Turner Morrison and Co. Ltd. Vs. Comr. of I.T. - Court Judgment

Sen, J.

1. There are six references by the Income Tax Appellate Tribunal, Calcutta Bench, made under Section 66 (1) Income Tax Act. Two of them relate to the levy of Income Tax & four to the levy of Excess Profits Tax.

2. The relevant facts briefly are as follows:-The Port Said Salt Association Limited are a Company incorporated in the United Kingdom & registered therein. They carry on business at Port Said in Egypt & have their head offices at Alexandria. They do not pay British Income Tax on their profits as they are not resident in the United Kingdom. They are also nonresident in India & Messrs. Turner Morrison & Company Limited, Calcutta have been appointed statutory agents of the Port Said Association by the Income Tax/Excess Profits Tax officer under Section 43 of the Income Tax Act.

3. The Port Said Association Limited obtain and manufacture salt in Egypt. They assign this salt to Messrs. Turner Morrison & Company Limited for sale at the best price obtainable at or above the prices approved of by the Port Said Association Limited: The shipping operations i.e., chartering, loading, insurance, etc., are effected by the Association in Egypt who send the shipping documents to Messrs. Turner Morrison & Company Limited; all handling of Cargoes on arrival at Calcutta is made by Messrs. Turner Morrison & Company Limited who make the necessary disbursements in connection therewith. The sales are effected by Turner Morrison & Company Limited through the medium of brokers and the sale proceeds are collected by the aforesaid Company and deposited in their bank, the Hongkong-Shanghai Banking Corporation in their name and account. Messrs. Turner Morrison & Company Limited are paid 21/2 per cent commission on all sales except in some cases where they are paid 11/2 percent. After deducting that commission and disbursement expenses they remit the balance to the Port Said Association in Egypt. Unsold salt is kept in salt golahs at the risk and expense of the Port Said Association. Messrs. Turner Morrison & Company sell this salt at the best possible price and remit the proceeds to the Port Said Association. These shortly are the facts which need be stated for the purposes of these references.

4. The Income Tax Authorities have levied Income Tax & Excess Profits Tax on the amounts realised by Messrs. Turner Morrison & Company by the sale of salt after making the usual deductions for commission, collection charges & other similar expenses incurred for the sale. They have treated Turner Morrison & Company Limited as statutory agents of the Port Said Salt Association Limited appointed under Section 43, Income Tax Act. The assessment has been made on the footing that what was realised was total income received in India on behalf of the said Association as defined or described in Section 4 (1) (a), Income Tax Act, & also on the footing that it was total income which actually accrued or arose in India within the meaning of Section 4(1) (c), Income Tax Act, in respect of a person not resident in India. The Port Said Salt Association shall hereafter be described as the assessee Company.

5. The contention on behalf of the assessee Company so far as these references are concerned may briefly be stated as follows: The amount on which the tax has been levied is not income but gross receipts & it cannot be said to be income received in British India. It became income only after it was received in Egypt by the assessee Company & after certain deductions were made therefrom. In short the contention was that the amount realised from the sale of salt did not acquire the character of income until it reached Egypt. Next it was argued on the same grounds that it was not income which accrued or arose in British India as no income could arise or accrue till the money reached Egypt. It was contended further that the amount on which Income Tax & Excess Profits Tax have been levied should be treated as income which is deemed to accrue & arise within British India as described in the provisions of Section 42 (1), Income Tax Act & that consequently the provisions of Section 42 (3) should be applied to the case. By that sub-section, it is argued. Income Tax & Excess Profits Tax may be levied only on such profits & gains as are attributable to that part of the operations as are carried out in India. In other words it was argued that Income Tax & Excess Profit Tax should be levied only on the merchanting profits & not on the manufacturing profits which accrued by reason of the acts done by the assessee Company in Egypt in manufacturing & processing the salt & in making it ready for export & putting it on board for export. These manufacturing profits should be excluded & tax should be levied only on the merchanting profits which are the only profits which can be said to be attributable to the operations carried out in India. It was also argued that the very fact of the Income Tax authorities appointing Turner Morrison & Company limited as statutory agents recognised that the case fell within Section 42 & that therefore the operation of Section 42 (S) was attracted.

