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Reference Cases Nos. 13 and 14 of 1958, decided on 3rd March 1959.
S. 42 (1)-‑Refers to accrual of all income from sources in taxable territories whether assessee be resident or non‑resident‑Commissions and allowances received outside Pakistan by assessee for services rendered from outside Pakistan in respect of which income accrues' in Pakistan‑‑Deemed assessable income in Pakistan.
The first part of subsection (1) of section 42, as it now stands, does not refer to accrual of income to a person but to accrual of all income, direct or indirect, from sources in taxable territories whether the assessee is a resident or a non‑resident. That is to say that even indirect accrual of income from sources in taxable territories is equivalent to accrual in the taxable territories. Therefore, commissions and allowances received outside Pakistan by the assessee, who were Managing Agents of several companies situate in Pakistan, for services rendered from outside Pakistan in respect of which income accrued or arose in Pakistan were held to be assessable income in Pakistan.
Imperial Tobacco Co. of India, Ltd. v. The Commissioner of Income‑tax, South Zone, Karachi, and another 1959 P T D 21 distinguished.
St. Lucia Usines and Estates Company, Limited v. Colonial Treasurer of St. Lucia L R 1924 App. Cas. 508 ; Raghunandan Prasad Singh and another v. Commissioner of Income‑tax, Bihar and Orisa A I R 1933 P C 101 ; Dewar v. Commissioners of Inland Revenue (1933‑35) 19 T C 561 ; Commissioner of Income‑tax, Bombay v. C. Parakh & Co., (India) Ltd. 29 I T R 661 S C ; Woodhouse v. Commissioner of Inland Revenue (1933‑37) 20 T C 673 ; Anglo‑French Textile Company, Ltd. v. Commissioner of Income‑tax, Madras 25 I T R 27 ; Commissioner of Income‑tax/ Excess Profits, Bombay City v. Bhogilal Laherchand (1954) S C Appeals 1172=25 I T R 50 ; Sutlej Cotton Mills, Ltd. v. Commissioner of Income‑tax, West Bengal A I R 1950 Cal. 551=18 I T R 112 ; Commissioner of Income‑tax, Excess Profits Tax, Madras v. Parasram Jethanand, Madras A I R 1950 Mad. 631= 18 I T R 302 ; Commissioner of Income‑tax, Bombay v. Western India Life Insurance Co., Ltd. (1945) 18 I T R 405 = A I R 1946 Bom. 185 and Commissioner of Income‑tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay A I R 1950 S C 135 ref.
Asrarul Hussain with Muhammad Nurul Huq for Applicant.
A. F. M. Mesbahuddin with A. M. Khan Choudhury for Respondent.
.‑These two Reference Cases, being Reference Cases Nos. 13 and 14 of 1958, have been made under subsection (1) of section 66 of the Income‑tax Act (which we shall hereinafter call the Act only) stating the cases upon the following questions;
"Reference Case No. 13 of 1958.‑Whether on the facts and in the circumstances of the case, commission and allowances receivable outside Pakistan by the applicant for services rendered from outside Pakistan can be deemed to be income assessable in Pakistan."
"Reference Case No. 14 of 1958.‑Whether on the facts and in the circumstances of the case, commission and allowances receivable outside Pakistan by the applicant, a non‑resident Company, as Managing Agents, for services rendered from outside Pakistan can be deemed to be income assessable in Pakistan."
In Reference Case No. 13 of 1958, the assessments in question concern two years, i.e. 1947‑48 and 1948‑49, the previous years being the year ending on the 31st of December, 1946, and the year ending on the 31st December, 1947, respectively. In Reference Case No. 14 of 1958, the assessments in question relate to four years, namely, 1949‑50, 1950‑51, 1951‑52 and 1952‑53, the previous years being the year's ending on the 31st of December of 1948, 1949, 1950 and 1951, respectively.
