Income Tax Appellate Tribunal - Mumbai
H.N.J. Dady vs Fourth Income-Tax Officer on 19 March, 1987
Equivalent citations: [1987]22ITD532(MUM)
ORDER
M.A. Ajinkya, Accountant Member
1. Since a common issue is involved in both these appeals relating to two brothers, they are dealt with and disposed of by a consolidated order. The assessment year in both the cases is 1980-81 and the accounting period is financial year ended 31-3-1980.
2. The facts in this case as gathered from the assessee's counsel as well as the records of the case may be briefly stated. Shri H.N.J. Dady and Shri K.N.J. Dady are brothers. Both of them left India on 28-3-1978 for Nepal with their respective spouses and returned to India on 10-4-1980. For proving their absence from India during the period between 28-3-1978 and 10-4-1980, entries in their passports to establish their departure out of India on 28-3-1978 and arrival in India on 10-4-1978 were shown to the Income-tax Officer. Since the accounting year of the assessee was the financial year, a claim was made before the 1TO that the assessees were non-residents for the assessment years 1979-80 and 1980-81. This claim was made in support of the further claim that the dividend income which was receivable by the assessees on the shares held by them in Hongkong & Shanghai Banking Corporation ("Hongkong. Bank" for short), was not taxable for these two years because such dividend income was received abroad and did not attract tax for the years in which the assessees were non-residents. For the assessment year 1979-80, the ITO accepted the claim of the assessees and did not include the dividend income receivable by the assessees from Hongkong Bank. The CIT, Bombay City-XII, however, passed an order Under Section 263 holding that the ITO had committed an error in excluding foreign dividend from the computation of income and in not properly determining the residential status of the assessee. For the assessment year 1980-81, the ITO, in an order Under Section 143(3) read with Sections 144A & B, held that although the assessees were non-residents, foreign dividend was received by them only when it was remitted to India and was therefore taxable in their hands Under Section 5(2)(a) of the IT Act. This decision of the ITO was confirmed in appeal by the CIT(A) in a fairly detailed order. The assessees have now come before us against the orders of the CIT Under Section 263 for the assessment year 1979-80 and against the orders of the CIT(A) for the assessment year 1980-81.
3. Shri S.E. Dastur, the learned counsel for the assessee, confined his arguments mostly to the facts relevant to the assessment year 1980-81 and the various points made by the C1T(A) in his order.
4. From the papers filed before us, it is seen that both these assessees had issued a Power of Attorney to the Chartered Bank on 22-3-1978. Para 4 of the Power of Attorney read as under :-
4. To appoint the Chartered Bank, Hongkong or any other substitute and to delegate to them or any of them any of the powers hereby conferred (without prejudice to the right of the said attorney to exercise concurrently any or all the powers so delegated) and to revoke or vary any such appointment and such appointment may be made by the Manager or an officer of the Bank by signing for and on behalf of the Bank.
Little & Co., acting as solicitors of the assessees, wrote a letter on 23-3-1978 to the Chartered Bank. They informed the Bank that a Power of Attorney in favour of the Bank in duplicate in a draft which was mutually agreed upon was executed by both Mr. K.N.J. Dady and Mr. H.N.J. Dady and it was clarified that the Power of Attorney had been executed in duplicate so that the duplicates could be annexed to the Power of Attorney that the Bombay Branch of the Chartered Bank would execute in favour of their Hongkong office. It may at this stage be said that the Power of Attorney issued, if any, by the Bombay Branch of the Chartered Bank in favour of their Hongkong office as per these instructions was not produced before us at the time of the hearing. Apparently both the assessees had informed the Hongkong Bank of the arrangement for collection of dividend that they had intended to make with the Chartered Bank, Bombay. This arrangement was that the Chartered Bank, Bombay, should ask their Hongkong office to collect dividend warrants of shares held by the two assessees in the Hongkong Bank and they should do this by issuing a Power of Attorney in favour of their Hongkong office as per the draft suggested by the assessees' solicitors. Apparently, the letter written by the assessees to the Hongkong Bank did not bear any date. A copy of this letter was also not filed at the time of the hearing before us on the plea that it was not available. In reply to this undated letter, the Hongkong Bank wrote a letter on 25-4-1978 to the assessees on their Bombay address in which they stated, inter alia, as under :-
You also indicated in the letter that you wish future dividends on your Bank shares to be forwarded by us to the Chartered Bank, Hongkong for onward transmission to you through their Bombay Branch. It occurs to us that this is only possible if you maintain a bank account with the Chartered Bank, Hongkong. Please confirm this point to us through Chartered Bank, Hongkong as soon as possible. In the event that this point is confirmed by the Chartered Bank, Hongkong, we would appreciate your advising us of your account number in due course.
