THE ERIN ESTATE, GALAH, CEYLON versus THE COMMISSIONER OF INCOME-TAX, MADRAS

April zz.

S.C.R.

SUPREME COURT REPORTS

573

THE ERIN ESTATE, GALAH, CEYLON" v. THE COMMISSIONER O.E' INCOME-TAX, MADRAS

(VENKA'rARAMA A1YAR, GAJENDRAGADKAR and A. K. SARKAR JJ.)

Iucome-tax-Assessment-Firm owning tea estate outside India -Partners residing within taxable territories-Residence of jirm Presumption -If and when rebuttable-Onus-Control and manage ment-Test-Indian Income-tax Act (XI of r922), s. 4A(b).

Section 4A(b) of the Indian Income-tax Act, 1922, provides inter alia that "for the purpose uf the Act, a firm is resident in the taxable territories unless the control and management of its affairs is situated wholly without the taxable territories". The appella11t was a registered firm owning a tea estate in Ceylon. All the partners of the firm were permment residents in India. The superintendent of the estate who resided permanently in Ceylon had the management and control of the affairs of the estate from day to day,- but the partners had the right to check him and give him directions if anything appeared irregular; they also approved the budget sent by him concerning important matters every year, after which the superintendent was at liberty to act upon it. The appellant claimed before the Income-tax Officer that the firm was not resident in the taxable territories, and so the income arising in Ceylon from the appellant's estate was not assessable to tax in India. The question was whether the appellant was resident in the taxable territories within the meaning of s. 4A(b) of thP, Indian Income-tax Act, 1922 :

Held, (1) Whether a firm is resident within the taxable terri tories under s. 4A(b) of the Indian Income-tax Act, 1922, is a mixed question of fact and law, and depends upon the legal effect of the facts proved in each case.

(2) Where the partners of a firm are residents in the taxable territories the normal presumption is that the firm is resident in the taxable territories, but this can be rebutted by the assessec, on whom the onus lies, by showing that the control and management of the affairs of the firm are wholly without th~ taxable terri tories.

(3) The exercise of the control and management even in part in the taxable territories would be enough to fix the assessee with the character of a resident within s. 4A(b), but such control and management must be de facto and not mere de jure and it is not relevant to enquire whether it amounted to a substantial part.

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x958

The Erin Estate, Galah, Cejlon

v.. . Th C e oHuntssioner ,, T 1 o1 nconie- ax, Madras

574

SUPREME COURT REPORTS

(1959]

(4) The appellant was a .firm resident in the taxable terri tories within the meaning of s. 4A(b) of the Indian Income-tax Act,

B. R. Naik v. Commissioner of Income-tax, Bombay, [1945] 13 l.T.R. 124; [1946] i4 l.T.R. 334 and Subbayya Chcttiar v. Com- missioner of Income-tax, Madras, [1950] S . .I,. 9 r, re erre

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Crv1L APPELLA'rE JURISDICTION: Civil Appeal No.

255 of 1953.

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Appeal from the judgmrnt and decree dated March 27, 1951, of the Madras High Court in C.R. No. 62 of 1946.

R. J. Kolah and R. Ganapathy Iyer, for the appel

lant.

H. N. Sanyal, Additional Solicitor-General of India, K. N. Rajagopala Sastri and R. H. Dhebar, for tbe res pondent.

1958. April 22. The Judgment of the Court was

delivered by

Gajcndragadkar J. GAJENDRAGADKAR J.-The short question which this appeal raises for our decision is whether the appel lant assessee is resident in the taxable territories within the meaning of s. 4A(b) of the Indian lncome tax Act, 1922. This question arises in this way.

The appellant is a registered firm owning a tea estate called 'The Erin Estate ' at Galah in. Ceylon. The firm consists of seven partners all of w horn are permanent residents of certttin villages in Timchira palli District. The total sum paid by the partners amounts to lb. 25,00,000 and the same is divided into i47 shares.· Out of these 147 shares, Andiappa Pillai owns 50 shares, V eera ppa Pillai owns 43 shares, N agalingam Pillai owns 18 shares and the remaining four partners own 9 shares each. The estate owned by the firm pro·duces tea which is sold to the authorities under the regulations prevailing in Ceylon. Under cl. (3) of the Partnership Deed, the superintendent Ponnambalam Pillai, who was himself a co-owner in the said estate previously, manages the estate and · looks after its working from day to day. Ponnam balam Pillai permanently stays in Ceylon. He, looks •

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S.C.R.