2. By consent of the Advocates, both the Reference Cases have been heard together and are disposed of by one order. Although two references have been made before us, it may be mentioned, the Tribunal also by one order disposed of the cases concerning the two years in Reference Case No. 13 of 1958 and the four years in Reference Case No. 14 of 1958. The common feature in these two Reference Cases is that although in the first case the Income‑tax Department treated the assessee Company as a resident, in both the cases the assessee was taxed on the basis that under subsection (1) (c) of section 4 read with subsection (1) of section 42 of the Act the income that was assessed was an income that accrued in Pakistan, the Pakistani income being Rs. 49,075 for the year 1947‑48, Rs. 55,644 for the year 1948‑49, Rs. 42,611 for 1949‑50, Rs. 45,930 for 1950‑51, Rs. 22,481 for 1951‑52 and Rs. 65,954 for 1952‑53, as worked out by the Income‑tax Officer. The Company also submitted returns for the said years. It also appears so from the record that in respect of Pakistani income the assessee Company always contended that their managing agency commission and allowances received from several managed companies in Pakistan were not assessable as income in Pakistan, for, all these concerns, during the material periods, were controlled and managed from their office in Calcutta where these commissions and allowances were receivable and the accounts were maintained.
3. The admitted facts in both the Reference Cases are that the assessee Company is the Managing Agents of five tea companies, namely, Loongla Tea Company, Ltd., Looksan Tea Company, Ltd., Chandichari Tea Company, Ltd., Kaliti Tea Company, Ltd., and Lubachera Tea Company, Ltd., and also of the Dacca Electric Supply Company, Ltd. Some of these managed companies i.e., the first two tea companies are managed from London and in case of the other com panies commissions are credited in the books of accounts in Calcutta but no amount has been received in Calcutta, as the amounts were not transferred, so far as the Indian- Rupee companies were concerned and so, according to the assessee Company, they are all receivable in Calcutta and not assessable in Pakistan. Although the Tribunal overruled the contention of the assessee Company and taxed the said Company as indicated above, subsequently when they came across the decision in the case of the Imperial Tobacco Co. of India, Ltd. v. The Commissioner of Income‑tax, South Zone, Karachi, and another (1959 P T D 21=P L D 1958 S C (Pak.) 125), they made the present references on the 16th of September, 1958. It will appear from the letters of references that according to the Tribunal the facts of the present cases are similar to those in the Imperial Tobacco Co. case mentioned above.
4. Mr. Asrarul Hussain, the learned counsel who appears for the assessee Company, has, to start with, made much of the word "receivable" occurring after the words "commission and allowances" in the points formulated by the Tribunal and has strenuously argued that neither the provisions of subsection (1) (c) of section 4 nor those of subsection (1) of section 42 of the Act nor these two provisions taken together can be applied to the present cases. The learned counsel claims that as the commission and allowances have neither been received nor have accrued in Pakistan nor received in Calcutta, there is no income to assess.
Relevant portion of subsection (1) (c) of section 4 of the Act runs as follows;
"(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived, which.
(c) if such person is not resident in the taxable territories during such year, accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year;
Subsection (1) of section 42 of the Act runs thus;
"All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories, or through or from any property in the taxable territories, or through or from any assets or source of income in the taxable territories, or through or from any money lent at interest and brought into the taxable territories in cash or in kind or through or from the sale, exchange or transfer of a capital asset in the taxable territories, shall be deemed to be income accruing or arising within taxable territories and where the person entitled to the income, profits, or gains is not resident in the taxable territories, shall be chargeable to income‑tax either in his name or in the name of his agent and 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
Provided that where the person entitled to the income, profits or gains is‑not resident in the taxable territories, the income tax so chargeable may be recovered by deduction under any of the provisions of section 18 and that any arrears of tax may be recovered also in accordance with the provisions of this Act from any assets of the non‑resident person which are, or may at any time come, within the taxable territories.
Provided further that any such agent, or any person who apprehends that he may. be assessed as such as agent, may retain out of any money payable by him to such non‑resident person a sum equal to his estimated liability under this sub section and in the event of any disagreement between the non -resident person and such agent or person as to the amount to be so retained, such agent or person may secure from the Income‑tax Officer a certificate stating the amount to be so retained pending final settlement of the liability and the certificate so obtained shall be his warrant for retaining that amount;
Provided further that the amount recoverable from such agent or person at the time of final settlement shall not exceed the amount specified in such certificate except to the extent to which such agent or person may at such time have in his hands additional assets of such non‑resident person."
The learned counsel has also relied, just like the Tribunal, on the recent decision of the Supreme Court of Pakistan in the Imperial Tobacco Co. case and has referred to the following passage;
"Thus, the Pakistan authorities' power to tax the foreign income of a company, the registered office of which has throughout the previous years been in Calcutta, is not to be easily inferred, and unless the words of the statute unmistakably lend themselves to a contrary result, full effect must be given to the principle recognised by our own Income‑tax Law, that if a foreigner earns or receives income in Pakistan, that income alone is liable to income tax and not the income earned by him in the country of his origin or elsewhere outside Pakistan.
