Tax withholding on non resident payments: payer must deduct where receipts are business income, not casual gains.

The issue was whether the payer was required to deduct tax at source on a resale payment to non-resident mills. The court analysed the sale and resale contracts, contemporaneous correspondence and account entries, applying the statutory requirement to deduct where payments to non-residents are chargeable unless the payer acts as agent. It found no agency relationship and held the mills' gains were revenue business receipts (raw material resale), not casual receipts, and therefore the payer was liable to deduct tax on the specified payment; costs awarded to the department.

---

---

Issues: Whether, on the facts and in the circumstances of the case, the assessee was liable to deduct income-tax at the maximum rate under section 18(3A) of the Income-tax Act, 1961, on the amount of Rs. 1,40,000 paid in respect of the resale transaction with non-resident mills.

Analysis: The Court examined the contract of sale and the subsequent contract of resale together with the contemporaneous correspondence and account entries. The material statutory provision requires a payer to deduct tax at source when making payments chargeable under the Act to a person not resident in the taxable territories, unless the payer is himself liable as an agent. The Court found no evidence that the assessee wilfully failed to perform the original contract; contemporaneous letters show the purchasers had been unable to obtain import licences and confirmed credits, and the resale was arranged in those circumstances. The Court considered whether the payments represented casual, non-recurring receipts of the non-resident mills (exempt from business taxation) but held that the mills had purchased cotton as raw material for their manufacturing business and profits on the subsequent resale were revenue receipts from business, not casual gains. The assessee was not an agent of the non-resident mills in India.

Conclusion: The Court answered the question in the affirmative and held that the assessee was liable to deduct income-tax under section 18(3A) of the Income-tax Act, 1961, on the sum of Rs. 1,40,000. The assessee was ordered to pay the costs of the department.

---