The suggestion to open an account with the Chartered Bank, Hongkong, made by the Hongkong Bank as above was not accepted by the assessees who through their solicitors' letter dated 7-5-1978 informed the Hongkong Bank inter alia, as under :-
Unfortunately under the prevailing foreign exchange regulations our clients cannot open an account with foreign banks without permission of the Reserve Bank of India and ordinarily Reserve Bank does not permit opening of accounts with foreign banks. In view of these difficulties our clients are unable to implement your suggestion.
On 25-5-1978, the Hongkong Bank informed the assessees' solicitors that arrangement had been made to forward future dividends on the assessees' holdings in the Hongkong Bank to the Chartered Bank, Hongkong, for onward transmission to the assessees in India. They made note of the fact that the assessees had given a Power of Attorney to Chartered Bank, Bombay, who, in turn, would appoint Chartered Bank, Hongkong, to receive dividend warrants from them. The assessees' solicitors were very keen that the Chartered Bank in Bombay should issue a Power of Attorney in favour of their Hongkong office so as to enable them to collect and discharge dividend warrants in Hongkong. It may again be stated here that copy of the Power of Attorney issued, if any, by the Chartered Bank, Bombay, in favour of their Hongkong Branch as per the suggestion of the assessees was not furnished at the time of hearing nor are we aware of the nature of instructions issued by the Chartered Bank, Bombay, to Chartered Bank, Hongkong, for the purpose of collecting dividend warrants. The Chartered Bank, Bombay informed the assessees' solicitors by a letter dated 18-9-1978 that they had been instructed by their Hongkong office to forward to them a simple letter of authority to deal with the dividend warrants of their constituents to enable them to collect the dividends from the Hongkong Bank. The authority letter, which was written to the Hongkong office by the Chartered Bank, Bombay, and which was reproduced by them in their letter dated 18-9-1978, to the assessees' solicitors, read as under:-
We would be pleased if you will forward us this letter and in the meantime the registrars verbally advise having noted to forward these dividends to us.
It is not known whether in addition to these instructions any Power of Attorney was issued by the Chartered Bank, Bombay, in favour of their Hongkong office. Both Mr. K.N.J. Dady and Mr. H.N. J. Dady individually hold shares of Hongkong Bank in two lots of 67,554 and 1,22,421. It appears that this holding was increased to 74,309 and 1,34,663 at the point of time when dividend for the year 31-12-1978 was declared. The Chartered Bank, Bombay, authorised the Hongkong Bank directly by their letter dated 20-9-1978 to pay all dividends, fractional entitlements, etc. now due or which may become due on these shares held, by M/s. K.N.J. Dady and H.N.J. to the Chartered Bank, Hongkong office, G.P.O. Box 21, 4-4 Des Voeux Road Central, Hongkong, whose receipts would be treated as full and sufficient discharge. Thus, a direct authorisation was given by the Chartered Bank, Bombay, in terms of their letter dated 20-9-1978 to Hongkong Bank authorising the letter to pay all dividends on shares held by assessees to the Hongkong office of the Chartered Bank and such authorisation was given on the basis of the Power of Attorney issued by the assessees to Chartered Bank, Bombay. The number of shares held by the assessees were specifically mentioned. The Hongkong Bank was asked to forward the reports and balance sheets directly to the Chartered Bank, Bombay. The Hongkong Bank declared final dividend for the year 31-12-1978 on the two lots of shares of HK $ 80,797.80 and HK $ 44,585.40 in each of the two cases. The rupee equivalent of this dividend was Rs. 1,26,637.93 and Rs. 69,878 which amounts were remitted by way of foreign inward remittances on 8-5-1979 in each of the two cases. Thus, a total amount of Rs. 1,96,560 was credited to the account of each of the assessees on 8-5-1979 by way of rupee equivalent of dividend received from Hongkong Bank and remitted by Chartered Bank, Hongkong, to Chartered Bank, Bombay, as a result of the arrangement discussed hereinabove.