A company is resident in Pakistan in the year 1947‑48 (a) if the control and management of its affairs was situate in British India before the 15th August, 1947, and in Pakistan after the 15th August, 1947. This construction is consistent with the words and the sense of the definition of British India' as well as with the principle observed in section 4 of the Income‑tax Act and the rule of International Law that a Legislature has authority to tax its citizens wherever they be, and to tax the foreigners only if they earn or receive income in the country for which that Legislature has the authority to make laws. The interpretation adopted by the Departmental authorities and by the High Court is opposed to these principles and leads to this absurdity that the Pakistan Income‑tax authorities may tax the foreign income of a company even if that company had its registered office for only a day during the previous year in Pakistan".
The brief facts of the Imperial Tobacco Co. case mentioned above are that the appellant Company was assessed for income‑tax for the year 1948‑49 for which the previous year was 1947‑48. Though the Company carried on some business in Pakistan in that year, the registered office of the Company and the control and management of its affairs throughout the previous year were in Calcutta. It was held that the assessee company was not resident within the meaning of section 4‑A (c) so as to be assessed for income‑tax under section 4 (1) (b) (ii) of the Act.
5. The learned counsel has also relied upon the following decisions. In the case of St. Lucia Usines and Estates Company, Limited v. Colonial Treasurer of St. Lucia (L R 1924 App. Cas. 508), relied upon by the learned counsel, it was held that, where interest on an unpaid part of the purchase price was paid in a year subsequent to the year of sale, the assessee was not liable to pay income‑tax on the amount that was payable and not paid and that it was not income arising or accruing during the period of assessment. The second case is that of Raghunandan Prasad Singh and another v. Commissioner of Income‑tax, Bihar and Orisa (AIR 1933 P C 101), where a fresh bond was executed in discharge of a prior bond and the interest thereon, and it was held that the interest on a prior bond could not be deemed to have been realised for the purpose of income‑tax. Relying on this case, the learned counsel has stressed that for the purpose of assessment of income‑tax, there must be actually realised or realisable profits. The next case is the case of Dewar v. Commissioners of Inland Revenue ((1933‑35) 19 T C 561), which was a case where interest was due in law (after executor's year) on pecuniary legacy but has not claimed, and it was held that it was not an income of the legatee inasmuch as he did not actually receive any interest in respect of the legacy. The fourth case is the case of Commissioner of Income‑tax, Bombay v. C. Parakh & Co. (India) Ltd. (29 I T R 661 S C). This was an appeal against the decision of Chagla, C. J., and Tendolkar, J., of the Bombay High Court reported in 24 Income‑tax Reports page 24, which was also relied upon by the learned counsel. In this case the assessee carried on business in a number of places and for purposes of section 10 of the Act it was taken to be one business and the net profits of the business were to be ascertained by pooling together all the income earned from all the branches deducting the expenses therefrom. The assessee was resident and originally resident in India and had its main office in Bombay and Branch office at Karachi for purchase of cotton and direct export to other places or shipment to Bombay. There was an agreement among the assessee and the agents that the latter were to earn 26 per cent. of the annual net profit of the assessee to ascertain which the result of the trade in all the branches had to be taken into account. It was held that the fact that some of the branches of the assessee were in foreign territories would make no difference in the decision if the assessee was resident and ordinarily resident within the taxable territories and, there fore, the profits earned in India and Karachi were to be thrown together and the managing commission deducted therefrom and the assessee company was, therefore, entitled to deduct the entire commission against the Indian profits and that the appropriation of the proportionate commission in respect of the profits earned at Karachi was not in accordance with the agreement or with the rights of the assessee under the law and the appeal was dismissed. The last but one case is that of Woodhouse v. Commissioner of Inland Revenue ((1933‑37) 20 T C 673). That was a King's Bench Division case in which a part of the annuity was drawn and the assessee was taxed in respect of the whole of the annuity. In appeal, it was held that the assessee could be charged only on the actual annuity drawn by him and not oft the annuity due to him but not drawn. The last case relied upon by the learned counsel is the case of the Anglo‑French Textile Company, Ltd. v. Commissioner of Income‑tax, Madras (25 I T R 27). That was a case where the assessee company had its registered office in London and manufactured yarn and cloth in their mill at Pondicherry. The assessee appointed a company in Madras as their agents and the manufactured goods were sold mostly in British India and partly outside British India. All the contracts in respect of the sales in British India were entered into in British India and deliveries were made and payments were received in British India and also payments in regard to sales outside British India were received in Madras through the agents. It was held that in view of the finding that the entire profits were received in India and the assessee teas liable to tax under section 4 (1) (a) of the Act, the provisions of section 42 (1) of the Act did not apply and that the income received in British India could not be said to wholly arise in British India within the meaning of section 4-A (c) (b) of the Act and that there should be allocation of the income between the various business operations of the assessee separating the income arising in the taxable territories in the particular year from the income arising without the taxable territories in that year for the purposes of section 4‑A (c) (b) of the Act.