6. These contentions failed before the Income Tax authorities & the Income Tax Appellate Tribunal has upheld the decision taken by Income Tax Department. Messrs Turner Morrison & Company Limited as agent of the assessee Company then applied to the Tribunal under Section 66 (1) of the Income Tax Act to refer certain questions of law which arose out of the appellate Tribunal's order to this Court. The Tribunal has drawn up a statement of the case and referred 3 questions of law to this Court which are as follows:

(1) 'Whether, in the facts & circumstances of the case, the Tribunal was right in holding that the income, profits & gains derived from the sale of salt in British India are assessable to tax as income, profits & gains received or deemed to be received under Section 4 (1) (a)?' And if the answer to the first question is in the negative,

(2) 'Whether, in the facts & circumstances of this case, the Tribunal was right in accepting the contention of the Department that the income accrued or arose or is deemed to accrue or arise in India & is assessable to tax as contemplated by Section 4 (1). (c)?'

(3) 'Whether the Tribunal was right in the circumstances of this case in rejecting the contention of the Assessee (Applicant) that the income, profits & gains are chargeable to tax from the sale of salt in British India under Section 42 only?'

At the inception of the hearing before us Mr. Section C. Mitra was questioned by us as to whether he accepted the statement of the case & the questions of law submitted to the Court as being correct or whether he wished the Court to refer the matter back to the Tribunal for a further & better statement or for the submission of other questions of law. He said that he did not wish to do so & would argue the matter on the statement & questions as submitted.

7. I propose to deal first with the question whether Income Tax has been properly levied. I shall thereafter deal with the levy of Excess Profits Tax.

8. The point for determination is whether the amount realised by Turner Morrison & Company Limited by the sale of the salt consigned to them by the assessee Company constitute income, profits or gains received in India on behalf of the assessee Company. Leaving aside for the moment the question whether the account represented income, I propose to consider whether the amount was received in India on behalf of the assessee Company. That the amount was received in India cannot, I think, be capable of any doubt. Admittedly Turner Morrison & Company Limited sold the salt in India & received the proceeds of the sale in India & put them in their own Bank, the Hongkong & Shanghai Banking Corporation in India, in their own name. It was argued by Mr. Mitra for the assessee Company that the proceeds of the sales were not received on behalf of the assessee Company inasmuch as Messrs Turner Morrison & company received the proceeds on their own behalf & put them into their own bank in their own name. It was also pointed out by him that the purchasers had nothing to do with the assessee Company nor had the assessee Company any dealings with the purchasers. The sales were direct transactions between Turner Morrison & Company Limited & the purchasers. I am quite unable to accept this view. Upon their own statement of their case the salt was consigned to them for sale at or above a minimum price fixed by the assessee Company. Turner Morrison & Company Limited never purchased the salt themselves. They sold it & deducted a commission for themselves at the rate of 1 l/4th p.c. & 21/2 p. c. according to the particular circumstances under which the sales were held. They stated that salt not sold was kept in salt golahs at the risk & expense of the assessee Company. Obviously therefore Messrs. Turner Morrison & Company were selling the salt on behalf of the assessee Company & were receiving the sale proceeds in India on behalf of that Company. I find it impossible to come to any other conclusion on their own statements contained in the enclosures attached to their applications for these references under Section 66 (1), Income Tax Act. Indeed the facts as stated are not disputed by Mr. 'Mitra. I therefore hold upon these facts that the sale proceeds were received in India by Messrs Turner Morrison & Company on behalf of the assessee Company.

9. This takes us to the next point whether these sale proceeds after the necessary deductions & allowances constitute income, profits or gains. Mr. Mitra's argument is that these proceeds were 'gross receipts' & not income & that they did not acquire the character of income until they were received in Egypt. For this proposition he relies upon the decision of the Privy Council in the case of 'Prabhat Chandra v. Emperor, 57 IA 228. He drew our attention to a passage at p. 240 which is as follows: 'The tax is upon 'income, profits & gains'. It is not on gross receipts.' In my opinion this observation cannot be read divorced from its context. If the case be read as a whole it will be found that all that the Judicial Committee was saying was that income tax should not be levied on 'gross receipts' but on net income after making certain allowances. Their Lordships nowhere said that gross receipts did not include income. On the contrary at p. 241 they speak of 'gross income' meaning thereby gross receipts. This decision is no authority for the proposition that the amount received in India from the sale of salt could not be income until it was received in Egypt. In receiving the 'gross receipts' or gross income Messrs Turner Morrison & Company Limited were receiving total income, profits or gains within the meaning of Section 4, Income Tax Act, in India on behalf of the assessee Company. What would be the total taxable income received in India would be ascertained after making the allowances for commission, collecting charges & other charges paid out of the gross receipts by Messrs Turner Morrison & Company Limited. Our attention in this connection was drawn by Dr. Pal for the Commissioner of Income Tax to the case of 'Tarn v. Scanlan', (1928) 13 Tax Cas 91. In this case a Danish Shipping Company did a carrying trade in England. They appointed certain persons to obtain business. These persons got in touch with shippers & got them to ship their goods by the Shipping Company & collected the freights which they made over to the Shipping Company after deducting their commission. Income Tax was levied on the freights collected by them. It was contented on behalf of the assessees that these persons were not agents & secondly that although they received freights they were not in receipt of profits; we are concerned now with the second point. Rowlat J. held that in receiving the freights from the shippers they were receiving profits. This is what he says:

