Commissioner of Income-tax Vs. Anglo French Textiles - Court Judgment

Ratnam, J.

1. These tax case references, at the instance of the Revenue, under sections 256(1) and 256(2) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), are dealt with together as they relate to the same assessee, though for different assessment years and common questions also arise for decision.

2. The circumstances leading up to the reference in T. C. Nos. 1058 to 1061 of 1979 may first be stated :

The assessee, a public limited company incorporated in 1951, under the French laws applicable to possessions at Pondicherry, then, with its registered office at Pondicherry, was formed to acquire the holdings of the Sterling Company and the Anglo French Textiles Company Ltd., who were running Rodier mills at Pondicherry, and the process of acquisition of shares was completed by about June, 1953. The assessee was engaged in running a textile mill at Pondicherry, and its activities consisted of manufacture of yearn and textiles. Export of textiles from Pondicherry also formed part of the activities of the assessee and the entire business operations of the assessee are confined to the territory of Pondicherry, where the operations regarding the manufacture of textiles, sale and export of textiles are conducted. For the assessment years 1960-61, 1961-62 and 1962-63, assessments were made on the assessee, in the status of non-resident and for the assessment year 1963-64, as a resident. The previous years were the calendar years 1959 to 1962, respectively. Proceedings under section 147 read with section 148 of the Act were initiated by the Income-tax Officer with the prior permission of the Commissioner of Income-tax against the assessee, as, in the opinion of the Income-tax Officer, the assessee had taxable income, but had failed to furnish a return of income. The income earned by the company, according to the Income-tax Officer, was by way of premium for surrender of import entitlements for the import of foreign cotton. Responding to the notice, the assessee filed 'Nil' returns, but the Income-tax Officer subjected to tax the income by way of premium earned by the assessee for the assessment years 1960-61, 1961-62, 1962-64 overruling the objections of the assessee that no income accrued or arose to the assessee in India and income was also not received in India and cannot be deemed to have been received or to have accrued or arisen in India and the income had already been included in the assessments made by the officers of the Government of India by virtue of the powers vested under section 4 of the Foreign Jurisdiction Act, 1947. In so doing, the Income-tax Officer found that amounts were earned by the assessee in India from a source of income and the right to receive the amounts under the export incentive schemes accrued and arose at the places where it was determined to be payable and they were in India, but outside Pondicherry, and the assessments under the French law then in force in Pondicherry was with reference to income which could be assessed as having arisen in Pondicherry and could not have dealt with income accruing outside Pondicherry. On appeal by the assessee to the Appellate Assistant Commissioner questioning the jurisdiction of the Income-tax Officer to reopen the assessments under section 147 of the Act and the correctness of the assessment themselves in view of the repeal of the French law on income-tax and the extension of the provisions of the Act to Pondicherry and the provisions of the Pondicherry (Taxation Concessions) Order, 1964 (hereinafter referred to as 'the Concessions Order', for short), it was held that there was no escapement of income, as all the facts were before the Income-tax Officer even initially and that the provisions, of the Concessions Order precluded the reassessment of income earned prior to 1962, once such income had already been taxed under the French law. It was also further found by the Appellate Assistant Commissioner that the right to receive the income arose in Pondicherry. On the conclusions so arrived at, the Appellate Assistant Commissioner allowed the appeals. Thereupon, the Revenue preferred appeals before the Tribunal and the Tribunal found that the export incentive was the result of textile manufacture, sale and export by the assessee in Pondicherry and no portion of the activity such as purchase or manufacture or sale took place outside Pondicherry and in India and that the mere quantification of the amount of incentive, outside Pondicherry, cannot be regarded as accrual of income to the assessee outside Pondicherry, cannot be regarded as accrual of income to the assessee outside Pondicherry and the incentive accrued the moment the export sale was completed and at Pondicherry. Considering the question from the view-point of receipt, the Tribunal found that the assessee wanted the payment to be made at Pondicherry, and, under those circumstances, the posting of the cheque made the post office the agent of the payer and not the agent of the assessee. Following the decisions of the Tribunal on this aspect in respect of the assessment years 1964-65 to 1969-70, which is the subject-matter of reference in T. C. Nos. 42 to 47 of 1982, the Tribunal ultimately held that since no income arose or was received in India other than in Pondicherry, the assessments could not be supported and dismissed the appeals. That is how the following common question of law in respect of the assessment years 1960-61 to 1963-64 has arisen in T. C. Nos. 1058 to 1061 of 1979 :

'Whether, on the facts and circumstances of the case, the Appellate Tribunal was correct in law in holding that the income from export incentives accrued or arose in Pondicherry ?'