6. Mr. Mesbahuddin, who appears for the respondent, at the outset says that the facts of the Imperial Tobacco Company case upon which the Tribunal and the learned counsel for the assessee have relied are not at all similar to the facts of the present case and that it will appear from the order of the Appellate Tribunal disposing of tire appeals against the order of the Appellate Assistant Commissioner that although the Tribunal in Reference Case No. 13 of 1958 has stated that the assessee was a resident and ordinarily resident in Pakistan they have assessed the Company's income as an income which has arisen and accrued in Pakistan and, in support of this, the Department has relied on section 4 (I) (c) and section 42 (1) of the Act. The learned Advocate points out that apart from and indepen dently of any question of residence during the period of assessment once it is held that the income has actually accrued in Pakistan, directly or indirectly, there is no escape from the payment of the income‑tax on the income that has actually accreted in the taxable territories. The learned Advocate relies on the provisions of subsection (1) of section 42 of the Act and claims that, even if the income that has actually accrued or arisen in Pakistan is receivable outside Pakistan, under subsection (1) of section 42 of the Act such an income is liable to be taxed. The learned Advocate points out that the facts in the case of Imperial Tobacco Co. v. Commissioner of' Income‑tax are quite different from those of the present case inasmuch as that was a case of assessment under section 4 (1) (ii) of the Act and the profits of the Company which accrued to it in India and not in Pakistan during the previous year were taxed by the authorities and their Lordships of the Supreme Court held that the assessee Company was not resident in Pakistan within the meaning of section 4‑A (c) of the Act and its income was not assessable. On the other hand, in support of his argument, the learned Advocate has referred to the following observation of his Lordship the Chief Justice of Pakistan (Munir, C. J.) in that case;
" Tax is charged on the total income of the previous year of every person ; all income of a person is taxable if it is received in Pakistan during the previous year irrespective of whether he is or is not a resident of Pakistan ; if a person is resident in Pakistan during the previous year all income that accrues or arises is taxable irrespective of whether such income accrues or arises in Pakistan or without Pakistan ; if a person is not resident in Pakistan then only such income as accrues or arises to him in Pakistan during the previous year can be taxed. The principle underlying these provisions is that income may be taxed on two bases;
(1) receipt of income and (2) accrual of income. If a person is not a resident in Pakistan all that can be taxed is the income that the receives in Pakistan or that accrues to him in Pakistan during the previous year. But if he is a resident in Pakistan the income is taxable if it is received by him in Pakistan or if it accrues to him in Pakistan or outside Pakistan during the previous year."
In support of his contention, the learned Advocate has also taken us through a number of other relevant cases: The case of Commissioner of Income‑tax/Excess Profits, Bombay City v. Bhogilal Laherchand.( (1954) S C Appeals 1172=25 I T R 50), the relevant passage being;
" Before its amendment in the year 1939, the first part of the section ran thus :‑--
42 (1) In the case of any person residing out of British India, all profits or gains accruing or arising to such person, whether directly or indirectly, through or from any business connection or property in British India, shall be deemed to be income accruing or arising within British India, and shall be chargeable to income‑tax in the name of the agent of any such person, and such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income‑tax.'
The rest of the section was substantially in the same terms. In spite of its amendment in 1939, the marginal note to the section continued to refer to non‑resident' as before, though the words residing out of British India' were deleted from the body of subsection (1). The retention of this marginal note gave rise to conflicting decisions on the question whether the section in spite of the change made in its language in 1939 still continued to have application to cases of "non‑residents" alone. In order to clarify this matter, by Act XXII of 1947, the marginal note was amended and it now is in these terms;
Income deemed to accrue or arise within British India.'
