KESHAV MILLS LTD vs. COMMISSIONER OF INCOME-TAX, BOMBAY

CIVIL APPEAL No. 151/1951Supreme Court[1953] 1 S.C.R. 95030 January 1953Bench: 4 JudgesAuthor: MEHR CHAND MAHAJAN, SUDHI RANJAN DAS, VIVIAN BOSE, NATWARLAL HARILAL BHAGWATI23 pages
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What were the facts?

The appellant, Keshav Mills Ltd., a non-resident company, manufactured textile goods outside British India and sold them ex-mills. For sales to purchasers in Ahmedabad (within British India), a firm, R & Co., guaranteed the sale price. The company maintained its accounts on the mercantile system. R & Co. collected payments from purchasers on behalf of the company and credited these sums to the company's bank accounts in Ahmedabad, also disbursing them to the company's creditors in British India. The company debited R & Co. for the goods sold and credited its sales account. The dispute concerned the taxability of two amounts: Rs. 12,68,480 (recovered through R & Co.) and Rs. 4,40,878 (sale proceeds through British Indian banks). The High Court upheld the Tribunal's decision that these amounts were sale proceeds received in British India and thus taxable.

What did the Supreme Court hold?

A majority of the Supreme Court (Justices Mehr Chand Mahajan, S. R. Das, and Bhagwati) held that the two amounts in question were indeed sale proceeds of goods sold and delivered by the company to merchants in British India. However, they found that these amounts were neither actually received by the company nor deemed to have been received when entries were made in the books at Petlad. Instead, they had merely accrued or arisen to the company in British India. The Court determined that the amounts were first received by R & Co. and by the banks, through whom railway receipts were negotiated on behalf of the company in British India. Consequently, these amounts were held to be liable to tax under Section 4(1)(a) of the Indian Income-tax Act as having been received in British India on the company's behalf. The Court also noted that while it is obligatory for income-tax authorities to compute income according to the mercantile system for residents, it was doubtful if this applied to a non-resident maintaining books outside British India. Section 13 was considered relevant for total profit computation, not for assessing stray items received in taxable territories by a non-resident. Justice Vivian Bose dissented, arguing that taxation should be on profits that 'accrued or arose' under Section 4(1)(c) for non-residents, not on amounts 'received' under Section 4(1)(a), and suggested the case be remanded for reframing of questions.

What were the issues?

1. Whether the amounts of Rs. 12,68,480 and Rs. 4,40,878 were sale proceeds of goods sold by the assessee to merchants in British India and received in British India, making them liable to income-tax under Section 4(1)(a) of the Indian Income-tax Act, 1922. Assessee's contention: The assessee argued that the amounts were not received in British India, but had merely accrued or arisen there. They contended that the mercantile system of accounting should be applied, and that Section 13 of the Act was relevant for computing total profits, not for assessing stray items of income received in taxable territories by a non-resident. Revenue's contention: The revenue argued that the sale proceeds were received in British India on behalf of the company by R & Co. and the banks, and were therefore taxable under Section 4(1)(a). They relied on the fact that the High Court reframed the question and found the amounts taxable.

Which sections of the Income-tax Act were involved?

Section 4(1)(a),Section 4(1)(c),Section 13

AI-generated summary — verify with the full judgment below

• 195:: J anuar,Y .10. 950 SUPREME COURT REPORTS [1953] KESHAV MILLS LTD.' v. COMMISSIONER OF INCOME-TAX, BOMBAY [Mmm CHAND MAHA.JAN, S. R. DA~, VrnAN BosE and BHAGWATI JJ.)

Indian Income-ta.•r Act (XI o/1922), ss. 4 (1) (a) and (c), 18- J\-ron-resident-Accoz~nts in 11icrcantile systern-Sale of goods in British Inrli<t throuah agents-Assessability of profits derived front wch sale-Provision of law apvlicable to such cases-Inc01ne-tax outhori.ties, whether bound to compute incorne according to mercantile .•11stein-Avvlicablit?1 of s.13 to non-1·esidents. A non-resident company manufactured textile goods at Pout- side British India and sold the goods ex-mills. A firm, R & Co., guaranteed the sale-price of goods sold ex-mills by the company to purchasers at Ahmedabad within British India.

As the com- pany maintained its accounts according to the mercantile system, the company debited R & Co., with the price of goods sold and credited the sales account with the amount of \be bills. R & Co., collected the amounts of the bills from the purchasers on behalf of the company and c1·edited the snms realised in the company's "°count with banks at Ahmedabad and also dis

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