SUPREME COURT REPORTS

575

after the estate from day to day and it is by him that all sales are effected through commission agents by name Uordon and Company. The pass books for the bank account for the estate are kept in his name and he receives the income and makes the requisite dis- The Commissioner bursements from time to time. of Income-Tax,

The Erin Estate, catah, Ceylon v.

I958

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The a;;sessment proceedings for

the assessment

Madras

years 1!)39-40 to 1942-4:5 were started by the Addi- Gajendragadkar ]. tional Income-tax Officer, Tiruchirapalli Circle. The appellant submitted its returns before the Income-tax Officer and claimed that the firm was not resident in British India and so the income arising in Ceylon from the appellant's estate was not assessable to tax in India. The Income-tax Officer rejected the appellant's contention and held that the appellant was a resident under. the provisions of s. 4A(b) of the Act and so he proceeded to tax the entire income accruing to and arising from the appellant's estate in Ceylon. The returns submitted by the appellant were accepted as substantially accurate and the appellant was assessed on its income from Ceylon with some minor adjust- ments considered necessary by the Income-tax Officer. The appellant filed appeals against the several assess- ments thus made before the Appellate Assistant Commissioner of Income-tax, Tiruchirapalli. These appeals, however, failed and were dismissed. The appellant then went in appeal before the Income-tax Appellate Tribunal, Madras; the Tribunal dealt with the appeal for 1941-42 assessment in the first instance and allowed it. The Tribunal took the view that the evidence produced in the case showed that the control and management of the appellant's affairs was situated wholly without the taxable territories and so it revers- ed the finding of the Income-tax authorities that the appellant was a firm resident in the taxable territories. ]'or the other years in question the same order was passed by the Tribunal.

Against t,hese orders of the Tribunal reference applicil'tions Were filed by the Commissioner of Income Tax but these applications were dismissed by the. Tribunal under s. 66(1) of the Act. 'fhen the Commis sioner took up the matter tp the High Court of Mad-as

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576

SUPREME COURT REPORTS

[1959]

'958

v.

Madras

under s. 66(2); the High Court .directed the Tribunal The Erin Estate, to refer the question a8 to ... whether the assessee fi.rm Galah, Ceylon was i·esident in British India within the meaning of s. 4A(b) of the Act". Accordingly a consolidated The Commi,,ioner reference was I/lade to the High Court and, on of Income-Tax, March 27, 1951, the High Court held that the appellant was a resident in British India and answered the Gajendragadkar J. question referred to it in .the affirmative. Subsequently the appellant applied for and obtained a certificate from the High Court under s. 66A(2) that the present case is a fit one to appeal to the Supreme Court of India. That is how this appeal has come before us; and the only point which it raises for decision is whether the appellant is a firm resident in the taxable territories under s. 4A(b) of the Act. This appeal was argued before

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this Cow·t on February 9, 1956 ; but after arguments were heard for some time, the Court adjourned the hearing of the. appeal sine die, "to enable the parties to compile an agreed pa per-book containing letters which they res pectively relied upon in support of their respective cases". In pursuance of this direction, by consent the parties have filed an additional pa per- book containing some·more correspondence. . ' There is no doubt that the ·question raised for our decision is a question of la\V. VVhether or not the appellant is a resident firm under s. 4A(b) would depend upon the legal effect of the facts proved in the case. The status of the appellant which has to be determined by reference to the relevant section of the ·Act is a mixed question of fact and law and in deter mining this question the principles of law deducible from the provisions of the said section will have to be applied. This position has not been disputed before us in the pi;esent proceedings; Section 4A(b) provides , inter alia that " for the purpose of the Act, a firm is · resident in the taxable territories unless the control and ·management of its affairs./is situated wholly w_ithout the taxable territories". I This provision shows that, \vhere the partners of a firin _are residents "of this country, the normal presumption would. be that the in the. taxal)le .territories. This ·. fi.i'm , is i;esidiint

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S.C.R.