5. On these facts, the question involved is the assessibility to Indian tax of dividend on the shares of Hongkong Bank held by the assessees. Shri Dastur argued that the Annual General meet-ting of the Hongkong Bank, a company registered in Hongkong, was held in Hongkong and dividend declared in Hongkong. Up to assessment year 1978-79, such dividends on the shares held by the assessees were assessed to income-tax as assessees were residents in India. Assessees had accounts with Chartered Bank, Bombay, to which such foreign dividends were credited when received in India. However, when the assessees decided to go out of India as they did on 28-3-1978, they made certain arrangements about collection of dividends. They gave a power of attorney to Chartered Bank, Bombay, authorising the Bank to collect the dividend due to the assessees from Hongkong Bank, who, in turn, was instructed to pay the dividend to Chartered Bank in Hongkong. The Chartered Bank at Hongkong, after collecting the dividend forwarded it to Chartered Bank, Bombay. On these facts, argued Shri Dastur, the dividend income accrued outside India since it was declared outside India and was also received outside India. According to Shri Dastur, the dividend was received by the Hongkong office of the Chartered Bank which was functioning as a substituted agent of the Chartered Bank, Bombay, in whose favour a power of attorney was executed by the assessees. For this proposition, Shri Dastur relied on Section 194 of the Indian Contract Act. He argued that the Chartered Bank at Hongkong, being a Substituted agent, was acting as if it was appointed as agent by the principals in India, namely, the assessees. There was, therefore, a privity of contract between the Chartered Bank, Hongkong, and the assessees. According to Shri Dastur, what was remitted to Chartered Bank in Bombay was remittance of income after it was received in Hongkong by the Hongkong office of the Chartered Bank. He relied on the decision of the Supreme Court in Turner Morrison & Co. Ltd. v. CIT [1953] 23 ITR 152 at page 158. If the amouut is collected by a Bank in India on assessees' behalf, argued Shri Dastur, the receipt is where the cheque is collected and where the Bank making payment is situated. Shri Dastur cited a catena of judgments-Sir Sobha Singh v. CIT [1950] 18 ITR 998 (Punj.), Keshav Mills Co. Ltd. v. CIT [1950] 18 ITR 407 (Bom.) and Hira Mills Ltd. v. CIT [1965] 57 ITR 103 (Bom.)-in support of his arguments. Shri Dastur next argued that CIT(A)'s reliance on FERA (Foreign Exchange Regulation Act) was totally irrelevant, that we were concerned with determining the residential status of the assessees under the Income-tax Act and that it was not disputed that the assessees were non-residents during the two accounting years relevant to the assessment years 1979-80 and 1980-81. Finally, Shri Dastur argued that Section 9(1) of the Act would not be attracted in view of Clause (i) of Sub-section (1) which spoke of income accruing or arising through or from any asset or source of income in India. According to Shri Dastur, the assets, namely, the shares, which were also the source of income, were located outside India since the registered office of the company, namely, Hongkong Bank, was located outside India.