'Now were they in receipt of profits? I have said that Lord Herschell put it that, if they were in receipt of the moneys out of which the profits came, that was enough. Lord Davey, I think, said the same. Now here they collect the freights. It is said that they do not really collect freights, but that in many cases they are the consignors upon the bill of lading, & therefore they are paying freights as principals, receiving them in turn as principals from the real shippers. I do not think there is any substance in that at all. If they did in any case, or in all the cases, sign the bill of lading as consignors, I do not think there is any significance in it. They were not here as speculators in freight; they were here as agents, for this purpose, at any rate, of the ship. 'They had to tell the public in England & true freights for which the ship would carry; they could not make a speculation in it. They had to be content with their commission as their reward, & they guaranteed the freights, so that they were responsible in any case to the shipowner for the amount. Under those circumstances I do not think the fact that they put their names on the bill of lading, instead of the names of all sorts of consignors, makes any difference at all. I think the freights are, for this purpose, the freights of the shipowner, & they are collecting them & getting a commission upon them. Therefore I think, from every point of view, the Act of 1842 is satisfied.'

The same view is taken by Lord Hanworth M. R. at pages 115-116-'. This is what he says:

'As there is a trade, as I have already said, found to be exercised within the United Kingdom prima facie it is chargeable; but where it is trade exercised by a company or person not resident within the United Kingdom the assessment is to be made & the tax has to be recovered through the machinery which is provided under Section 41 for that purpose, & there under Section 41 the tax is chargeable in the name of a 'factor, agent or receiver having the receipt of any profits or gains arising as herein mentioned'. It is said that the meaning of these words 'receipt of any profits or gains arising as herein mentioned' must indicate the net profits or gains on which the tax would actually be imposed & does not include gross profits or gains which on examination & when proper deductions have been made fade away & leave nothing upon which the tax itself can be payable. But I do not think that is the right interpretation to be put upon these words'. I think it is made plain by what was said by Lord Justice Fry, as affirmed in the case of 'Grainger v. Gough', (1896 A C 325) that the meaning of these words 'factor or agent having the receipt of any profits or gains' is gross profits or gains in which there may be wrapped up some net profits or gains ultimately to be found chargeable to Income Tax.'

At 'pp. 159-60' Viscount Cave held the view

'that persons who were agents for some purposes connected with a trader's business & who received 'the gross proceeds (in which the net proceeds are included)' were agents in whose name the trader could be assessed.'

I realy on the words in brackets for the view that gross receipts include net income or profits.

10. This case related to the interpretation of Sections 41 & 44 of the Income Tax Acts of 1842 of England. I am aware of the danger of relying on English decisions on English statutes in interpreting Indian statutes unless similar words or phrases occur in both statutes. I have seen the words of the English statutes & am of opinion that the English decisions as to what is meant by 'the receipt of profits or gains by an agent, partner or receiver' (here I am quoting the words of Section 41 of the English statute) would apply in interpreting the Indian Act.

11. Messrs. Turner Morrison & Company Limited are admittedly statutory agents for the non-resident assessee Company having been so appointed under Section 43, Income Tax Act, & by virtue of that section they are deemed to be agents for all the purposes of the Act. The gross receipts received by them include total income within the meaning of Section 4, Income Tax Act, & they were received by them on behalf of the assessee Company. The assessee Company were therefore liable to be assessed with income tax on the income, profits & gains received by Messrs. Turner Morrison & Company Ltd. on their behalf by reason of the provisions contained in Sections 3, 4 (1) (a), 6 and 10, Income Tax Act.

12. Mr. Mitra's argument that Section 42 (3) would be attracted is in my opinion not sustainable so far as income tax is concerned. Section 42 (1) is in the following terms:

'42 (1). All income, profits, or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India, or through or from any property in British India, or through or from any asset or source of income in British India, or through or from any money lent at interest & brought into British India in case or in kind or through or from the sale, exchange or transfer of a capital . asset in British India, shall be deemed to be income accruing or arising within British India, & where the person entitled to the income, profits or gains is not resident in British India, shall be chargeable to income-tax either in his name or in the name of his agent, & in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax.'