SUPREME COURT 11EPOHTS

577

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I95

The Frin Estate.

i;.; situated Galah. Ceylon

presumption is rebuttable and it can be effectively rebutted b.'r the assessee showin0a that the control aud managenwnt of the affairs of the firm wholly without the taxable territories. The onus to rebut the initial presumption is on the aRsessce. The The Co111111issio11er control l1ntl management contemplated by the section °1 Income-Tax, evidently refers to the controlling and directing power. Jlfall~'15 Often enough, thiR pO"wer has been described in judicit1l r l - lk l1U)f1U.ragar. ar ]. decisions as the 'head and brain ' ; the affairs of the firm which arc subject to the said contrnl and manage ment refer to the affairs which arc relevant for the purpose of taxation and so they must have some rela tion to tho incon1e of the firm. \iVhen the ;.;ection refers to the control and management being situated wholly without the taxable tenitories it implies that the.control and management can be situated in more places than one. vVht>re the control and management are situated wholly ontsid•.;, India the initial presump tion ~irising under the section is effectively rebutted. It is true that the control and management which must be shown to. be situated l1t least partially in India is not the mei·ely theoretical control and power, not a de jure control and power but the de facto control and power actually exercised in the course 9f the conduct and management of the affairs of the firm. Theoretically, if the partners reside in India they would naturally have the legal right to control the affairs of the firm which carries on its operatious out side India. The presence of this theoretical de ;jiire right to control and manage the affairs of the firm which inevitably vests in all the partners would not by itself show that the requisite control and management is situated in lndia. It must be shown by evidence that control and management in the affairs of the firm is exercised, may be to a small extent, ip Indiit befoi:e it can be held that the control and management is not sitlmted wholly without the taxable territories. (Vide B. R. Naik v. Commissioner of Income-tax, Bombay (1)). r.rhfl Clff(let 11ml seope of the provisions of s. 4A(b) has bee't1 considered by this Court in V. V.R. N.J.11. Subbayyci Chettiar v. Commissioner of Income-tax, J.Vladra$ (").

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(I) [1945] r3I.T.R. 124; (1946] 14 I.T.R. 334· (2) [I!ISO] S,C.R. 961, !16j. • •

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578

SUPREME COURT REPORTS

'[1959]

0

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r958

Tlze Erin Estate,

After examining the relevant decisions on this point, Fazl Ali J. who delivered the judgment of the Court, G tah Ceylon has observed "(1) that the conception of residence in the case of a fictitious "person" such as a company, Tile Commi;sioner is as artificial as the company itself and the locality of the residence call' only be determined by analogy, by of Income-Ta-<, asking where is the head and seat and directing Mad,as power of the affairs of the company." .................. (2) - Ga1endragadkar J ... Mere activity by the company ·in a place does not create residence, with the result that the company may· be "residing" in one place and doing a great deal of business in another."· (3) "The central management and control. of a company may be divided and it may keep house and do business in more than one place, and, if so, it may have more than one residence." (4) "In case of dual resid"nce it is necessary to show that the company performs some of the vital organic functions incidental to its existence as such in both the places so that in fact ·there are two centres of management." It is in the light of these principles that s. 4 A (b) has to be con strued. Thus the only question which remains to be considered is whether the High Court ·of Madras was right in holding that the. appellant was resident in India under s. 4 A (b).

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On behalf of the appellant, Mr. Kolah has contended that the only conclusion· which can be legitimately drawn from the evide!lce .in the case is that the control and management of the appellant's affairs resided · wholly in Ceylon. In support of this argument he has ·laid considerable emphasis on cl. (3) of the Partnership Deed. This clause provides that the .estate (of the ·firm) shall be managed "by the superintendent Shri man A1B.S.T. Ponnambalam Pillai who has hitherto· been in charg,. of the same and managing the same or by a person appointed by a majority of the part ners". The appellant's case is that, since the partners ·had specifically left the superintendent in charge of the management of the estate, the control and man.age ment was entirely· entrusted to him and thus it is·( 'vholly ·situated in Ceylon. It is no doubt true that the §Ubstantial p{J<rt of the ~anagement of the. estate ·

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$.0.R.

SUPREME OQURT .REPORTS

579

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in favour of

e a all's the

looking The Erin Estate,

1 to t rn genera management o

was left to the superintendent. The superintendent was staying near the estate and was after its . management and its affairs from day Galah, Ceylon to day. Prima facie the material clause in the Partnership Deed and the evidence adduced in The Commissioner of Income-Tax, regar d Madrns of the estate are no doubt appellant ; but it has been held by the High Court Gajendragadkar ]. that the correspondence produced in the case con- . elusively showed that the control and management was not wholly situated in Ceylon and that at least a part of the control and management was situated in India because the partners who resided in the District of Tiruchira palli are shown to have exercised control and management of the affairs of . the firm from time to timo.. It is this conclusion which has been challenged by Mr. Kolah. \Ve must, therefore, proceed to examine the evidence given by the parties and the correspond ence produced by the appellant in the case.