6. Shri Raju, for the department, argued that both the assessees had received dividend income in India only when the rupee equivalent of the foreign dividend was remitted to their account. If all circumstances of the case are taken into account, according to Shri Raju, Section 5(2)(a) would come into operation and all income received or deemed to be received in India would be includible in the assessees' total income even if the assessees' residential status is non-resident. Shri Raju further argued that the assessees had embarked on a planned device to avoid the payment of taxes on the dividend income (which was Substantial) by taking appropriate steps which would make it appear firstly that the assessees were out of India and secondly that the foreign dividend was received by assessees' agent abroad. In support of this argument, Shri Raju pointed out that it was not necessary to secure a passport for Indians visiting Nepal; still, the assessees took care to get their passports duly stamped at the point of exit from India and the point of entry into India to create evidence that the aasessees were outside India during the whole of the period between 28-3-1978 and 10-4-1980. Shri Raju argued that Section 8 of FERA had to be taken into account in the context of the fact that the assessees had not opened accounts with the Hongkong office of the Chartered Bank in spite of a specific suggestion made by the Hongkong Bank to that effect for facilitating the collection of dividend on their shares by the Chartered Bank, Hongkong, and their remittances to India. The assessees could not have opened accounts in Hongkong because they were residents under the Foreign Exchange Regulations Act and in this context the reference made by the CIT(A) both to Section 8 of FERA as well as the notification of the Reserve Bank of India dated 1-1-1974 was very relevant. Shri Raju, relying on the CIT(A)'s order, pointed out that the assessees were residents in India in terms of Section 2(p) of FERA which was reproduced by the CIT(A) in para 7 of his order. It could not be said, according to Shri Raju, that the assessees had gone outside India for an uncertain period Under Clause (c) of Section 2(p). The purpose of visit to Nepal and also the intention of staying there for an uncertain period was not established either before the CIT(A) or before the Tribunal. Shri Raju, therefore, argued that this was a device for avoiding payment of tax on a Substantial dividend income. He relied on Supreme Court's decision in McDowell & Co. Ltd. v. CIT [1985] 154 ITR 148. Finally, he argued that the dividend could be said to have been received in India or deemed to be received in India because the assessees acquired effective control over such income when the rupee equivalent of such dividends was remitted to their accounts in the Bombay office of the Chartered Bank. The assessees had no control over the dividend income as long as it was with the Hongkong office and assessees could not have withdrawn any amount from such income from the Chartered Bank, Hongkong, for the simple reason that they had no account with that Bank.
7. We have carefully considered the Submissions made by on behalf of either side. It must be firstly stated that for both the assessment years in both the cases, the department has accepted that the assessees were non-residents. Therefore, it would be futile at this stage to suggest or insinuate that the assessees were in fact not outside India during this period. The short question for consideration is whether the assessees had appointed the Hongkong office of the Chartered Bank as their Substituted agent, whether there was a privity of contract between the assessees and the Chartered Bank, Hongkong, and whether it could, in the circumstances of the case, be said, that the dividend income from shares held by the assessees in the Hongkong Bank was in fact received as income by the assessees in Hongkong when it was collected by the Hongkong office of the Chartered Bank. There is no doubt that while executing a Power of Attorney in favour of the Chartered Bank Bombay, the assessees had authorised the Chartered Bank to appoint Chartered Bank, Hongkong or any other Substitute or to delegate to them or any of them any of the powers conferred under the said Power of Attorney. It is, however, not clear whether in pursuance of Clause 4 of the Power of Attorney given by the assessees to the Chartered Bank, Bombay, the Chartered Bank, Bombay, had in fact executed a Power of Attorney in favour of their Hongkong office. No copy of any such Power of Attorney has been filed before us, although from the correspondence filed it appears that the assessees' solicitors were anxious that the Bombay office of the Chartered Bank should