Holding

The commission amounts credited in the statutory agent's books do not constitute receipt by the non‑resident agents and, as the agents performed no business operations in India, such commissions are not deemed to accrue or arise in India; therefore, the assessments under section 161 are not justified.

Summary

The statutory agent in Guntur exported tobacco to Japan and France and paid a 3% commission to non‑resident agents (Toshoku Ltd. and a French firm). The sale proceeds were received in India, and the agent made credit entries for the commissions in his books before remitting the amounts abroad. The Revenue assessed the commissions under sections 5(2), 9(1)(i), 160, 161 and 163 of the Income‑Tax Act, 1961, arguing that the credit entries amounted to receipt and that the income was deemed to accrue in India. The Supreme Court held that a mere credit entry does not constitute receipt by the non‑resident agents, and since the agents performed their services wholly outside India, no part of the commission is attributable to operations in the taxable territory. Consequently, the commissions are not deemed to accrue or arise in India and the assessments under section 161 are invalid. The appeals were dismissed.

Issues considered

Whether credit entries made by the statutory agent in his books constitute receipt of income by the non‑resident agents for tax purposes.
Whether commission income earned by non‑resident agents for services rendered outside India is deemed to accrue or arise in India under section 9(1)(i) and its explanation.
Whether the statutory agent is liable as a representative assessee under sections 160, 161 and 163 of the Income‑Tax Act.

Legislation cited

Income Tax Act, 1961s. 160, s. 161, s. 163, s. 5(2), s. 9(1)(i)

Subjects

Income taxNon‑residentCommissionRepresentative assesseeSection 9Section 161Deemed receiptCredit entryForeign agentTaxable territoryBusiness connection

Judgment

587

A
COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH
HYDERABAD
v.
TOSHOKU LTD., GUNTUR ETC. B
August 29, 1980
[P. N. BHAGWATI AND E. S. VENK4TARAMI~H, JJ.]

Commission payable to non-resident foreign agent by the statutory agent-
Statutory agent making credit a1id debit entries in his books of account under c
the head "commission account" on receipt of the sale price from the foreign
agent and thereafter on remitting the commission amount to the foreign
agent-Whether the commission amounts sent were assessable to income tax-
.Sections 5(2), 9(1)(i), 160, 161 and 163 of the Income Tax Act. 1961 read with
Board's Circular (XXVII-l) of 1953 No. 26 (II/53) dated July 17, 1953-
Whether the amounts should be treated as income deemed to have acr.rued or
arisen in India. D
Dismissing the Revenue appeal by special leave, the Court
HELD: (I) The credit entries made in the books of a ~tatutory agent
, -do not by themselves amount to receipt by assessees who are non-residents
as long as the amounts so credited in their favour are not at their disposal
-0r control. [592 F]
E
The non-resident assessees in this case neither received nor could be deem-
ed to have received the sums in question when their accounts with the statu-
tory agent were credited, since a credit balance without more only represents
.a debt and a .mere book entry in the debtor's own books does not constitut~
payment which will secure discharge from the debt. They cannot, there-
fore, be charged to tax on the basis of receipt of income actual or construc-
dive in the taxable territories during the relevant accounting period. [592 F-G]
F
P. V. Raghava Reddi & Anr. v. Commissioner of Income-tax [1962] Supp.
"1 S.C.R. 596~ distinguished.
(2) Under clause (a) of the Explanation to clause (i) of sub-section (1) of
section 9 of the Income Tax Act. in the case of the business of which all
the operations are not carried out in India, the income of the business deemed
.under that clause to accrue or arise in India shall be only such part of the G
income as is reasonably attributable to the operations carried out in India.
If all such operations are carried out in India, the entire income accruing
· therefrom shall be deemed to have accrued in India.- If, however, all the
operations are not carried out in the taxable territories, the profits and gains
of business deemed to accrue in· India through and from business connection
in India shall be only such profits and gains as are reasonably attributable to
that part of the operations carried out in the taxable territories. If no opera- H
tions of business are carried out in the taxable territories, it follows thal
the income accruing or arising abroad through or from any business connec-
-tion in India cannot be deemed to accrue or arise in India. [593 B-D]
~

\,_
588 SUPREME COURT REPORTS [1981] 1 S.C.R.