This section does not relate to income, profits or gains received in India. It relates in terms only to income, profits or gains which may be deemed to arise to accrue within British India. Income, profits or gains received in India on the one hand & income, profits or gains arising or accruing or which may be deemed as arising or accruing in India on the other are differentiated in the Income Tax Act. Income, profits or gains received in India form the subject-matter of Section 4 (1) (a) while income, profits or gains accruing or arising or which may be deemed as accruing or arising in India are the subject-matter of Section 4 (1) (b) in the case of assessees resident in India & of Section 4 (1) (c) in the case of non-resident persons. If income, profits or gain fall within the ambit of Section 4 (1) (a) they may be taxed as such & there is no necessity for the Income Tax Authorities to treat the income, profits or gains as falling within the definitions of Section 4 (1) (b) or (c) in order to tax them. In the present case I have found that the income, profits or gains were received in India on behalf of the assessee Co. & that they fall within the ambit of Section 4 (1) (a) That being so, there is no necessity for the Income Tax authorities when levying income tax to rely on Section 42, Income Tax Act, which does not deal with income, profits or gains received in India but only with income, profits or gains deemed to accrue or arise in India. The assesee Company cannot therefore invoke the aid of Section 42 (3) & insist, so far as income tax is concerned, that the tax is leviable only on such income, profits or gains as are reasonably attributable to that part of the operations carried out in India. It is hardly necessary to point out that the application of the provisions of Sub Section (3) of Section 42 is restricted to cases in which the provisions of Sub Section (1) of Section 42 are relied upon by the Income Tax authorities for levying income tax.

13. Section 4 (1) (b) & Section 4 (1) (c), Income Tax Act, would, however, have to be relied on in the case of the levy of Excess Profits Tax, as income, gains & profits coming within the definition of Section.4 (1) (a), Income Tax Act, are not subject, as such,'to the levy of Excess Profits Tax. Only income, profits or gains falling within the provisions of Section 4 (1) (b) & Section 4 (1) (c), Income Tax Act, are subject to excess Profits Tax (See Section 5, Excess Profits Tax Act, 1940). As stated before I shall deal with the cases of Excess Profits Tax later.

14. The next argument of Mr. Mitra is that as the Income Tax authorities appointed Messrs. Turner Morrison & Company Limited as statutory agents of the assessee Company by invoking the aid of Section 43, Income Tax Act, Section 42 immediately became attracted & there-fore by reason of the provisions of S 42 (3) income tax could only be chargeable for such gains or profits as may reasonably be attributable to that part of the operations carried out in India. I can see no reason for accepting this contention. Under Section 43, Income Tax Act, any person employed by on behalf of a person resident outside India or through whom any person resident outside India is in receipt of any income, profits or gains may be served with, a notice by the Income Tax Officer of his intention of treating him as an agent of the person residing outside India & such person shall 'for all purposes of the Act' be deemed to be such agent. I have already held that Messrs. Turner Morrison & Company Limited are in receipt of income on behalf of the Port Said Salt Association Limited. The Port Said Salt Association Limited therefore receives the income, profits or gains through Messrs. Turner Morrison & Company Limited. Messrs. Turner Morrison & Company Limited may consequently be appointed statutory agents under Section 43, Income Tax Act, & they would therefore become agents for all purposes of the Act. Now by the provisions of Section 40 (2) if an agent of a person non-resident in India is entitled to receive or recover on behalf of such person any income, profits or gains chargeable under the Act, Income Tax may be levied on such agent in the same way it may be levied on the person for whom he is agent as if the income were directly received by the non-resident person. It is clear from these two sections that the statutory agent i.e., the agent appointed under Section 43 may be levied with income tax as if he were an agent under Section 40 of the Act. Section 42 is not necessarily or always involved in the levying of income tax on such agent. Messrs. Turner Morrison & Company Limited are admittedly the statutory agents of the assessee Company. Income Tax may therefore be levied on them as agents as they are in receipt of income, profits & gains on behalf of the non-resident Company without invoking the provisions of Section 42. It cannot therefore be argued that Section 42 (3), Income Tax Act, applies to this case merely because tax is being levied on Messrs. Turner Morrison & Company as statutory agents. It is not at all necessary for me to consider whether Messrs. Turner Morrison & Company Limited are agents of the assessee Company under the Contract Act, Sale of Goods or any other Act. They are statutory agents, under S, 43, Income Tax Act & that is sufficient to make them liable to assessment with the aid of Section 40. Mr. Mitra's argument that a statutory agent can be assessed to income tax only with the aid pf Section 42 & under no other section is untenable in view of the clear provisions of Sections 40 & 43 of the Income Tax Act. In my view the provisions of Section 42 are in no way attracted. It seems that Mr. Mitra has not taken into consideration Section 40 which was the section relied upon by the Income Tax Authorities. He relied on the case of 'Commissioner of Income Tax, Bombay v. Metro Goldwyn Mayer (India), Ltd. : [1939]7ITR176(Bom) , & referred to a passage 'at p. 184' in support of his contentions. I am of opinion that no such view is laid down there. All that was said was that Section 43

