchasers, the third having conveyed his interest to the others on 10th May

1941. At one stage of the proceedings before the In-come-tax Officer and the Appllate Assistant Commissioner it was contended that the two

individuals who now own the Estate were merely co-owners or co-sharers and not partners and that no business was being carried on beyond the

usual agricultural operations incidental to the ownership of a rubber Estate, It has been found as a fact both by the Income Tax Officer and the

Appellate Assistant Commissioner that the two owners of the Estate are in fact partners who carry on the business of rubber production and that

the estate is an asset of the firm. This finding is not now open to challenge before us as no question has been referred to us as to whether or not the

two persons owning the estate are members of a firm. The case must now proceed on the basis that the owners of the estate constitute a firm

whose business is the working of the rubber estate for profit and that the estate itself is an asset of the partnership.

The contention of the assessee is that though one of the partners is resident in British India the control and management of the firm''s affairs is

wholly situate without British India and the firm is therefore a non-resident. The estate which is situate in Ceylon is managed by an agent holding a

power-of-attorney from the partners, The business of the firm requires the employment of a large number of labourers and the supervision of their

work, the collection of the rubber juice and the processing of the raw product into a commodity which in fit for sale in the market. u/s 4-A(b),

Income Tax Act, a firm is resident in British India unless the control and management of its affairs is situated wholly without British India. It is true

that the residence of the individual partners of the firm in British India does not determine the residence of the firm for purposes of Income Tax if

the control and management of the firm''s business is wholly situate outside. It has been held in out Court, as pointed out by the learned advocate

for the assessee, that the mere receipt of copies of accounts from agents abroad, which is a common enough practice among Nattukottai Chettiars,

does not amount to the exercise of control by the principal who lives in British India : Commissioner of Income tax v. Palaniappa Chettiar, I. L. R.

(1946) Mad. 26 : A. I. R. 1945 Mad. 210. If the business is transacted abroad by the agent with plenary powers of management and control and

the principal does not take any part in the conduct or supervision of the business beyond keeping himself occasionally informed of business

conditions then the residence of the principal does not determine the place of control of the business. A mere fleeting or sporadic visit of a principal

to the place where the business is conducted by an agent without any exercise of supervision or control during such visit would not connote the

exercise or control over the business : Commissioner of Income Tax, Madras v. Ganga bishan Mohanlal 1946 13 ITR 20: AIR 1945 Mad. l74.

The mere fact that a partner in British India keeps himself in touch with his other partners conducting or carrying on business in ft foreign country

and keeps himself informed of the general condition of the business does not amount to the exercise of control in British India over the affairs of the

BHIMJI R. NAIK Vs. COMMISSIONER OF Income Tax, BOMBAY., The decision in Secretary to Commissioner, Salt, Abkari and Separate

Revenue, Madras v. Ramanathan Chetti, 43 Mad. 75 : A. I. R. 1920 Mad. 344 cited by the learned advocate for the assessee dealt with the

question of the basis of taxation under the Income Tax Act, 1918 and held that under the Act, as it then stood, the profits of a foreign money

lending business of a Nattukottai Chetty banker residing in British India accrued or arose outside British India and was not taxable in British India

unless received here. The Court held that though the proprietor or the principal acquainted himself with the state of his business abroad and issued

occasional instructions to the agent regarding the conduct of the business, it could not be said that the business was carried on in British India or

that the profits accrued or arose here. The profits were held to have accrued or arisen at the place where the moneys were lent and interest was

earned and realised, in other words, at the place where the business was actually carried on. This decision does not help to solve the problem that

arises in the present case where we are concerned only with the control and management and not with the carrying on of the trade or business

itself.

We have been taken through the correspondence at some length. It is unnecessary to refer to the many letters that passed between the agent in

Ceylon and the partner in British India, but their substance can be summarised as follows: The agents were selected and sent out from British India

by the partner resident here with a power-of-attorney to manage the rubber estate in Ceylon and look after the business. Reports have been made

by the agent to the partner in British India about the progress of the work in the estate and the expenses incurred in connection therewith. Regular

accounts have been sent from time to time of the receipts and disbursements of the business to the partner in British India. Instructions have been

asked for and issued with reference to some of the matters connected with the business carried on in Ceylon. Instructions have been sent to the

agents to engage an adequate number of workmen, reduce the cost of production, increase the wages of workmen, sell the rubber produce at

favourable market rates, and so on. One of the partners paid a visit to the estate in Ceylon in the accounting period presumably to attend to the

affairs of the firm during his stay at Ceylon. One of the partners also opened an account with the Colombo branch of the Imperial Bank for

facilitating the conduct of the business.

On these facts we hold that not only the right to exercise control and management over the firm''s affairs in Ceylon rested with the partner

resident in British India but some amount of control and management of the firm''s affairs was actually exercised in British India. If any part of the

control and management is in British India, then the firm is a resident within the meaning of Section 4-A (b). The acts and instructions of the partner

in British India were done and given in the exercise of his right as a partner and were acts of control and management of the firm''s affairs in

Ceylon. See Commissioner of Income Tax v. Subbiah Chettiar, I. L. R. (1948) Mad. 607 : A. I. R. 1948 Mad. 307, Commissioner of Income

Tax v. Shanmugam Rubber Estate, I. L. R. (1946) Mad. 162: A. I. R. 1915 Mad. 366.

We would therefore answer the first question referred to us in R. C. No. 65 of 1946 and the only question referred to us in R. C. No. 56 of

1946 in the affirmative and against the assessee.

The second question referred to us arises in R. C. No. 55 of 1946 out of the following facts. One of the partners had been assessed in 1941-42

to Income Tax in British India on its total income, profits and gains which included his share of the profits of the partnership business carried on in

Ceylon. In the assessment year 1942-43 the firm was sought to be assessed as a resident u/s 34 of the Act on the ground that its income had

escaped assessment for the previous assessment year 1941-42. It is contend-ed by the learned advocate for the assessee that this assessment was

not permissible in view of the terms of Section 34, Income Tax Act. A firm or partnership is different from the members composing it for Income

Tax purposes and is recognised as a separate assessable unit u/s 3, Income Tax Act, Though according to the Partnership Act a partnership firm is

not a single legal person, still for purposes of Income Tax the firm is regarded as having a separate status and existence and as a distinct entity

apart from the individual partners who carry on the business of the firm. It is true that this principle is not carried to its logical conclusion in every

respect and that there are a few exceptions recognised in the Act itself. But it cannot be said that the assessment of an individual partner in a

particular year is a bar to the assessment of the firm for that year. Even granting that when the partner was assessed in 1941-42 on an income

which included his share of the profits of the partnership, the Income Tax Officer must have had definite information that there was a partnership

which was resident in British India and that its income was liable to assessment in British India, still the Income Tax Officer having taken action

within the period of four years of the end of that year, the assessment on the firm was justified u/s 34, Income Tax Act. We do not think there is

any room whatever for the argument advanced on behalf of the assessee that there has been no honest exercise of the Income Tax Officer''s

judgment in the present case, that he must be fixed with knowledge of the existence of the firm as a resident in British India even in 1941-42 and

that therefore the present proceedings are illegal. His action was perfectly justified under the terms of Section 34, and the answer to the second

question that has been referred to us must be in the affirmative and against the assessee. The assessee is directed to pay the costs of the

Commissioner in R. C. No. 55 of 1946 which we fix at Rs. 250/-. C.R.K./D.B.