A. Lakshmanan vs Commissioner of Income Tax, Madras

Srinivasan, J.—The assessee left India for Fiji Islands in 1922. He remained there till 1948. During that period, he engaged himself as an

employee for some time and later had an independent business. He acquired certain properties one of which was a house which he constructed in

1939. On his return to India in 1948, he brought with him the cash that was available. Subsequently, through his friends and others at Fiji the other

assets left behind were sold and the sale proceeds were remitted to India Such remittance amount to Rs. 9,300 Rs. 24,074 and about Rs. 31,000

in the account years relevant to the assessment years 1949-50, 1951-52 and 1952-53. The Income Tax Officer started proceedings u/s 34 in the

view that these amounts brought into the taxable territories cam out of the profits from business carried on in the Fiji Islands. The contention of the

assessee was that these amounts represented remittances out of capital. But this contention was repelled and assessments were made. An appeal

was taken to the Appellate Assistant Commissioner, before whom the assessee pleaded that it was impossible for him to furnish particulars of his

income from 1932 onwards. He claimed that he had converted the profits into capital assets and that what he brought into the taxable territories

was only the sale proceeds of such capital assets. These contentions failed to find favour with the appellate authority, who thought that the mere

investment of income for the time being in any asset would not alter the character of the income. while he accepted the fact that so long as the

assessee resided in the Fiji Islands he kept the money in the shape of property, he thought that when he decided to return to India he converted the

assets into cash. He held accordingly that the alternation did not destroy the character of the amount as income. On further appeal to the Tribunal,

the assessee again reiterated his former contentions. He pointed out that his return to India was due to unforeseen circumstances and that the

purchases of real property and other assets in Fiji Islands from out of his income could not be regarded as merely temporary investments, that

these acquisitions were genuine and that when once the income had been converted into capital, its subsequent reconversion into money would not

restore to it the original character of income. But the tribunal declined to accept this contention holding that the conversion into capital in the Fiji

Islands was only of ""passing nature"" there being no ""effective capitalisation"" of the income.

On the application of the assessee u/s 66(1) of the Indian Income Tax Act being rejected, this court directed the Tribunal to state a case and

submit the following question for the determination of this court.

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law sustaining the assessment made on the assessee as

remittances to the taxable territories out of the business profits made by the assessee in Fiji Islands, 1949-50, Rs. 6,643 plus Rs. 2,657, 1951-52,

Rs. 24,704 and 1952-53 Rs. 27,500 plus Rs. 3,551?

It is not disputed that the petitioner was employed in a firm between 1922 and 1931. Thereafter, he appears to have set up independent

business and carried it on till 1938, when he sold that business to Messrs. Indian Trading Company. He served that company as a manager till

1944. From 1944 onwards he worked as a receiver in another company. In 1939, he built a house at a cost of pounds 1,000. During his long stay

in Fiji Islands for a period of nearly a quarter of a century, he had acquired other assets. The department did not care to ascertain what the nature

of the assets were, on what dates they were acquired and when they were disposed of. But is seems to be implicitly recognised that these assets

were of a nature which were capable to being enjoyed by the owner and were not in the shape of investments such as securities might not have

returned to India. It is also seen that in respect of the income of the assessee during the time he was abroad, there had been assessments in the

usual course.

Even on the statement of the facts, it seems to us that there is singularly little substance in the case of the department that there had been no

effective capitalisation of the income, or that the conversion of the profits into house properties and other assets in the Fiji Islands was only of a

passing nature. It is somewhat difficult to appreciate the argument that if the assessee had purchased movable assets such as those normally

required for the purpose of ordinary livelihood or wasting assets of a similar nature, the department can maintain that the sale of those assets would

result in recovery of the profit or the income. We are also unable to understand what is meant by effective capitalisation of the income. If the

income is utilised in the purchase of assets, movable or immovable, and the assessee enjoys the use of these assets for a considerable length of

time, is it too much to infer that there assets for considerable length of time, is too much to infer that there was a real intention to convert the money

into capital ? We cannot see how any other inference can be justify drawn from the circumstances of the case.