A In the instant case the non-resident assessees did not carry on any busi-
ness operations in the taxable territories. They acted as selling agents out~idc:r
India. The receipt in India of the sale proceeds of tobacco remitted or
caused to be remitted by' the purchasers from abroad does not amount to
an operation carried out by the assessees in India as contemplated by clause
(a) of the Explanation to section 9(1)(i) of the Act. The commission amounts
which were earned by the non-resident assessees for services rendered outside
B India cannot, therefore, be deemed to be incomes which have either accrued
or arisen in India. [593 E·G]
Commissioner of Income-tax, Punjab v. R. D. Aggarwal & Co. & Anr.
56 1.T.R. 20 and M/s. Carborandum Co. v. C.I.T. Madras [1977] 3 S.C.R.
475, referred to.
•
c CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 782-783 of
1973.
Appeals by Special Leave from the Judgment and Order dated ~
18-11-1972 o~ the Andhra Pradesh High Court in Cases Referred
Nos. 50 and 52 of 1970.
D P. A. Francis, K. C. Dua and Miss A. Subbashini for the
Appellant.
L. A. Subba Rao for the. Respondent.

The Judgmoot of the Court was delivered by
E VENKATARAMIAH, J.-These two appeals by Special Leave are
filed against a common judgment dated November 18, 1971 delivered
by the High Court of Andhra Pradesh in Case Referred Nos. 50 and
52 of 1970.
Sri Bommidala Kotiratnam (hereinafter referred to as 'the
statutory agent') is a dealer in tobacco at Guntur in the State of
F
Andhra Pradesh. During the previous year relevant to the assessment
year 1962-63, the statutory agent purchased tobacco in India and
exported it rt:o Japan, where it was sold through M/s. Toshoku· Ltd.
~'the assessee involved in Civil Appeal No. 782 of 1973 a Japanese
Company and admittedly non-resident. Under the termsi of the
G agreement between the statutory agent and the assessee referred te>
above, the latter was appointed the exclusive sales agent in Japan
for selling tobacco ex.ported by the former. The assessee was entitled
to a commission oJl 3 % of the invoice amount. The sale price received
on the sale of tobacco in Japan was remitted wholly to the statutory
agent who debited his commission account with the amount of
H connni&sion payable to the Japanese company and credited the same
in the account of the Japainese company in his books · on December
31, 1961. The amount was remitted to the Japanese company on
C.I.T. v. TOSHOKU LTD. (Venkataramiah, !.) 589

February 1, 1962 on which date an appropriate debit entry was made A
in the account of the Japanese company with the statutory agent.
The statutory agent had similarly sold some tobacco during the
same accounting period through another non-resident business house
by name 'M/s Societe Pour Le Commerce International Des Tobacs'
(the assessee involved in Civil Appeal No. 783 of 1973) carrying B
on business in France. The terms of agreement were the same as
in the case of the Japanese Company referred to above. the only
difference being the geographical area in which each of them had to
render service as a selling agent. In this case also the statutory
- agent made similar entries in his books regarding the commission
payable to the assessee and uitimately made a debit entry in the c.
account of the assessee in his books when the.amount was transmitted
to the assessee.
During the assessment year the question whether the commission
amounts sent to the Japanese company and the French business
house (hereinafter referred to collectively as 'the. assessees') were
D
assessable in terms of section 161 of the Income-tax Act, 1961
(hereinafter referred to as 'the Act) arose for consi\ieration before .
the Income-tax Officer. The statutory agent contended that the
amounts in question were not taxable in view of the clarification of
the legal position by the Board Circular (XXVII-I) of 53 No. 26
(II/53) dated July 17, 1953 which stated: E
"A foreign agent of an Indian exporter operates in his own
country and no part of his income arises ID. India. Usually
bis' commission is remitted directly to him and is therefore not
received by or on his behalf in India. Such an agent is not
liable to Indian Income-tax."
The Income-tax Officer, however, came to the conclusion that F
the sums in question were taxable in view of the deci1sion of this
Court in P. V. Raghava Reddi & Anr. v. Commissioner of lncome-
tax(1) and assessed them under section 143(3) read with section 163 of
the Aot. The appeals preferred by the statutory agent against the
orders of assessment before the Appellate Assistant C.ommissioner of G
Income-tax and the Income-tax Appellate Tribunal were unsuccess-
ful. Thereafter the following common question of law was referred
to the High Court of Andbra Pradesh under section 256(1) of the
Act:-
"Whether on the facts and in the circumstances of the case
the assessment on the appellant under section 161 of the Income- H
tax, Act, 1961 is justified ?"
(1) [1962] Supp. 2 SCR 596.
17-647 s.c. India/80
590 SUPREME COURT REPORTS [1981] 1 S.C.R •.

