1949 (11) TMI 21 - HC - Income Tax

Hindu undivided family manager's permanent residence in Hyderabad State means family not resident in British India under Section 4-A(b)

Sri Rajah K.V. Narashimha Rao Bahadur, Zamindar of Aswaraopet Versus Commissioner of Income-Tax, Madras

Sri Rajah K.V. Narashimha Rao Bahadur, Zamindar of Aswaraopet Versus Commissioner of Income-Tax, Madras - [1950] 18 ITR 181 1. The principal legal question considered by the Court was whether the finding that the appellant Hindu undivided family (HUF) was a resident within the meaning of Section 4-A(b) of the Income Tax Act was tenable in law for the accounting year 1938-39.2. The core legal issues identified and analyzed include:The correct interpretation of Section 4-A(b) of the Income Tax Act, particularly the meaning of 'resident' for a Hindu undivided family based on the location of 'control and management' of its affairs.The temporal application of the control and management test-whether it must be determined with reference to the accounting year in question or can be inferred from other years.The evidentiary threshold for establishing actual control and management within British India, including whether occasional visits or isolated acts of management suffice.The relevance and weight of prior assessments and subsequent years' findings in determining residence for the year under consideration.The application of judicial precedents interpreting residence and control and management in the context of Hindu undivided families, firms, and companies.3. Issue-wise detailed analysis:Interpretation of Section 4-A(b) and Definition of Residence for HUFsThe Court examined Section 4-A(b), which states that a Hindu undivided family is resident in British India unless the control and management of its affairs is situated wholly outside British India. The Court emphasized that the statute requires the 'control and management' to be 'situated' at a particular place, implying a degree of permanence and stability. The word 'wholly' indicates that if control and management are divided between British India and elsewhere, the family is resident in British India.Drawing on authoritative precedent, especially the judgment of Patanjali Sastri J. in a prior case, the Court clarified that 'control and management' refers to the directing power or 'head and brain' of the family's affairs. It is not sufficient that isolated or casual acts of management occur in British India; rather, continuous and effective control must be exercised there to constitute residence. The Court rejected the notion that occasional visits or sporadic acts of management could establish residence.Temporal Application of Control and Management TestThe Court underscored that the determination of residence must be made with reference to the accounting year in question. Prior or subsequent assessments or findings cannot be used to infer residence for the year under consideration. The Income Tax Officer and Appellate Assistant Commissioner erred by relying on assessments from other years and prior assumptions of residence, which the Court held to be irrelevant and legally improper.Evidence and Findings on Control and ManagementThe facts showed that the karta of the family was a permanent resident of Aswaraopet in Hyderabad State, where the ancestral home and principal management of family affairs were located. The family owned properties in British India, but the income from these was largely collected by agents and remitted to the karta outside British India. The karta made occasional visits to British India to attend suits or Income Tax matters and a junior family member leased a house for educational purposes. However, the Court found no evidence that during the accounting year the karta exercised continuous control and management of the family affairs within British India.The Court noted that the suits attended to by the karta were not shown to be ongoing during the accounting year or directly related to the management of family affairs. The presence of a house leased for education was insufficient to establish the family's residence. The Court rejected the Appellate Tribunal's reliance on such facts and on the Commissioner's conclusions for later years to infer control and management during the year in question.Application of PrecedentsThe Court extensively reviewed precedents:In the Subbiah Chettiar case, the Court held that the seat of control and management must be located with some permanence and cannot be established by isolated acts or visits.In Gangabishan Mohanlal, mere location of business without actual management and control was insufficient to establish residence.The Shanmugham Rubber Estate case established that actual exercise of control by a partner residing in British India could establish residence.The Bombay High Court in Bhimji R. Naik emphasized that control and management must be de facto and not merely de jure.These precedents collectively reinforced that actual, continuous control and management within British India is necessary to constitute residence under Section 4-A(b).Treatment of Competing ArgumentsThe revenue authorities argued that prior assessments and the karta's visits to British India for litigation and tax matters evidenced residence. The Court rejected this, holding that prior assessments were based on different legal standards predating Section 4-A(b), and visits alone did not amount to control and management. The Court also rejected the argument that the family's money-lending business to residents in British India equated to conducting business there, as the evidence did not show the business was managed from British India.ConclusionsThe Court concluded that the undivided family was not resident in British India within the meaning of Section 4-A(b) for the accounting year 1938-39. The control and management of the family's affairs was situated wholly outside British India, specifically at Aswaraopet in Hyderabad State. The findings of the Income Tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal were set aside for failing to properly apply the statutory test and for relying on irrelevant or insufficient evidence.4. Significant holdings:The Court preserved and endorsed the following crucial legal reasoning:''Control and management' signifies in the present context, the controlling and directive power, 'the head and brain' as it is sometimes called, and 'situated' implies the functioning of such power at a particular place with some degree of permanence, while 'wholly' would seem to recognise the possibility of the seat of such power being divided between two distinct and separated places.''The section itself was introduced in 1939... the acts of control and management exercised in British India by the person having the power of control should extend to the whole affairs of the family or firm in order to make it 'resident' in British India... an isolated or casual act of management and control exercised in British India by a karta who lives abroad is insufficient to bring the family within Section 4 A (b).''The test to be applied... is whether, in fact and in truth, the control and management of the affairs and business of the firm or the family is exercised at a place in India either by the partner or the manager of the undivided Hindu family.'Core principles established include:Residence of a Hindu undivided family for income tax purposes depends on the location of actual, effective control and management of its affairs during the accounting year.Control and management must be situated with some degree of permanence and stability; casual or sporadic acts do not suffice.Prior or subsequent years' assessments or findings cannot determine residence for the year in question.The presence or residence of individual members is irrelevant unless they exercise control and management at that place.The test for residence of firms and Hindu undivided families aligns with principles applied to companies regarding central management and control.Final determinations:The undivided family was not resident in British India within the meaning of Section 4-A(b) for the accounting year 1938-39.The assessments made on the basis of residence in British India were legally untenable and set aside.The assessee was entitled to costs.