1951 (1) TMI 47 - HC - Income Tax

Court rules commission paid for supervisory services outside India not taxable under Section 42.

Commissioner of Income Tax Versus Steel Brothers and Co. Ltd.

Commissioner of Income Tax Versus Steel Brothers and Co. Ltd. - [1951] 19 ITR 435 (Cal) Issues:1. Interpretation of Section 42 (3) of the Indian Income Tax Act for computing total income.2. Determination of whether the commission payable to the assessee under the agreement with Attock Oil Co. falls under Section 42 (3) or Section 4 (1) of the Act.3. Assessment of whether the income of the assessee accrued or arose in India based on the nature of services provided.Detailed Analysis:1. The judgment involves a reference under Section 66 of the Indian Income Tax Act at the instance of the Commissioner of Income Tax, Calcutta, regarding the interpretation of Section 42 (3) of the Act for computing total income. The central question was whether the commission payable to the assessee under the agreement with Attock Oil Co. was governed by Section 42 (3) for income tax purposes.2. Section 42 (3) of the Act deals with the attribution of profits and gains to taxable territories in cases where business operations are not entirely carried out within the taxable territories. The judgment focused on determining whether the commission received by the assessee falls under the purview of this section in the context of the agreements with Attock Oil Co.3. The facts of the case revealed that the assessee, a non-resident company, was the managing agent of Attock Oil Company, both incorporated in the UK. The agreements between the parties outlined the commission payable to the assessee for various services, including the sale of goods. The key issue was whether the income accrued in India due to the sales activities conducted by the Burma Oil Company, the selling agent.4. The Income Tax Officer initially held that the income accrued in India as the sales were effected there. However, the Appellate Assistant Commissioner and the Tribunal took a different view, emphasizing that the commission paid to the assessee was for supervision, control, and general advice provided from London, not for the actual sale of goods in India.5. The crux of the judgment revolved around the application of Section 4 (1) versus Section 42 (3) of the Income Tax Act. Section 4 (1) pertains to the total income of any person, including income accruing or arising in India, while Section 42 (3) deals with profits reasonably attributable to business operations in taxable territories.6. The Court analyzed precedents cited by both parties, distinguishing cases where income accrued in India due to business activities from the present case where the income was derived from supervision and control services provided from London. Ultimately, the Court held that the income of the assessee did not accrue or arise in India and should be taxed under Section 42 rather than Section 4 (1) of the Act.7. In conclusion, the Court answered the reference question in the affirmative, ruling that the assessee's income did not accrue or arise in India. The judgment highlighted the distinction between income earned through business activities in India and income derived from supervisory services provided from a foreign location.