3. With reference to the assessment years 1964-65 to 1969-70, the Income-tax Officer subjected the incentives received by the assessee under the import entitlements to tax on the ground that the Export Promotion Scheme was administered from Bombay, and not at Pondicherry, and the assessee could seek its remedies in connection with the Scheme only through courts at Bombay and that the cheque in respect of the entitlements had been posted from Bombay and the amounts should be regarded as having accrued to the assessee at Bombay. Dealing with the claim of the assessee for tax concession given under the concessions Order, the Income-tax Officer found that the assessee was not entitled to the benefit of such concession for the assessment years 1964-65, 1965-66 and 1966-67. In regard to the assessment years 1967-68, 1968-69 and 1969-70, the benefit of concession was denied to the assessee for the entire income for 1967-68 and for the excess worked out for the other two assessment years. The assessee appealed to the Appellate Assistant Commissioner claiming the benefit of the Concessions Order. The appeals in regard to the assessment years 1964-65 to 1966-67 came to be dealt with by one Appellate Assistant Commissioner, while the appeals in respect of the assessment years 1967-68 to 1969-70 were disposed of by another Appellate Assistant Commissioner. The Appellate Assistant Commissioner who dealt with the appeals in respect of the assessment years 1964-65 to 1966-67 took the view that the facts indicated that the export incentive receipts arose to the assessee in Pondicherry and that the provisions of the Concessions Order applied to all the income of the assessee, whether it accrued at Pondicherry or outside Pondicherry and this would cover the incentive receipts even if such receipts even if such receipts were held to accrue outside Pondicherry. In the view so taken, the appeals filed by the assessee in respect of the assessment years 1964-65 to 1966-67 were allowed. The Appellate Assistant Commissioner who heard the appeals in respect of the assessment years 1967-68 to 1969-70 was not disposed to agree with the reasoning of the Appellate Assistant Commissioner who decided the appeals for the assessment years 1964-65 to 1966-67 as, according to him, the incentive arising out of the export activities constituted a source of income which existed outside Pondicherry and the income received automatically accrued in India and outside Pondicherry, which were determined and paid outside Pondicherry and the relief available under paragraph 8 of the Concession order was not available to the assessee on its entire income. In that view, the assessment order were affirmed and the appeals preferred by the assessee for the assessment years 1967-68 to 1969-70 were dismissed. In respect of the assessment years 1964-65 to 1966-67, the Revenue appealed to the Tribunal, while the assessee preferred appeals against the order of the Appellate Assistant Commissioner in respect of the assessment years 1967-68 to 1969-70. The Tribunal found that the export incentive receipts and the income therefrom accrued or arose only in Pondicherry and that the provisions of the Concession Order do not make a difference between income of the assessee accruing inside or outside Pondicherry. In that view, the Tribunal, while dismissing the appeals preferred by the Revenue for the assessment years 1964-65 to 1966-67, allowed the assessee's appeals for the assessment years 1967-68 to 1969-70. That is how the following three common questions of law have arisen in T. C. Nos. 42 to 47 of 1982 :

'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the export incentive receipts and the ultimate income contained with the above accrued or arose in Pondicherry

2. Whether, on the fact and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the provisions of the Pondicherry (Taxation Concessions) Order, 1964, do not make any distinction between the income of the assessee accruing in Pondicherry and outside Pondicherry

3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in allowing the assessee's claim for the assessment years concerned ?'