Mr. S. Ranganathan, learned counsel for the department, has referred to Walls v. Randall. That was a case where the appellant had two sources

of income abroad, dividends on investments in India and his share of profits as a sleeping partner in a firm carrying on business in Calcutta. The

income from both these sources was paid into his bank accounts in Calcutta. Out of these amounts, he directed that a sum of pounds 10,000

should be forwarded to him in England in the shape of a draft for making a gift to a hospital. Out of this amount, a portion was out of income

already charged to tax in the United Kingdom. The question was whether the remittance of the balance to United Kingdom was a remittance out of

capital or out of the income, The General Commissioner took the view that it was out of income, whether capitalised or not in India and this view

was accepted by the High court. The point to note in this case is that the assessee was resident and ordinarily resident in the United Kingdom and

he had obviously no intention of creating any permanent investments in India. Whether or not the income had been capitalised in India, there was

always the animus of taking these amounts to the United Kingdom, The learned judge observed :

The fact is that if a man resides here, he cannot, by investing for the time being his income abroad, change its character vis-a-vis the Income Tax

collector.

What the position would have been if the assessee in that case had resided in India and had acquired assets of a different nature than by

investments with the banks and the like we cannot say. But the facts of the decisions are certainly far different from those that we have to deal with.

Another decision of the privy Council relied upon for the department is commissioner of Income Tax v. Ahmedabad Advances Mills Ltd. In that

case the assessee received interest on Government of India bonds, which interest was payable in England. They invested the income in the

purchase of mill stores and machinery in England and brought the articles to India and used them for the purpose of their mills. The question was

whether this sum was income which was brought to British India and therefore assessable. The High court held that it was not received in or

brought to British India and there was no liability to Income Tax. This decision was affirmed by the Privy council. The principle is amply illustrated

by the headnote which reads thus :

If income arising or accruing without British India is spent or otherwise so dealt with that it ceases to be income instead of being brought into British

India, it is not chargeable under the Act merely because the thing upon which it has been expended or into which it has been turned is subsequently

brought there. But it is not necessary, in order to attract tax, that income received abroad should be brought in to India in the exact form in which it

was received.

If, therefore, we understand the decision to mean that if the income has been expended, the income ceases to exist, but if the income is either

brought to India in specie or in a different form, it would still be income and would be assessable the questions to ask would then be what was

done with the income that was received abroad ? In the case before the Privy Council, it was not disputed, that income was brought to India. The

judicial Committee characterised as extravagant the contention that when the income was spent upon the purchase of stores and machinery and

with whatever intention they might have been purchased, their arrival in India resulted in that income being brought to British India. They pointed

out that such a view could not be accepted and that the truth of the matter was that the assessee in such a case does not bring any amount at all but

had spent it all abroad. This decision does not render much assistance in the circumstances of the present case.

In S. Narayanswamy v. Commissioner of Income Tax it was pointed out that unless there was a device by reason of the alteration of the shape

of the income to enable it to be brought into British India, what was really capitalised could not be regarded as income. In that case, out the

accumulated profits earned in Trivandrum outside British India, the assessees purchased Mysore securities and kept them at Trivandrum. In order

to effect a change in the mode of investment, the securities were sold to a firm at Trivandrum. That firm entered into a contract at Madras to sell

those securities to a broker at Bombay. The Mysore securities were brought to Madras and then forwarded to Bombay. The assessees were

credited with the sale proceeds of the mysore securities. The Income Tax department claimed that there was a remittance to British India of

unassessed foreign profits. This court took the view that the securities represented capital, as the accumulated foreign profits had been so

capitalised when the securities were purchased. There was no device to bring any money for use in British India but only a substitution of securities.

Accordingly, there was only a remittance of capital. Giving the matter careful attention we are satisfied that the undisputed facts in the present case

can lead to only one conclusion. The assessee had capitalised whatever surplus income was in his hands. The view of the Tribunal that such

capitalisation was not effective or it was only of a passing nature is entirely opposed to the facts proved. There was no material upon which the

Tribunal could reach such a conclusion. Though there may exist cases where such capitalisation is only a ruse to overcome the tax liability, in the

present case, we see no vitiating features of that kind. The receipt of these moneys in our opinion represented only the receipt of these moneys in

our opinion represented only the receipt of capital and none of income.

The question is answered in favour of the assessee, who will be entitled to his costs. Counsels fee Rs. 250.

Question answered in favour of the assessee.