It is significant that the changes made in section 42 in the year 1939 were consequential to the entire recasting of section 4 of the Act. Section 4 as it stood prior to 1939 charged income‑tax on all income, profits or gains from whatever source derived; accruing or arising, or received in British India or deemed under the provisions of the Act to accrue, or arise, or to be received in British India. It further provided that income, profits and gains accruing or arising without British India to a person resident in British India shall, if they are received in or brought to British India be deemed to have accrued or arisen in British India and to be income, profits and gains of the year in which they are so received or brought, notwithstanding the fact that they did not so accrue or arise in that year. By the amendment in the year 1939, the total income of any previous year of any person was defined as including all income, profits and gains from whatever source derived which----
(a) are received or are deemed to be received in British India in such year by or on behalf of such person, or
(b) if such person is resident in British India during such year,
(i) accrue or arise or are deemed to accrue or arise to him in British India during such year ; or '
(ii) accrue or arise to him without British India during such year ; or‑
(c) If such person is not resident in British India during such year ; accrue or arise or are deemed to accrue or arise to him in British India during such year ; . . . . . . .
This legislative change in the Act made all income accruing or arising or deemed to accrue or arise in British India during the previous year to a resident the subject of a charge apart from income accruing or arising without British India during the previous year.
The term deemed' brings within the net chargeability income not actually accruing but which is supposed notionally to have accrued. It involves a number of concepts. By statutory fiction income which can in no sense be said to accrue at all may be considered as so accruing. Similarly, the fiction may relate to the place, the person or be in respect of the year of taxability. Section 42 (1) defines what income is deemed to accrue within taxable territories. It is only by application of this definition that one class of income deemed to accrue to a resident within taxable territories' within the meaning of section 4 (1) (b) (i) can be estimated. The words In the case of any person residing out of British India' were deleted from section 42 (1) during the pendency of the amendment bill of 1939 in the Council of State presumably with the object of making the section applicable to any person who had any income which in a primary sense arose in British India, even though technically it had arisen abroad, irrespective of the circumstance whether that person was resident, ordinarily resident or not ordinarily resident.
* * * * * * *
In view of these legislative changes in the provisions of sections 4, 14 and 42 of the Act, the conclusion is irresistible that the object of recasting section 42 (1) in general, terms was to make the definition of deemed incomes' given in the section generally applicable to all classes of assessees. This subsection has been drafted in the widest terms and there is nothing whatsoever in the language to suggest that its operation is confined to non‑residents only. Wherever the Legislature intended to limit the operation of any part of this section to non‑residents alone, it said so in express terms. Subsection (2) and the latter portion of subsection (1) expressly concern themselves with the case of non‑residents, while subsections (1) and (3) are so framed that they cover both residents and non -residents."
7. The following observations of Harris, C. J., from the case of Sutlej Cotton Mills, Ltd. v. Commissioner of Income‑tax West Bengal (AIR1950Cal.551=181TR112) have also been placed before us by Mr. Mesbah uddin;
"However, it is clear that originally part of this section did apply only to non‑residents and the opening words of section 42 before it was amended in 1939 were "In the case of any person residing out of British India". Had those words remained, it would have been clear that subsection (1) had no application to residents. But, by the amendment in 1939, the words "in the case of any person residing out of British India" were eliminated from the statute and new words were substituted. Subsection (1) now opens with the words;
All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India, etc'."
In opening part of the subsection as amended there is now nothing to suggest that the subsection was intended to apply only to non‑residents. Further, it appears to me that in the latter portion of subsection (1) there are words which clearly show that the subsection applies both to residents and non- residents. After dealing with what income, profits or gains shall be deemed to be income accruing or arising within British India, the subsection then provides and where the person entitled to the income, profits or gains shall be chargeable to income‑tax in a certain manner.'
It appears to me that the inclusion of these words, which were added by the amending Act of 1939, makes it clear that the subsection applies both to residents and non‑residents and it is applied to them in a different manner. Further, the first proviso I think makes it clear that the subsection was applicable to both residents and non‑residents, because the first proviso deals with the cases of persons entitled to income, profits or gains who were not resident in British India. A proviso to a sub section is, as a rule, ire the nature of an exception and I cannot understand the necessity for the wording of this proviso if subsection (1) applied only to non‑residents. If, on the other hand, subsection (1) of section 42 applied to both residents and non‑residents, then the form in which the first proviso is found was necessary where a distinction was to be drawn between the liability of the two classes.
