COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH HYDERABAD vs. TOSHOKU LTD. GUNTUR ETC.

CIVIL APPEAL No. 782/1973Supreme Court[1981] 1 S.C.R. 58729 August 1980Bench: 2 JudgesAuthor: P.N. BHAGWATI, E.S. VENKATARAMIAH COMMISSIONER OF INCOME7 pages
AI SummaryDismissed

What were the facts?

The assessee, Toshoku Ltd., a Japanese company and non-resident, acted as an exclusive sales agent in Japan for tobacco exported by a statutory agent, Sri Bommidala Kotiratnam, based in Guntur, India. The assessee was entitled to a 3% commission. The sale price of tobacco sold in Japan was remitted to the statutory agent. The statutory agent debited the commission amount to the assessee's account and credited it in his books on December 31, 1961. The commission was remitted to the assessee on February 1, 1962. Similar arrangements existed with another non-resident, M/s Societe Pour Le Commerce International Des Tobacs, based in France. The Income-tax Officer assessed these commission amounts as taxable in India under Section 161 of the Income Tax Act, 1961, relying on a Supreme Court decision. Appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were unsuccessful. The High Court referred the question of the assessment's justification to the High Court, which answered it against the Department. The Revenue filed these appeals by special leave.

What did the Supreme Court hold?

The Supreme Court held that the commission amounts were not taxable in India. Regarding the first issue, the Court distinguished the present case from P. V. Raghava Reddi by noting that the agreements in this case did not contain terms similar to those where the funds were explicitly at the disposal of the non-resident. The Court found that the credit entries in the statutory agent's books did not amount to receipt by the non-resident assessees as the credited amounts were not at their disposal or control. A credit balance without more represents a debt, and a mere book entry by the debtor does not constitute payment. Therefore, the assessees could not be charged to tax on the basis of actual or constructive receipt in the taxable territories. On the second issue, concerning accrual of income, the Court referred to Section 9(1)(i) and its Explanation (a). It stated that if all business operations are not carried out in India, the income deemed to accrue or arise in India is only that part reasonably attributable to operations in India. If no operations are carried out in India, income arising abroad through a business connection in India cannot be deemed to accrue or arise in India. The Court found that the non-resident assessees did not carry on any business operations in India; they acted as selling agents outside India. The receipt in India of sale proceeds by the statutory agent did not amount to an operation carried out by the assessees in India. Therefore, the commission amounts earned for services rendered outside India could not be deemed to have accrued or arisen in India. The High Court was correct in answering the question against the Department.

What were the issues?

1. Whether the commission amounts credited in the books of the statutory agent in India to the accounts of the non-resident assessees constituted 'receipt' in India under Section 5(2) of the Income Tax Act, 1961, making them taxable. - Assessee's contention: The credit entries in the statutory agent's books did not amount to receipt as the funds were not at their disposal or control; a credit balance merely represented a debt, and a book entry by the debtor does not constitute payment. - Revenue's contention: The High Court in a similar case (P. V. Raghava Reddi) held that such credit entries constituted receipt. The amounts were held by the statutory agent as a depositee for the assessee and were at their disposal. 2. Whether the commission amounts were income deemed to have accrued or arisen in India under Section 9(1)(i) of the Income Tax Act, 1961, due to a business connection in India. - Assessee's contention: The non-resident assessees did not carry out any business operations in India. The commission was earned for services rendered outside India. The receipt of sale proceeds in India by the statutory agent did not constitute an operation by the assessees in India. - Revenue's contention: The commission amounts accrued or arisen through and from the business connection in India between the non-resident assessees and the statutory agent.

Which sections of the Income-tax Act were involved?

Section 5(2),Section 9(1)(i),Section 160,Section 161,Section 163

AI-generated summary — verify with the full judgment below

587 COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH HYDERABAD v. TOSHOKU LTD., GUNTUR ETC.

August 29, 1980 [P. N. BHAGWATI AND E. S. VENK4TARAMI~H, JJ.] Commission payable to non-resident foreign agent by the statutory agent- Statutory agent making credit a1id debit entries in his books of account under the head "commission account" on receipt of the sale price from the foreign agent and thereafter on remitting the commission amount to the foreign agent-Whether the commission amounts sent were assessable to income tax- .Sections 5(2), 9(1)(i), 160, 161 and 163 of the Income Tax Act. 1961 read with Board's Circular (XXVII-l) of 1953 No. 26 (II/53) dated July 17, 1953- Whether the amounts should be treated as income deemed to have acr.rued or arisen in India.

Dismissing the Revenue appeal by special leave, the Court HELD: (I) The credit entries made in the books of a ~tatutory agent , -do not by themselves amount to receipt by assessees who are non-residents as long as the amounts so credited in their favour are not at their disposal -0r control. [592 F] The non-resident assessees in this case neither received nor could be deem- ed to have received the sums in question

The order continues below.

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