A The High Court held that the assessments were not justified and
answered the question against ·the Department. Hence these appeals
under Article 136 of the Constitution.
The relevant provisions of the Act on which reliance is placed
before us are sections 5(2), 9(l)(i), 160, 161 and 163. Section 5(2)
of ihe Act which deals with the chargeability of the income
B
of a penson who is a non-resident under the Act proviC!es that subject
to the provisions of the Act, the total income of any previous year
of a person who is a non-resident includes all income from whatever
source derived (a) which is received or is deemed to be received in
India in such year by or on behalf of such person, or (b) accrues or
arises or is deemed to accrue or arise in India during such year. Expla-
nation 1 to section 5(2) of the Act declares that an income arising abroad
can not be ,deemed to be received in India for the purpose of that sec-
tion by reason only of 1he fact that it is included in a balance sheet
prepared in India. Se<:tion 9(1)(i) of the Act provides that all income
accruing or arising whether directly or indirectly, through or from
D an'y business connection in India, or through or from any property
in India, or through or from any asset or source of income in India,
or through the transfer of a capital asset siituate in India .5hall be
deemed to accrue or arise in India. · The explanation to this clause
provides that in the case of a business of which aU the operations
are not carried out in India, the income of the business deemed under
E this clause to accrue or arise in India shall be only such part of the
income as is reasonably attributable to the operations carried out in
India and in the case of a non-resident no income shall be deemed to
accrue or arise in India to h:im through or from operations which are
confined to the purchase of goods in India for the purpose of export.
An agent of a non-resident including a person who isi treated as an
F agent under section 163 of the Act becomes, according to section 160(1)
of the Act, the representative assessee in respect of the income of a
non-resident specified in sub-section (1) of section 9 of the Act.
Section 161 of the Act makes a representative as.sessee, who is an ·
· agent of a non-resident personally liable to assessment in respect of
the income of the non-resident. Section 163 of the Act defines persons
G who may be regarded as agents of non-residents for the purposes of
the Act. Sections 160, 161 and 163 of the Act are merely enabling
provisions which empower the authorities at their option to make
assessment on and to recover tax due under the Act from the
representative assessee. It is not disputed in the·se cases that ill the
incomes in question of the assessees are taxable, the statutory agent
H is liable to pay the tax. The real question which falls for determination
is whether the said incomes are taxable. The facts found in these
appeals are that the statutory agent exported his goods to Japan and
C.I.T. v. TOSHOKU LTD. (Venkataramiah, J.) 591

France where they were sold through the assessees. The entire sale A
price was received in India by the statutory agent who niade credit
entries in his account book.s tegarding the commission amounts payable
.1: to the assessees and remitted the commission amounts to them
subsequently. One extra feature in the case of the Japanese company
is that it. had been appointed as an exclusive agent for Japan. It is

.l not disputed that the assessees rendered service as selling agents 'lo B

:!e::t:~::::eitt::::a:~:
8
the s;::::: :::::: ·bas
strongly relied on
the decision of this Court in the case of P. V. Raghava Reddy (supra).
~ A perusal of that decision shows that the said case is dis1inguishable on
facts. In that case the assessee had exported in the years 1948-49 and c
).. ~949-50 certain quantity of mica to Japan. Mica was not exportable
directly to Japanese buyers during those years as Japan was under mili-
tary occupation but to a State organisation called Boeki-Cho (Board of
Trade). To negotiate for order and to handle its other affairs in
Japan in connection 'therewith the assessee engaged Sa"ID-Ei Trading
Co. Ltd., Tokyo as its agent., The JapaJfese Company was admittedly D
a 'non-resiaent' company. Under the agreements the assessee under·
took to pay certain percentage of gross sale proceeds as commission
to the Japanese Company. With regard to the mode of payment of
commission, the agreements provided a term which read thus :
"In view of the difficulties in this country it is requested E
that the first party credits all these amounts to the account .of
-~ the second party with them without remitting the same until
definate instructions are received by the first party."
The first party to the agreement was the assessee and the second
party was the Japanese Company. During the two accounting years
F
a total amount of Rs. 13,319-12-4 was paid to the Japanese Company
eithe11 directly or through others to whom the assessee was instructed
by the Japanese Company to pay the amount. The Court rejected
the contention of the assessee that the Japanese Company was not
in receipt of the amount in the taxable territories and the amount was
' not income within the meaning of section 4(l)(a) of the Indian G
income-tax Act, 1922 with the following observations : - .
"This leaves over the. question which was earnestly argued,
namely, whether the amounts in the two accounting years can
be said to be received by the Japanese Company in the taxable
territories. The argument is that the money was not actually
received, but 1he assessee firm was a debtor in respect of that H
amount and unless the entry can be deemed to be a payment or
receipt cl. (a) cannot apply. We need not consider the fiction.
592 SUPREME COURT REPORTS [1981] 1 S.C.R..