4. Before proceeding to consider the questions referred, certain undisputed facts may be stated. The mill of the assessee is situate in Pondicherry and every activity of the assessee such as purchase, manufacture, sale etc., is carried on in Pondicherry and after 1954, there had been no sales at all in India. After the de jure merger of Pondicherry, on August 16, 1962, the provisions of the Act were extended to the erstwhile territory of Pondicherry with effect from April 1, 1963. Till then, the French law relating to income-tax was in force. On the extension of the provisions of the Act to the territory of Pondicherry with a view to obviate certain difficulties, the Concessions Order was issued, which provided that the income of the previous years ending on December 31, 1962, which is the previous year for the French assessment year 1963, shall be assessed under the Income-tax Act, 1961, if and only if, such income had not been assessed under the French law. Further, some other concessions were also made available to the assessee and a detailed reference would be made to them while dealing with T. C. Nos. 42 to 47 of 1982. A reference may now be made to the Export Promotion Scheme which was in force from 1959. To encourage export of textiles under the Scheme, export incentives were given and the Scheme was administered initially by the Indian Cotton Mills Federation, Bombay, and later by the Textile Commissioner, Bombay. An exporter of textiles under the Scheme became entitled to import raw cotton, staple fibre, coal-tar dyes, textiles, chemicals, textile machinery, etc., and these import entitlements could either be utilised for the use of the exporter or may be sold to other needy mills or surrendered to the Federation. The import entitlements of an exporter were based upon the monthly statement of exports sent to the Indian Cotton Mills Federation, Bombay, which advised the exporter about the amounts due for each month's export. The assessee had surrendered its raw cotton import and machinery import entitlements and received payments clearly specifying that the payments should be made in Pondicherry and there is no dispute regarding the quantum of the payments received during the relevant assessment years. It is in the above factual background that the question whether the receipts by the assessee accrued or arose to it in Pondicherry or outside Pondicherry has to be considered. While the Department maintains that the income referable to the import entitlements arose or accrued to the assessee outside Pondicherry, the assessee reiterates its stand that such receipts were only in Pondicherry. That question has to be decided on an overall consideration of all the facts and circumstances. Learned counsel for the Revenue contended that the export incentive entitlements accrued to the assessee in Bombay. On the other hand, learned counsel for the assessee submitted that they arose or accrued only in Pondicherry. It has to be borne in mind that the import entitlements arose out of the export activity which was carried on by the assessee only in Pondicherry. No part of the manufacturing or selling activity of the assessee was carried on outside on outside Pondicherry. Indeed, it is seen from paragraph 12 of the order of the Tribunal that before it, there was no dispute that any activity had been carried on by the assessee outside Pondicherry. Further, there is no material and it had also not been found by the Tribunal that the assessee had done anything, even in connection with the encashment of the import entitlements, outside Pondicherry. As pointed out earlier, the import entitlements are relatable only on the export performance by the assessee which took place only in Pondicherry and on the fulfilment of the export activity, a right to receive the incentive accrued in favour of the assessee, though the value of such entitlement was later on ascertained or quantified and the circumstance that an arithmetical calculation or quantification of the import entitlements had to be done either in Bombay or in some other place would not, in our view, justify the conclusion that the amounts had accrued to the assessee at Bombay where such quantification was made. Reliance placed by learned counsel for the Revenue on section 5(1)(b) of the Act to contend that income has accrued or arisen or is deemed to accrue or arise to the assessee in India cannot, therefore, be of any assistance on the facts of this case. A reference may also in this connection be made to the decision in E. D. Sassoon and Co. Ltd. v. CIT : [1954]26ITR27(SC) , where it has been laid down that, if an assessee acquires a right to receive the income, the income can be said to have accrued to him, though it may be received later on its being ascertained and, as stated earlier, the right to receive the import entitlements arose when the export commitment was fulfilled by the assessee in Pondicherry, though such amounts was subsequently ascertained or quantified. Learned counsel for the Revenue also attempted to contend that the import entitlements should be regarded as a source of income in India and, under section 9(1) of the Act, the income arising out of the encashing of the import entitlements should be deemed to accrue or arise in India. We are, however, unable to accept this contention, for, in order to deem that income has accrued or arisen in India, such income must have accrued or arisen, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, etc. It cannot be stated that the assessee had any business connection in India, as there should be a relation between the business carried on by the assessee at Pondicherry which yielded profits or gains and some activity in India which contributed either indirectly or directly to the earning of those profits. A close connection between the activity carried on outside India and the trading or business activity within India is contemplated and, in its absence, it cannot be said that there was any business connections as contemplated under section 9(1) of the Act. Equally, it is difficult to regard the import entitlements as a source of income which should be looked at from a practical view-point and not merely as an abstract legal concept. We are, therefore, unable to agree with the contention of learned counsel for the Revenue that the import entitlements constituted a source of income within the meaning of section 9 of the Act as to deem the import entitlements as having accrued or arisen in India.