execute a Power of Attorney in favour of their Hongkong office on the basis of a draft Power of Attorney which was enclosed by the assessees' solicitors and sent to the Chartered Bank, Bombay, along with their letter dated 23-3-1978. The assessees' solicitors wrote one more letter on 21-6-1978 reminding the Chartered Bank, Bombay, that if the Hongkong Bank is to discharge the dividend warrants, they should have authority to do so under a Power of Attorney executed by the Bombay Office of the Chartered Bank pursuant to the Power of Attorney given to them by the two assessees, The solicitors further pointed out that the dividends will be declared by the Hongkong Bank shortly and that the two assessees, namely, their clients, desired that these dividend warrants should not come to India but should be directly collected and encashed by the Chartered Branch in Hongkong. These two letters amply illustrate the assessees' anxiety to ensure that some arrangements were made for collection of dividend in Hongkong during their absence from India. On the other hand, we find that the Chartered Bank, Bombay, gave a simple letter of authority to their Hongkong office and intimated this fact to the assessee's solicitors on 18-9-1978. The copy of the letter of authority reproduced in this letter has already been reproduced hereinabove in the recital of facts. Apparently, no specific power of attorney was executed by the Bombay Branch of the Chartered Bank in favour of their Hongkong office as suggested by the assessees. In this context, it may further be noted that the Chartered Bank at Bombay wrote directly to Hongkong Bank on 20-9-1978 in which the account numbers in the books of the Hongkong Bank and the number of shares held by the two assessees were clearly stated. A reference was made to the power of attorney granted to them by their constituents, namely, the assessees herein, and the Hongkong Bank was-authorised to pay all dividends, fractional entitlements, etc., due to the assessees. They were also asked to send all reports and balance-sheets to Bombay. This authorisation, it may be noted, was given to the Hongkong Bank by the Bombay office of the Chartered Bank and not by the Hongkong office of the Chartered Bank. These two facts have to be considered together. On the other hand, there was no letter of authority as suggested by the assessees' solicitors executed by the Chartered Bank, Bombay, in favour of their Hongkong office. On the contrary, the Chartered Bank, Bombay, directly authorised the Hongkong Bank to pay the dividend due to the assessees into their Hongkong office, the detailed address of which was communicated to the Honkong Bank and they were assured that the receipt given by the Hongkong office shall be considered as full and sufficient discharge. This assurance came not from the Hongkong office of the Chartered Bank but from the Bombay office of the Chartered Bank which derived authority for giving such assurance as well as instructions that it gave in terms of their letter dated 20-9-78 from the power of attorney executed in their favour by the assessees. On these facts, it is very difficult for us to accept Shri Dastur's argument that the Hongkong office of the Chartered. Bank was functioning as the Substituted agent of the assesseea. It is also very difficult to accept the argument that there was a relationship of principal and agent between the Hongkong office of the Chartered Bank and the assessees because no authority was given by the assessees directly to the Hongkong Bank nor was it given by their bankers in Bombay, namely, the Chartered Bank, Bombay, to the Hongkong office to function as assessees' agents there. The authority to pay dividend to the Hongkong office issued by the Chartered Bank, Bombay. The Hongkong office was functioning only as a collecting agent. It did not enjoy the same authority as the Chartered Bank, Bombay, in whose favour a power of attorney was issued. There is nothing to indicate that the Hongkong office was functioning as a Substitute for the Bombay Office qua the assessees. The extent and scope of its authority was very limited. The assurance that the receipt given by the Hongkong office would be considered as a sufficient discharge was given by the Bombay office of Chartered Bank. The type of authority that was given by the Bombay office of Chartered Bank to their Hongkong office is so brief and limited as preclude any inference that they were appointed as Substituted agent of the assessees by virtue of Clause 4 of the power of attorney. It appears that only a verbal advice was given from Bombay office to the Hongkong office of the Chartered Bank and it wa,s reduced to writing in the authority letter referred to in the Bank's letter dated 18-9-1978.