The matter however does not rest there because subsection (2) only applies to persons not resident or not ordinarily resident in British India, but it is to be observed that the subsection opens with those very words;
Where a person not resident or not ordinarily resident in British India carries on business with a person resident in British India, and it appears to the Income‑tax , officer, etc.'
There it is clear that the subsection applies only to non- residents and if it was necessary to make it clear in subsection (2) it appears to me that it was equally necessary to make it clear in subsection (1) if that subsection was intended only to apply to non‑residents. It seems to me that it was more necessary then ever to make the position clear with regard to subsection (1) because words which strictly limited the operation of that sub‑section to non‑residents have been deleted by the amendment and general word put in statute in the place of them.
Subsection (2) of section 42 is in the widest terms and there is nothing whatsoever in that subsection to suggest that its operation is confined to non‑residents. Subsection (3) merely deals with the case of a business of which all the operations are not carried out in British India and there is nothing to suggest that that business must be the business of a non‑resident. In fact, to hold that subsection (3) applied only to non‑residents, if the subsection stood alone, would be actually to do violence to the language of the subsection. However, the argument is, and that appears to have been the view of the Bombay High Court, that as subsection (3) is part of a section which deals with non‑residents only, it must be construed as also dealing with non‑residents and not with residents. However, in my view, only one subsection of section 42 is confined to non-residents and that is subsection (2). Subsections (1) and (3), in my opinion, are so framed that it must be held that they cover both residents and non‑residents."
The passage in the case of Commissioner of Income‑tax, Excess Profits Tax, Madras v. Parasram Jethanand, Madras (AIR 1950 Mad. 631=18 I T R 302), relied upon by the learned Advocate, runs as follows;
"The first part of section 42 (1) deliberately omits all reference to the category of persons to whom the income accrues or arises'. The language is wide enough to comprise persons who are resident as well as non‑resident and persons who are not ordinarily resident in British India. The omis sion in the first part of section 42 (1) of all reference to persons to whom the income is deemed to accrue or arise by reason of the business connection is significant. By way of contrast it may be pointed out that in section 42 (2) there is specific reference to persons not resident or not ordinarily resident in British India. Again in section 4 (1) (b), Income‑tax Act, reference is to the accrual or the arising of income to a person resident in British India, whereas in the first part of section 42 (1) there is no reference to the person to whom income, profits or gains are deemed to accrue or arise. The language being perfectly general there is no reason for so limiting it as to exclude its application to residents and persons not ordinarily resident and confine it to non‑residents. The matter does not stop there. The second part of section 42 (1) which refers to cases where the person entitled to the income, profits or gains is not resident in British India, by necessary implication, demonstrates that the first part of section 42 (1) takes in all persons whether resident or non -resident, and the latter part of section 42 (1) deals with only one class of persons falling under the first part of section 42 (1), namely, persons entitled to income, profits or gains, who are not residents in British India. Further, the first proviso to section 42 (1) specifically refers to the case of a person entitled to the income, profits or gains, who is not resident in British India. If, as contended by the learned Advocate for the assessee, section 42 (1) is confined in its application to persons not resident in British India, the proviso which is a sort of an exception to the general rule enacted in section 42 (1) would become meaningless in so far as it is confined to income, profits and gains of persons not resident in British India. The proviso itself suggests that the main part of section 42 (1) applies to a larger category of persons, namely, residents as well as non‑residents. The matter again received the attention of the Legislature in the year 1947. In spite of the amendment of section 42 in the year 1939, the marginal note continued to be as it was before, namely, "non‑residents". In the year 1947, a new marginal note was substituted in these terms income deemed to accrue or arise within British India' evidently with a view to counteract one of the reasons relied on by the Bombay High Court in the Commissioner of Income‑tax, Bombay v. Western India Life Insurance Co., Ltd., (1945) 18 I T R 405= A I R 1946 Bom. 185 for its conclusion that subsection (1) of section 42 applied only to non‑residents."