5. We may next consider the argument of learned counsel for the Revenue that the cheques were sent to the assessee from Bombay and the post officer had been constituted as the agent of the assessee at Bombay to receive the cheques on its behalf and, therefore, unable to accept this contention, for we find from the order of the Tribunal that the assessee had by a letter addressed to the Indian Cotton Mills Federation clearly stated that the payment should be made in Pondicherry. In other words, there was no request, express or implied, by the assessee to the Indian Cotton Mills Federation, Bombay, to send the amounts by cheque and by post. In the decisions in CIT v. Ogale Glass Works Ltd. : [1954]25ITR529(SC) ; CIT v. Kirloskar Bros. Ltd. : [1954]25ITR547(SC) ; Shri Jagdish Mills Ltd. v. CIT : [1959]37ITR114(SC) ; and Azamjahi Mills Ltd. v. CIT : [1976]103ITR449(SC) ; the Supreme Court had clearly laid down the following propositions : (a) when payment is received by cheque, the receipt is at the time when the cheque is delivered and not when it is encashed. This would be so, even if the cheque is was accepted conditionally in the first instance, provided it is not dishonoured subsequently on presentation; (b) If the cheque is sent by post, the receipt would be at the place where the cheque is posted, provided the mode of sending it by post is adopted at the express or implied request of the recipient, the post office in such cases being the agent of the addressee; otherwise, the receipt would be at the place where the cheque is delivered by the post office to the addressee; and (c) Having regard to business usage, a request to make payment by the cheque may, in itself, imply a request to send it by post, while a request to remit the amount would be tantamount to an express request to send it by post. On the facts in this case, it is found that the assessee had merely asked for payment to be made in Pondicherry and the mode of payment, whether by cheque or draft and by post, had also not been in any manner indicated. The mere fact that the cheques were dispatched from Bombay or Coimbator could not, on the facts of this case, be treated as an agreement on the part of the assessee to receive the amount at Bombay, treating the post office as its agent. Though the cheques were discounted and collected at Pondicherry, the total absence of any activity outside Pondicherry and the express request made by the assessee for payment to be made in Pondicherry, would certainly support the stand of the assessee. Further, in cases dealing with payment of money either by cheque or by draft, at the point of dispatch of the cheque or draft, something tangible would have been received, such as goods, etc., by the person who paid for it, by the issue of a cheque or draft, but in this case, there is no sale of commodities or rendering of services by the assessee to the person who issued the cheques. The payment cannot, therefore, be regarded as quid pro quo for something done by the assessee. In view of the foregoing considerations, we are of the view that the proceeds of the import entitlements were not received by the assessee outside Pondicherry. We agree with the conclusion of the Tribunal on this aspect.