'is really only machinery for giving effect to Section 42 & the mere appointment of an agent under Section 43 would be of no consequence unless tax could be levied under Section 42.'

No reference was made to Section 40, Income Tax Act. Section 40, Income Tax Act has been amended since the decision referred to but I am not relying on this fact for my view that the decision referred to does not lay down any rule that once a statutory agent is appointed Under Section 43. Section 42 necessarily applies. I rest my decision on a broader & more fundamental ground. In the case of 'Commissioner of Income Tax Bombay v. Metro Goldwyn Mayer (India), Ltd.', : [1939]7ITR176(Bom) , income tax was sought to be levied by the Income Tax authorities by resorting to the provisions of Section 42. The Income Tax authorities were not relying on Section 40 at all. It was objected on behalf of the nonresident assessee that the person upon whom income was so levied could not be deemed to be their agent having regard to the terms of the Contract between such person & the nonresident assessee. The Income Tax Authorities repelled this contention & on an application being made for a reference, the question was referred to the High Court of Bombay for decision. All that the High Court said was that the terms of the contract between the parties were such that the Income Tax authorities were entitled to appoint that person as a statutory agent by having recourse to the provisions of Sections 43 & 42, Income Tax Act, & in so deciding they expressed the view that Section 43 was really only machinery for giving effect to Section 42 & for getting over the difficulty of levying income tax under Section 42 when there was no agent of the non-resident assessee in British India. They nowhere said or implied that a statutory agent could not be appointed for giving effect to or for providing machinery for giving effect to Section 40. In the present case Messrs. Turner Morrison & Company Limited were appointed statutory agent under Section 43, Income Tax Act, as being a person in receipt of income on behalf of the non-resident Port Said Salt Association Limited. Messrs. Turner Morrison & Company Limited therefore must be deemed to be an agent for all purposes under the Act & thus they become liable to assessment as an agent of the Port Said Salt Association Limited under Section 40 of the Act. I may say in the words of their Lordships in the Bombay case, that Section 43 is really only machinery for giving effect to Section 40. I hold therefore that the fact that the Income Tax Officer appointed Turner Morrison & Company Limited statutory agents does not attract the provisions of Section 42(3), Income Tax Act, so far as the levy of income tax is concerned & no deduction, allowance or restriction as is envisaged in Section 42(3) need be made so far as the levy of Income Tax is concerned.

15. Having regard to the views expressed above I hold that the Income Tax Officer was right in assessing Messrs. Turner Morrison & Co. Ltd., with income tax as statutory agents of the assessee Company on the footing that they had received total income on behalf of the assessee Company. Such assessment of income-tax is not controlled by Section 42 and therefore Section 42(3) has no application to the assessment. No deduction or restriction such as is contemplated in Section 42(3) has to be made or imposed on the assessment of income tax. So far as income tax is concerned, the first question must be answered in the affirmative. The second question does not arise so far as the levy of income tax is concerned. The third question must be answered in the affirmative so far as the levy of income tax is concerned. Section 42, Income Tax Act, has no application to the levy of income tax on this case as income tax has been levied properly & legally on income, profits & gains received by Messrs. Turner Morrison & Co. Ltd., in India on behalf of the assessee Company.