looked after

the Superintendent

Andiappa Pillai stated before the Income-tax Officer that the entire management of the estate and the entire control of the affairs of the firm had been left to him by the partners. He, however, admitted that, if anything done by him <•ppeared to them to be irregular, they had the right to check him or to give him direc tions as to how he should carry on the busi ness. He also added that so far there had been no occasion for them to disagree with anything done by him. Whilst Andiappa Pillai thus claimed that no control has been exercised from India, he had to concede that at the beginning of every year the superintendent sends to.. the four partners mentioned by him a budget concerning any important or big matter to be attended to in connection w!th the estate. It was usual for them, said Pillai, to approve of the budget. It would thus be clear that this statement shows that in regard to important and big matters a budget was required to be submitted by the superin tendent to the four principal partners and it was after the budget was a.pproved by them that the superin tendent was at liberty to &ct upon it .. In our opinion,

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580

SUPREMJ11 COURT REPORTS

[1959]

8

'95

the fact that the budget thus submitted by' the superin- 1:,

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The Erin Estat• tendent was usually approved by the partners does Galah, Ceylon ' not detract from the position that the budget had to •1i.e submitted and could be acted upon only after it The Commissio"er was approved, The act of approval in the context is undoubtedl v an act of exercising the right of control 01 Income-Tax, l\ladras and management of the affairs of the firm. That the Gajcndrngadkar J. estimate for 1940 had been submitted to the partners appears · from the letter written by V eera ppa Pillai to the superintendent on January 2, 1940. In this letter Veerappa Pillai had told the superintendent that only the school building should be built during the year and that the plan about the stable may be considered and attended to after April or May. Andiappa Pillai's letter to the 8Uperintondent written on December 31, 1939, 'gives instructions about manuring and ask~ the superintendent to undertake the building works mentioned in the letter as economically as possible even though the estimated cost of the building had been approved, Then instructions are given as to how the salary of the three accountants should be adjusted in the account. He. was also told that Periasamy had complained th'1t his salary W'1S insnfficie1it and the superintendent was required to give his opinion about the merits of the complaint. A direction w11s also given to the superintendent that tea, should be· ti1kcn in accordance with what is mentioned in the estimate In ·so as not to go behind the quantity stated there. other words, the superintendent wt1s asked to confine the. purchase of the tea within the limits mentioned in the estimate which had been approved. It appears that, on receiving the opinion of tht, Hnpcrintondont :ahou.t the ~omplaint made by Periasamy in regard to his s'1lary, the· superintendent was told to p11y him H.~. 2 more P"r month. This no doubt is a small item but it shows that even where the salary of a clerk had to be increased by .Rs. 2, the clerk made a representa tion to the partner, the partner called for the opinion of the superintendent and, on considering the represen tation and the opinion together, the partner directed the superintendent to pay the clerk Its. 2 more per rn0t1th. B~, his. letter dated July 11, 1!)40, Andiappa

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KC.R.

SUPREME COURT REPORTS

581

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Galah, Ceylon v.

to engage of Income-Tax,

the direction The Commissioner

Pillai directed the superintendent as to how the garden income should be adjusted. Once in six months Rs. 7,500 to Rs. 10,000 should be retained as reserve Then,;,. Estate,/ and the balance distributed amongst the pa.rtners in proportion to their shares. That is given. Then the superintendent is told lab9urcrs and to send Vaidyalingam and the labourers Madras to cut the wild plant growth in both the said garden G . d -dk. and Konangodai garden. Certain other directions as a;en raga "' to the work to be assigned to the other clerks are also given. On July 13, 1940, Andiappa Pillai told the superintendent to pack and send 70 lbs. F. B. 0. P. tea and suggested that, if the tea had not been sent already to V eera ppa Pillai, be should ·carry out the In this letter the superintendent is said instruction. also a~ked to enquire from other companies the price of Nevvil and he is told that, having regard to the nature of the current sales of tea, manuring need not be stopped. On July 29, 1940, the superintendent is told as to how the account is to be made in regard to the charges for the guards. On August 8, 1940, Andiappa Pillai tells the superintendent that "when the coupon price goes down purchase for our garden lbs." This correspondence shows that the 20,000 entire control and management of the affairs of the firm had not been left with the superintendent. In regard to the manuring of tea gardens, the salary to be paid to the clerk, the purchase to be made, the expenditure to be incurred in constructing a build- ing, the goods should be the manner these are subjects discussed packed and sent, all the superin• to by the partners tendent and in respect of all these, presumably the superintendent had asked for directions and the partners gave him the directions. Besi<fus, we have already referred to the admission made by Andiappa· Pillai that, at the beginning of every year, the superin- tendent sent to the four important partners a budget ~oncern_ing important and big matters to be attended to during the course of the year. Having regard to this evidence we are unable to accept the appeHant'ij

in their letters

in which

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582

SUPREME COURT :P.,EPORTS

[1959]