6. In relation to such receipts by the assessee for the assessment years 1960-61 to 1963-64, the assessee took the stand that it had already paid income-tax, inclusive of the amounts received by it under the Export Promotion Incentive Scheme, by the completion of the assessments by the officers of the Government of India in exercise of the powers conferred on them under section 4 of the foreign Jurisdiction Act, 1947. In view of the finding given by the Income-tax Officer that the receipt by the assessee of the import entitlements was in India, outside Pondicherry, he took the view that such amounts were assessable under the provisions of the Act as, under paragraph 4(1) of the Concessions Order, the income which accrued or arose to the assessee in India could not have been subject to tax. The Appellate Assistant Commissioner, on the other hand, took the view that the accrual or arising of the income to the assessee was only in Pondicherry, as the import entitlements cannot be viewed independent of the export of textiles and the income therefrom had already been assessed under the French law and when once that had been done, the Income-tax Officer was debarred from exercising jurisdiction once again to assess the same income and subject it to tax under the Act. The Tribunal has also, in the course of its order, observed that the assessment orders in respect of the assessment years 1960-61 to 1963-64 were produced before the Appellate Assistant Commissioner and true copies were also filed and in the assessments made by the officers of the Government of India administering the French law for taxing income, the income had been assessed, inclusive of the income referable to the export incentives an in view of paragraph 4 of the Concessions Order, no assessment for the earlier years can be made. In so holding, the Tribunal was quite right. Under Paragraph 4(1) of the Concessions Order, it is provided that the income of the previous year ending on December 31, 1962, which is the previous year for the French assessment year 1963, shall be assessed under the Income-tax Act, 1961, if an only if such income had not been assessed under the French law. Paragraph 4(2) of the Concessions Order provides that where the income referred to in sub-paragraph (1) has not been assessed under the French law, it shall be assessed under the Income-tax Act, 1961, for the assessment year commencing on the 1st day of April, 1963, and the tax payable thereon shall be determined as provided thereunder. In this case, we have earlier found that the accrual or arising or even receipt of the income by the assessee was at Pondicherry and the Appellate Assistant Commissioner and the Tribunal have also referred to the prior orders of assessment on the assessee under the French law for the assessment years 1960-61 to 1963-64, and under paragraph 4 of the Concessions Order, it would not be open to the Income-tax Officer to assess the income again under the provisions of the Act. We, therefore, hold that the Tribunal was right in its conclusion in this regard.

7. That takes us on to a consideration of the availability to the assessee of the benefit of the concession provided in paragraph 8 of the Concessions Order in respect of the assessment years 1964-65 to 1969-70. On this question, though the two Appellate Assistant Commissioners who had dealt with the appeals in respect of the assessment years 1964-65 to 1969-70 have differed, the Tribunal had stated that the assessee would be entitled to the benefit of paragraph 8 of the Concession Order as, in its view, there is no restriction whatever with regard to the availability of the concession to so much of the income of the assessee included in its total income, in paragraph 3 (1) (i) (a) of the Concessions Order. We may now refer to paragraph 3(1) of the Concessions Order, which runs as follows :

'3. Scope of the main concessions in relation to income-tax.-(1) Subject to the provisions of sub-paragraph (2)-

(i) the provisions of paragraphs 4 and 5 of this order shall apply in the case of every assessee -

(a) who resided or maintained a dwelling place in Pondicherry for a period or periods amounting in all to one hundred and eighty-two days or more during the calendar year 1962 or carried on any business or profession in Pondicherry at any time prior to the 16th day of August, 1962, and is assessable as a person resident in India in the previous year relevant to the assessment year but would not have been so assessable if the Income-tax Act, 1961, had not been extended to Pondicherry; or

(b) who is not resident in India in the previous year relevant to the assessment year, to so much of his income included in his total income as accrues or arises in the Union Territories or outside India and is not deemed to accrue or arise or is not received or is not deemed to be received in any part of India other than the Union Territories;

(ii) the provisions of paragraphs 8, 14 and 15 shall apply in the case of every assessee referred to in sub-clause (a) of clause (b) to so much of his income included in his total income as is specified in the said clause.'