16. I now take up for consideration the question whether Excess Profits Tax has been properly imposed. Excess Profits Tax may be imposed only on that part of the profits which is chargeable to income tax by virtue of the provisions of Sub-clause (i) or Sub-Clause (ii)of Clause (b) of Sub Section (1) of Section 4, Income Tax Act, or of Clause (c) of that sub-section (vide Sections 4 & 5, Excess Profits Tax. Act). Shortly put Excess Profits Tax may be imposed only on income profits or gains which arise or accrue or which may be deemed to arise or accrue in India Before Excess Profits Tax may be levied in this case it must be shown that the amounts realised by Messrs. Turner Morrison & Co. Ltd., constitute or contain income, profits or gains which have accrued or arisen in India or which may 'be deemed to have accrued or arisen in India. The Income-Tax Tribunal holds the view that as the income, profits or gains actually accrued or arose in India they are assessable to Excess Profits Tax as such. It held that as the income, profits or gains actually accrued in India it cannot be said that they should be deemed to accrue or arise in British India. Next the Tribunal points out that Section 42, Income Tax Act, is concerned not with income which' has actually accrued but only with income which may be deemed to accrue or arise & that consequently Section 42 (1) or Section 42(3) has no application to this case. In this view they reject the assessee Company's contention that tax should be levied only on such part of the income, profits & gains as are reasonably attributable to that part of the operation carried out in India by reason of the provisions of Section 42(3), Income Tax Act. For this purpose reliance was placed by the Tribunal on the case of 'In the matter of Mohanpur Tea Co. Ltd., I. L. R. (1937) Cal. 201. Dr. Pal on behalf of the Income Tax Officer supported this view. He says that Section 42 applied only to those cases where income, profits & gains accrued or arose outside India as a result of a business connection in India. In such a case, he argued by reason of Section 42 the income, profits and gains though not actually arising or accruing in India shall be deemed to arise or accrue in India. In the present case he says the income profits & gains actually accrued or arose in India & therefore Section 42 had no application; consequently Section 42(3) could not apply. He relies also on the case of 'Hira Mills Ltd.' Cawnpore v. Income Tax Officer, Cawnpore (1945) 14 ITR 417 ', which was decided by the Allahabad High Court, the case of 'Nagayya v. Commissioner of Income Tax,, Madras : [1949]17ITR194(Mad) ' decided by the Madras High Court & the case of the 'Commissioner of Income Tax, Madras v. Anamallais Timber Trust Ltd. : [1950]18ITR333(Mad) ' decided by the High Court of Madras.

17. On behalf of the assessee Company Mr. Mitra argued that the income, profits or gains accrued or arose from a business connection in British India and therefore it was-income which must be deemed to arise & accrue within India within the meaning of Section 42(1), Income Tax Act. He pointed out next that all the operations of the business were not carried out in India & contended that the provisions of Section 42(3), Income Tax Act, were attracted & tax could be levied only on such profits & gains as are reasonably attributable to that part of the operations carried out in India. This was his argument in respect of the levy of Income Tax & he contended that the same consequences would follow in respect of Excess Profits Tax. He did not, however, indicate how or why Section 42 (3), Income Tax Act, should apply to the levy of Excess Profits Tax but he said that even if Section 42(3) was not in terms applicable the same result would follow by reason of the terms of the second proviso to Section 5,.Excess Profits Tax Act, & he invited us to construe that proviso & apply it.

18. As regards the contention of Mr. Mitra regarding the effects of the second proviso to Section 5, Excess Profits Tax Act, Dr. Pal's answer was that we should not accept it as this point was not raised before the Tribunal nor in the assessee's application for these references when all the points for reference were categorically stated. He further pointed out that there has been no reference made by the Tribunal regarding this point. I am of opinion that Dr. Pal's argument must prevail. We are restricted to the matters referred to us under Section 66, Income Tax Act, & we cannot travel beyond them. Mr. Mitra clearly stated at the inception of the hearing that he was not raising any point that matters which should have been referred had not been referred. I have been through the order of the Tribunal & also the application on behalf of the assessee Company for this reference & I do not find any indication that this point was ever raised before the Tribunal or in the application for a reference. I therefore refrain from expressing any opinion regarding the applicability or otherwise of Section 5 Proviso 2, Excess Profits Tax Act, to the facts of this case.

19. I find however on reference to Section 21, Excess Profits Tax Act, that the provisions of Section 42, Income Tax Act, shall apply as if they were provisions of the Excess Profits Tax Act & although the aid of Section 21, Excess Profits Tax Act, was not invoked by Mr. Mitra, I find no difficulty or bar in the way of applying it as the contention of the assessee Company was that Section 42, applied to the levy of excess profits tax & that question has been referred to this Court, the reference being in relation to cases under the Income Tax Act, as well as those under Excess Profits Tax Act. If therefore the assessee Company can show that the income taxed under the Excess Profits Tax Act is income which is deemed to arise or accrue in India within the meaning of Section 42(1), Income Tax Act, & that all the operations of the business through which the income arose were not carried out in India then, in my opinion, the assessee Company Would be entitled to the benefit of Section 42(3), Income Tax Act, & could claim that excess profits tax should be levied only on such profits or gains as are reasonably attributable to that part of the operations as were carried out in India.