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argument that the control and management of the The Erin E;tarr, appellant's affairs was situated wholly in Ceylon, In · Galah, Ceylon dealing with this question it would be relevant to bear in mind that the appellant would not succeed even if it The Commi.<_siona is shown that a part of the control and management of the affairs of the company rested in India. The control 0! Inrome-Tax, Madms e s lOW!l to have an management must no Gajendragadkar· J. been actually exercised; and the exercise. of the control and management should not be illusory or merely notional. Once it is shown that control and manage ment in the affairs of the firm was exercised by the partners residing in India, it would not be relevant to enquire whether the control and management thus exercised amounted to a substantial p'1rt of the control '111d management of the affairs of the firm. The exercise of the control and m'11rngemeut even iJJ, part in the t'1xable territories would be cuough to fix the '1ppe11'1nt with the ch'1racter of '1 resident within s. 4A(b). \Ve must accordingly hold that the High Court of Madms was justified in holding that the appellant is a firm resident in the tax'1ble tenitmics. Mr. Kolah then rnised a further point which had not been urged before the High Court. He contended th'1t the control tind management mentioned ins. 4A(h) must be control and management valid tind effective in 1'1w. Under s, 12 of the Partnership Act, it is only the nrnjority of partners who could h'1ve given effective directions to the superintendent '1rtd since there. is no evidence th'1t the '1lleged control and management has been exercised by the majority of partners acting in concert it would not be possible to hold that any con trol and mtinagement of the firm's '1ffairs resided in India. \Ve do not think there is any substtince in this argument. Under s. 12(a), everj p'1rtner has a right to take part in the conduct of the business '1nd it is only where difference arises as to ordinary m'1tters con nected with the business of the firm that the same has to be decided by majority of part,ners under sub-s. (c) of the said section. It has not been suggested or . shown that there was any difference between tlic p'1rt ners in regard to the ma ttern covered by the individual p~rtner's letters of instruc.tion to the superintendent.

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S.C.R.

SUPREME COURT REPORTS

583

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1958

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The Erin Estate,

I11deed the course of conduct evidenced by these letters shows that Andiappa Pillai who holds the maximum number o indivi ua s ares as purported to act for Ga/ah. Ceylon the partnership and usually gave instructions in regard to the conduct and management of the firm's affairs. The Commissioner On the record we sec no trace of any protest against, of Income-Tax. or disagreement with, this cor!duct of Andiappa Pillai. Madras Besides, it was never suggested during the course of G . d -d k the enquiry before the Income-tax Officers that the a;en raga ar J. directions given by Andi11.ppa Pillai were not valid or effective and had not been agreed upon by the remain- ing partners. That is why we think this technical point raised by Mr. Kolah must fail.

v.

The result is the appeal fails and must be dismissed

with costs . •

Appeal disrnissed.

K. KAMARA.JA NADAR v. KUN JU TREV AH, AND OTHE1~S

(and connected appeals)

April 22.

(BHAGWATI, J. L. KAPUR and A. K. SARKAR JJ.)

Election Petition-Claim fvr seat-Candidate retiring from con test, whether a necessary party-vVithdrawal of claim for seat, if cures defect of parties-Provisions relating to security deposit, if mandatory-Representation of the People Act, I95I (43 of I95I), SS. 82 and IIJ.

There were seven candidates duly nominated for election, and four out of them withdrew their candidature by the due date. The names of the remaining three were placecl on t11e list of con testing candidates prepared by the Returning Officer under s. 38 of the Representation of the People Act, 195r. Out of the three candidates one Pillai retired from the contest under s. 55A(2) of the Act leaving the appellant and the second respondent to con test the• election. After the appellant was declared duly elected the first respondent, an elector in the constituency, filed an. election petition praying that the election of the appellant be declared void and further that the second respQndent be decl<JJ"ed

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