The learned Advocate for the respondent has also referred to the following in the case of the Commissioner of Income‑tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay (1), which runs as follows;
"It is noteworthy that the first part of subsection (1) of section 42 providing that certain classes of income are to be deemed to accrue or arise in British India is not confined in its application to non‑residents, but is in general terms as to be ap plicable to both residents and non‑residents. Before its amend ment in 1939, the subsection began with the words in the case of any person residing out of British India', which obviously restricted the application of the provisions to non‑resident persons, but in its amended form the subsection has been recast into two distinct parts, the first of which is not so restricted, and the second part alone, which begins with the words and where the person entitled to the income, profits and gains is not resident in British India', is made applicable to non‑resident persons, thereby showing that the former part applies to both residents and non‑residents. The opening words of proviso I also point to the same conclusion, for, these words would be surplusage if the subsection as a whole applied only to non‑residents. A contrary view, has, no doubt, been expressed by a Division Bench of the Bombay High Court in Commissioner of Income -tax v. Western India Life Insurance Co. Ltd. Though refer ence was made in the case to the alteration in the structure of subsection (AIR 1950SC135), its significance, as it seems to me, was not properly appreciated."
8. We have considered the arguments of the learned Advocates and the cases relied upon by them. In our opinion, there is no substance whatsoever in the contention of the learned counsel for the assessee and the cases cited by him, of which the facts have been briefly set out, are not at all relevant to the question before us. Obviously the basis of the assessments is that the income and profits have actually accrued in the territories of Pakistan. Thy fact that the head office of the Company is in Calcutta or that it is wholly controlled and managed from there is of no help, as rightly pointed out by the learned Advocate for the respondent. Apart from the cases, it will be noticed that the wordings of section 4 and that of section 42 (1) of the Act are very clear. After the amendment of section 4 and section 42 of the Act in 1939, the words "accruing to a person in a place" and "accruing in a place" make no material difference except that the case will be now hit by section 42 instead of section 4. Whether the source of income is in taxable territories or not will arise only under section 42 and not under section 4 where all that has to be determined is whether the income accrues or arises or received in taxable territories or deemed so to accrue or arise or be received irrespective of the territory of the source, the words in section 4 being "from whatever source derived". The first part of sub section (1) of section 42, as it now stands, does not refer to accrual of income to a person but to accrual of all income, direct or indirect, from sources in taxable territories whether the assessee is a resident or a non‑resident. That is to say that even indirect accrual of income from sources in taxable territories which is receivable outside the taxable territories, as in the present case in India, is equivalent to accrual in the taxable territories. This can obviously arise in respect of income receivable outside taxable territories, for, otherwise the case will fall under section 4. Where profits are actually received in taxable territories by or on behalf of non‑residents, section 4 (1) (a) applies and section 42 need not be invoked. So, whether section 42 (1) or section 4 applies, as indicated above, the assessee Company cannot escape payment of the tax on the income which has accrued in Pakistan. The learned Advocate for the respondent has rightly distinguished the case of Imperial Tobacco Co. from the present case. We respectfully agree with the view taken in the cases relied upon by the learned Advocate for the respondent, and accept his argument. We notice that although the learned counsel for the assessee tried to establish that there was no income whatsoever within Pakistan, from the returns which were produced along with the original records by the learned Advocate for the respondent, we find that the assessee has expressly mentioned their various income in Pakistan during material years.
9. Before we conclude, we may mention that it is most unfortunate that the Tribunal in whose office the paper‑book is prepared does not see that the material papers are included in the paper‑book. We may mention that the application for reference under section 66 (1) of the Act has not been printed in any of these cases and this we discovered when Mr. Hussain was arguing about the form in which the points have been formu lated and, on a reference to the original records produced by Mr. Mesbahuddin, we find that the points formulated were copies verbatim from the applications of the assessee though the assessee Company makes a grievance now that the points were not properly framed or formulated by the Tribunal.
10. So our answers in both the cases is in the affirmative and, although the points have not been formulated in identical terms in these two Reference Cases, we resettle them as follows; On the facts and circumstances of the cases, the commissions and allowances received outside Pakistan by the applicant for services rendered from outside Pakistan in respect of which the income accrues or arises in Pakistan are to be deemed to be assessable income in Pakistan.
11. The References are disposed of in the above manner. The assessee‑applicant will pay ten gold mohurs, as consolidated hearing fee for the two References, to the respondent.
.‑I agree with my lord the Chief Justice.
A. H.
Reference answered accordingly.
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