8. The assessee in this case has been carrying on business in Pondicherry even in 1953, long prior to August 16, 1962, and, but for the extension of the Act with effect from April 1, 1963, the assessee would not have been assessed as a resident in India. To the assessee, therefore, paragraph 3(1) (i) (a) of the Concessions Order would stand attracted. Under paragraph 3(1) (i) (a) of the Concessions Order, there is no restriction or limitation of the operation of the Concession Order to any portion of income accruing outside Pondicherry when, under paragraph 3(1) (i) (b) of the Concessions Order, it has been provided that the Concessions Order would be applicable to so much of the income of the assessee included in its total income, as accrues or arises in the Union Territories or outside India and is not deemed to accrue or arise or is not received or is not deemed to be received in any part of India other than the Union Territories. A reference to the Dadra and Nagar Haveli and Goa, Daman and Diu (Taxation Concessions) Order, 1964, may be made to appreciate the difference between the scope of the concessions in the two Concessions Orders. Paragraph 3(1) of the Dadra and Nagar Haveli and Goa, Daman and Diu (Taxation Concessions) Order, 1964, runs as follows :

'3. Scope of the main concessions in relation to income-tax. - (1) Subject to the provisions of sub-paragraph (2) -

(i) the provisions of paragraphs 4, 5 and 6 of this Order shall apply in the case of every assessee -

(a) who resided or maintained a dwelling place in Dadra and Nagar Haveli, for the period or periods amounting in all to one hundred and eighty-two days or more during the calendar year 1961, or carried on any business or profession in Dadra and Nagar Haveli, before the appointed day, and is assessable as a person resident in India in the previous year but would not have been so assessable if the Income-tax Act, 1961, had not been extended to Dadra and Nagar Haveli; or

(b) who is not a resident in the previous year relevant to the assessment year, to so much of his income included in his total income as accrues or arises in the Union Territories or outside India and is not deemed to accrue or arise or is not received or is not deemed to be received in any part of India other than the Union Territories;'

9. Paragraph 3(1) of the Dadra and Nagar Haveli and Goa, Daman and Diu (Taxation Concessions) Order, 1964, makes applicable the provisions of paragraphs 4, 5 and 6 of that Concessions Order in relation to two categories of assessees specified in paragraph 3(1) (i) (a) and (b) and to both categories of assessees, there is a limitation regarding the scope of the applicability of the concessions in paragraphs 4, 5 and 6 of that Concessions Order while, under paragraph 3 of the Pondicherry (Taxation Concessions) Order, 1964, the restriction is only with reference to the second class of assessees falling under paragraph 3(1) (i) (b) and not (a). It is also further significant that paragraph 3(1) (ii) of the Pondicherry (Taxation Concessions) Order, 1964, refers to the applicability of the provisions of paragraphs 8, 14 and 15 to the category of assessees falling under paragraph 3(1) (i) (a) to so much of the income included in its total income, as is specified in the said clause and when there is no restriction specified, it follows that the assessee would be entitled to the benefit of the concession, on the entire income. Paragraph 8 of the Concessions Order also does not indicate that there is any limitation on the income arising outside Pondicherry. Under paragraph 3(1) (ii) of the Concessions Order, the provisions of paragraphs 8, 14 and 15 shall apply in the case of every assessee referred to in sub-clause (a) of clause (i) to so much of his income included in his total income as is specified in the said clause. It is thus seen that clause (i) of paragraph 3 of the Concessions Order does not in any manner limit the operation of the scope of the concession to any portion of the income that accrues outside Pondicherry. In other words, the concession in paragraph 3(1) (i) (a) of the Concessions Order appears to us to be full and complete, extending to all the income which an assessee earns and which is assessable. This is further reinforced by a reference to paragraph 3(1) (ii) of the Concessions Order to the effect that paragraphs 8, 14 and 15 shall apply in the case of the assessee referred to in sub-clause (a) of clause (i) to so much of his income included in his total income as is specified and we do not find any restriction specified regarding the availability of the concession on any portion of the income included in the total income under paragraph 3(1) (i) (a) of the Concessions Order which would be applicable here. Thus, on a due consideration of the scope of the Concessions Order, particularly on the language employed in it, we are of the view that the Tribunal was right in holding that the assessee would be entitled to the benefit of the Concessions Order in respect of its entire income and not merely the income accruing or arising in the Union Territory or outside India. We, therefore, answer the common question referred in T. C. Nos. 1058 to 1061 of 1979 in the affirmative and the common questions Nos. 1 to 3 referred in T. C. Nos. 42 to 47 of 1982 also in the affirmative and against the Revenue. There will be however, no order as to costs.