20. I now proceed to decide the question whether Section 42(3), Income Tax Act, can be availed of by the assessee Company. Section 42(3), Income Tax Act, is in the following terms:

'42(3). In the case of a business of which all the operations are not carried out in British India, the profits & gains of the business deemed under this section to accrue or arise in British India shall be only such profits & gains as are reasonably attributable to that part of the operations carried out in British India.'

It is quite clear from Section 42 (3) that for its application two conditions must co-exist viz., (1) the income must be income deemed to accrue or arise in India under Section 42 (1); & (2) only part of the operations of the business through which the income profits or gains arise must be carried out in India.

21. Now what constitutes income deemed to accrue or arise in India? Before dealing with the case law on the subject it would be better to examine the section which defines such income viz., Section 42 (1). To me it seems perfectly clear from the words of the section that all income, profits or gains which arise directly or indirectly through or from any business connection in India is income deemed to arise within India. It does not matter whether the person entitled to the income profits or gains is or is not resident in India. If he is resident in India the tax will be levied on him; if he is not, the tax will be chargeable in his name or in the name of his agent & in the latter case the agent shall for all purposes of the Act be deemed to be the assessee in respect of such tax. Thus it is clear that income may be deemed to arise or accrue in India even though the assessee is resident in India. Further the section nowhere stipulates where the income profits or gains should arise or accrue in order that they may fall within the definition of the section. It merely says that if it arises or accrues from any business connection in India it shall be deemed to arise & accrue in India. Dr. Pal's contention that in order that Section 42 should apply the income profits or gains must arise outside India & be brought into India is not supported by the words of the section. If that were the intention of the legislature there could have been no difficulty in expressing it in a section which deals with this topic in great detail. The case of Mohanpur Tea Co. Ltd. ILR (1937) Cal 201, relied upon by the income Tax Authorities is in my opinion of no assistance to the Income Tax Authorities. The Income / Tax Act has been greatly amended since that decision. The decision was rested on Sub Section (2) of Section 4 of the old Act which said:

'Income profits & gains accruing or arising without India to a person resident in India shall, if they are received in or brought into British India be deemed to have accrued or arisen in British India.'

It was also rested on a proviso to Sub Section (2) of Section 4 which said that the sub-section would not apply to income from agricultural produce arising or accruing in a State in India from land for which any annual payment in money or in kind is made in India. The provisions of the present Section 42 were not & could not be considered in that case. It would therefore be quite unsafe to base our decision in this case on the views expressed in the case referred to. In the-case of 'Nagayya v. Commissioner of Income Tax, Madras : [1949]17ITR194(Mad) the decision was based on the fact that the assessee admitted that the income actually arose in British India. It was held that after such admission the assessee could not be heard to say that the income should be treated as income deemed to arise or accrue in British India. Section 42 was also construed but I am not prepared to accept that construction for reasons which I shall presently state. I am also not prepared to follow the decision in the cases of 'Hira Mills Ltd., Cawnpore v. Income Tax Officers, Cawnpore', (1945) 14 ITR 417 & of 'Commissioner of Income Tax, Madras v. Anamallais Timber Trust Ltd. : [1950]18ITR333(Mad) for the same reasons. In my opinion the safest way to construe an Act is to give the words of the Act their ordinary grammatical meaning unless such a course leads to an absurd .conclusion or to a conclusion inconsistent with the general tenor of the Act. In the present case I find no such difficulty.

22. Section 42, Income Tax Act deals with more than on possible combination of facts. I am concerned with the application of Section 42 to the particular combination of facts before me in this case. It would be a profitable waste of time to discuss how Section 42 would apply or whether it would at all apply to a different set of facts & then by the process of analogy to decide its application to the facts of this case. The facts in the above mentioned cases are dissimilar to the facts in the present one & these cases would not be a safe guide. Further I respectfully disagree with the interpretation put on Section 42 in these cases which are not in accord with certain Privy Council decision on the point. The main facts of this case have already been stated. The Port Said Company carrying on business in Egypt, consign salt to Turner Morrison & Co. Ltd. a company carrying on business in India for sale at or above prices fixed by the Port Said Company. The proceeds of the sale after deduction of commission & incidental charges are sent by Turner Morrison & Company Ltd., to the Port Said Company. Now in such a case it seems beyond doubt that there was a business connection between the Port Said Co. & the Indian Company. It is also quite clear that the income, profits or gains arose out of this business connection. The profits arose out of the sale in India by Turner Morrison & Co. Ltd., of the Port Said Company's products in the course of the business carried on by Turner Morrison & Co. in India as sellers of salt. It accrued to the Port Said Association by reason of or through this connection with Turner Morrison & Company's business in India. All the requirements of Section 42 are satisfied & therefore I must hold that the income shall be deemed to arise or accrue in India. Further as the income accrued to a person not resident in India, tax could be levied in the name of the agent of such non-resident. That agent is Messrs Turner Morrison & Co, Ltd. who were appointed statutory agents under Section 43, Income Tax Act.

