Foreign branch income controlled from India is fully taxable, and unproved past losses cannot be carried forward for set-off.

Income accruing outside the taxable territories was includible under the proviso to section 4(1) of the Income-tax Act, 1922 where it was derived from a business controlled in India, and the text indicates that temporary absence of the assessee did not by itself break that control. On that basis, the Hongkong branch income was treated as fully taxable in India rather than apportioned for part of the year. For loss carry-forward, section 24(2) was described as limiting set-off to losses actually established in assessment and capable of statutory carry forward, so unproved earlier losses and losses referable to a period outside the Indian tax net were not available for set-off in the later year.

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Issues: (i) Whether the income of the Hongkong branch was liable to be included in the assessee's total income in full or only in part on the footing that control of the business was exercised in India for only a portion of the year; (ii) Whether the alleged losses of the Hongkong business for the earlier years were available for set-off against the income of the assessment year 1947-48.

Issue (i): Whether the income of the Hongkong branch was liable to be included in the assessee's total income in full or only in part on the footing that control of the business was exercised in India for only a portion of the year.

Analysis: Under the proviso to section 4(1) of the Income-tax Act, 1922, income accruing or arising outside the taxable territories was includible in the case of a person not ordinarily resident if it was derived from a business controlled in India. The Tribunal's findings on the correspondence and surrounding facts showed that the Hongkong business remained controlled in India throughout the relevant year, and the assessee's temporary absence did not displace that control. The suggested time-based apportionment found no support in the language of the proviso or in the facts.

Conclusion: The entire income of the Hongkong branch was rightly included in the assessee's total income, and the issue was decided against the assessee.

Issue (ii): Whether the alleged losses of the Hongkong business for the earlier years were available for set-off against the income of the assessment year 1947-48.

Analysis: Section 24(2) of the Income-tax Act, 1922 permitted carry forward only of losses that had been established in assessment and were eligible for statutory carry forward. The earlier claim of loss had been rejected for want of proof, and that rejection did not amount to an assessed loss capable of being reopened as a second opportunity to prove the same loss. The further attempt to treat losses of 1941-45 as losses of 1946 also failed, because losses are ordinarily referable to the year in which they are sustained, and unabsorbed losses from a period when the Hongkong business was outside the Indian tax net could not be carried forward under the statutory scheme.

Conclusion: The assessee was not entitled to set off the alleged earlier losses against the income of the assessment year 1947-48, and the issue was decided against the assessee.

Final Conclusion: Both questions were answered against the assessee, with the result that the full Hongkong branch income remained taxable in India and no set-off of the alleged earlier losses was allowable.

Ratio Decidendi: Income accruing outside the taxable territories is includible under section 4(1) of the Income-tax Act, 1922 where it is derived from a business controlled in India, and only losses actually established and statutorily capable of carry forward under section 24(2) can be set off in a later year.

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