A for.it ,is not necessary to go into the fiction at all. The agreement,
from which we have quoted the relevant term, provided that
the Japanese Company de'Sired. that the assessee firm should
open an account in the name o~ the Japanese Company in their
books of accollllt, credit the amounts in th:at account, and deal
with those amounts according to the instructions of the Japanese
B Company. Till the money was so credited, there might be a
relation of debtor and creditor; but after the amounts were - -
credited, the money was held by the a&sessee. firm as a depositee.
The money then belonged to the Japanese, Company and was
held for and on behalf of the Company and was at its disposal.
The character of the money changed from a debt to a deposit
c in: such the same way as if it was credited in a Bank to the
account of the Company. Thus, the amount must be held, on
the terms of the agreement, to have been received by the Japanese
Company, and this attracts the application of s. 4(1)(a). Indeed,
the Japanese Company did dispose of a part of those amounts by
D instructing the assessee firm that they be applied in a particular
way. In our opinion, the High Court was right in answering the
question against the asses see."
The Court, as it is obvious from the portion extracted above;
proceeded to hold that the amount in· question was received by the
Japanese Company in India and hence was taxable on that basis.
E In the cases before us there were no terms corresponding to the
term extracted above which was found in the agreements between the ~
assessee and the Japanese Company in P. V. Raghava Reddi's case
(supra). It cannot be said that the making of the book entri·es in the ·
books of the statutory agent amounted to receipt by the assessees who ·.j'
were non-residents as the amounts so credited in their favour were
F
not at their disposal or control. It is not possible to hold that the
non-resident assessees in this case either received or can be deemed
to have received the s:ums in question when theif accounts with the
statutory agent were credited, since a credit balance without more
only represents a debt and a mere book entry in the debtor's own
G books does not constitute payment which will secure discharge from
the debt. They cannot, therefore, be charged to tax on the basis of , ·
receipt of income actual or constructive in the taxable territories,
during the relevant accounting period.
The second aspect of the same. question is whether the commission
amounts credited in the books of the statutory agent can be treated
H as incomes accrued,, arisen, or deemed to have accrued or arisen in
India to the non-resident assessees during the relevant year. This takes
us to section 9 of the Act. It is urged that the commissiion amounts
C.I.T. v. TOSHOKU LTD. (Venkataramiah, /.) 593

should be treated' as incomes deemed to have accrued or arisen in India A
as they, according 'to the Department, had either accrued or arisen
through and from the. business co111J1ection in India that existed
between the non-resident assessees and the statutory agent. This
contentio'll. overlooks the effect of clause (a) of the Explanation to
clause (i) of sub-sectiotn ~1) of section 9 of the Act which provides
that in the case of ·a business of which all the operations are not B
carried out in India, the income of the business deemed under that
clause to accrue or arise in India shall be only such part of the
income as is reasonably attributable to the operations carried out in
. 1ndia. If all such operations are carried out in India, the entire
income accruing therefrom shall be deemed to have accrued in India. c
If, however, all the operations are not carried out in the taxable
territories, the profits and gains of business deemed to accrue iin India
through and &om business connection in India shall be only 1such
profits and gains as are reasonably attributable to that part of the
operations carried out in the taxable territories. If no operations of
business are carried out in the taxable territories, it follows that the D
income accruing or arising abroad through or from any business connec-
tion in India cannot be deemed to accrue or arise in India. (See Com-
missioner of Income-tax, Punjab v. R ..D. Aggarwal & Clo. & Anr.(1)
and MI s. Carborandum Co. v. C.I.T.. Madras(2) which are decided
on the basis of section 42 of the Indian Income-tax .Act, 1922, which
corresponds to section 9(1)(i) of the Act.) ) E

In the instant case the non-resident assessees did not carry on
any business operations in the taxable territories. . They acted as sell-
ing agents outside India. The receipt in India of the sale proceeds of
'tobacco remitted or caused to be remitted by the purchasers from abroad
does not amount to an operation carried out by the assessees in India F
as contemplated by clause (a) of the Explanation to section 9(1)(i) of
the Act. The commission amounts which were earned by the non-
resident assessees for servjces rendered outside India cannot, therefore,
be deemed to be incomes which have either accrued or arisen in India.
The High Court was, therefore, right in answering the question against
the Department. G
For the foregoing reasons, the appeals fail and are hereby dismiss-
ed with costs. (Hearing fee one set).
Appeals dismissed.
V.D.K. H
(1) 56 I.T.R. 20.
(2) [1977] 3 S.C.R. 475.