23. I am fortified in my view by two decisions of the Judicial Committee viz., 'Commissioner of Income Tax, Bombay v. Bombay Trust Corportation Ltd.', 57 I.A. 49 & 'Commissioner of Income Tax v. Remington Typewriter Co., (Bombay) Ltd.', 58 I.A. 42. In the case of 'Commissioner of Income Tax, Bombay v. Bombay Trust Corporation Ltd.', 57 IA 49, the facts were briefly these. A company, the Hong Kong Trust Corporation was incorporated in Honk Kong; the Company advanced money to the Bombay Trust Corporation incorporated in India & received interest at 51/2 per cent, from the Bombay Co. In these circumstances it was held that the profits made by the Honk Kong Co. accrued from a business connection in India & therefore fell within the scope of Section 42. It was further held that as the Bombay Co. were appointed statutory agents of the Honk Kong Co. they were liable under Section 42 to be assessed to tax as assessees although the Bombay Co. were not agents in any other sense of the word {see p. 55). In the case of 'Commissioner of Income Tax v. Remington Typewriter Co. (Bombay) Ltd.', 58 IA 42, the facts were these: An American Co. carried on business in New York & manufactured typewriters. A Bombay Company purchased the goodwill of the American Co. in Bombay & paid for it by assigning certain of the Bombay Co's shares to the American Co. It was held that the dividends payable to the American Co. in respect of these shares & the profits made by the American Co. by the sale of the typewriters exported by the American Co. to India were taxable under Section 42 (1) & it was held that it was so taxable as the profits arose or accrued to the American Co. through a business connection in India (see pp. 48 & 49). The facts of these two cases are essentially the same as the facts of the present case. It is quite unnecessary for me to deal with other cases when there are the Judicial Committee's decisions on this point. I hold therefore that the income, profit & gains of the : assessee should be deemed to arise or accrue in India and Messrs. Turner Morrison & Co. Ltd., may be assessed with Excess Profits Tax on this footing as agents for the Port Said Co-That being so, Sub Section (3) of Section 42 applies, as all the operations of the business are not carried out in India, the manufacturing operations being carried out in Egypt & the merchanting operations in India. As the provisions of Section 42 (1) as well as Section 42 (3), Income-Tax Act apply as if they were provisions of the Excess Profits Tax Act by virtue of Section'21, Excess Profits Tax Act, the assessee company are entitled to the benefit of Section 42 (3) & may claim that excess profits tax should be levied only on such income, profits & gains as are reasonably attributable to that part of the operations carried out in India.

24. I would answer the questions thus: Question (1). The answer is in the affirmative so far as income tax is assessed. Excess profits tax, however cannot be levied on this basis.

Question (2). The Tribunal was wrong in accepting the contention of the department that the income accrued or arose in India. The Tribunal did not hold that the income is income which should be deemed to accrue or arise in India. The part of the question which states that the tribunal did so is not in accordance with fact. We find that the income, profits & gains must be deemed to have arisen or accrued in India so far as excess profits tax is concerned & that Section 42 (3), Income Tax Act, applies to the levy of excess profits tax by virtue of Section 21, Excess Profits Tax Act.

Question (3). The tribunal was right in rejecting the contention that the income, profits & gains are chargeable to tax under Section 42 only. They are also chargeable to income tax as falling within the purview of Section 4 (1) (a), Income Tax Act, as income received in India on behalf of the assessee company. In such a case Section 42, Income Tax would have no application. As both' parties have partially succeeded they shall bear their own costs of this reference.

25. Mr. Mitra brought to our notice a recent decision of the Supreme Court passed after the hearing had concluded & shortly before judgment was delivered. We have looked into the decision & find nothing in it that would lead us to come to any other conclusion that the one at which we have arrived.

K.C. Chunder, J.

26. I agree.