8. When the Hongkong Bank wrote to the assessees on 25-4-1978 in reply to their undated letter received by them on 25-4-1978, a copy of which letter was not produced before us, they specifically suggested that collection of dividends on shares held by the assessees to be forwarded by them, to the Chartered Bank, Hongkong, for onward transmission to their Bombay Branch would only be possible if the assessees were to maintain an account with the Chartered Bank, Hongkong. This suggestion was not accepted and the reason given was that under the prevailing Foreign Exchange Regulations Act the assessees could not open an account with the foreign Bank without the permission of Reserve Bank of India. It is in this context that the reference by the CIT(A) to PERA is very relevant. All the relevant provisions and notifications under the PERA have been discussed and referred to in detail by the CIT(A) in para 7 onwards of his order. Shri Dastur argued that the assessees had gone to Nepal for other purposes and for an uncertain period. This argument cannot be accepted in view of the several facts which have now come to our notice. The assessees had a permanent place of residence in India. It is seen from the papers filed before us that even after the assessees left India for Nepal, letters addressed to the assessees by the Hongkong Bank on Bombay address were accepted, instructions issued to their solicitors and solicitors kept correspondence with the Hongkong Bank as well as with the assessees bankers, namely, Chartered Bank, Bombay. A bank account was maintained in Bombay. The dividend income collected was immediately remitted to India. If the assessees intended to stay in Nepal for uncertain period, they would not have arranged to get the remittance of dividend in rupees in India so promptly. Therefore, Section 2(p) of FERA as discussed by the CIT (Appeals) would come into operation. The assessees were residents under that Act and therefore were not in a position to open an account with Hongkong Branch of the Chartered Bank. The control over dividend income was secured by the assessees only when its rupee equivalent was remitted and credited to their accounts in Bombay. The assessees had no remedy if the Hongkong office of the Chartered Bank were to commit any default in the matter of remittance of dividend collected by them. In any case as long as the foreign dividend remained with the Hongkong office, the assessees could not have utilised the same or withdrawn any part of it as they had no access to that amount, not having opened an account with the Hongkong office of the Chartered bank. We are, therefore, inclined to accept Sliri Raju's argument that the income was received or could be deemed to have been received in India when the rupee equivalent of the dividend was remitted by the Hongkong office and credited to the account of the assessees in the Bombay office of the Chartered Bank.
9. Finally, we would deal with the authorities cited by Shri Dastur in support of his case. Shri Dastur first relied on Section 194 of the Indian Contract Act. This section reads as under :-
194. Relation between principal and person duly appointed by agent to act in business of agency.-Where an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a Sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him.
The illustrations given by Pollock & Mulla in Indian Contract and Specific Relief Acts (Ninth Edition) at page 731, which were also referred to and relied upon by Shri Dastur, are also reproduced below :-
(a) A directs B his solicitor, to sell his estate by auction, and to employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a Sub-agent, but is A's agent for the conduct of the sale.
(b) A authorises B, a merchant in Calcutta, to recover the moneys due to A from C & Co. B instructs D, a solicitor, to take legal proceedings C & Co. for the recovery of the money. D is not a Sub-agent, but is solicitor for A. It was Shri Dastur's case that the Hongkong office of the Chartered Bank was acting as a Substitute for the Bombay office of the same Bank and the relation between the assessees and the Hongkong office of the Chartered Bank was that between the principal and the agent. For deciding whether the Hongkong office was functioning as a Substitute for the Bombay office for all purposes, qua the assessees, we have to see from facts the extent of the authority that the Hongkong office enjoyed, the sources from which such authority flowed and the manner in which such authority, if any, was given. When we look for answers to these questions, we find that the Hongkong office of the Chartered Bank was given a simple authority letter for the limited purpose of collecting dividend and remitting the same to India. As stated earlier, no power of attorney on behalf of the assessee as suggested by the assessees' solicitors was apparently given by the Bombay Office of the Chartered Bank to their Hongkong office. In any case, no such power of attorney has been produced before us. Secondly, the Bombay office of the Chartered Bank took upon itself the task of writing directly to the Hongkong Bank requesting them on behalf of their constituents (the assessees herein) to pay dividends due to them on the shares of the Hongkong Bank that would be declared. Further, it was the Bombay office of the Chartered Bank which assured the Hongkong Bank that the receipt given by their Hongkong office shall be the full and sufficient discharge. Thirdly, it was the Bombay office of the Chartered Bank acting as the agent of their constituents which requested the Hongkong Bank that the reports and balance-sheets should be forwarded to them directly. Thus, the authorisation for payment of dividends to the Hongkong office was given by the Bombay Office of the Chartered Bank and the Hongkong Bank paid the dividend on the shares due to the assessees on the basis of such authorisation. On the other hand, there does not appear to be any evidence of any correspondence between the assessees and the Hongkong office of the Chartered Bank or the Hongkong office of the Chartered Bank and the Hongkong Bank in the matter of collection of dividend. The receipt of the dividend warrant in the name of Chartered Bank, Securities Dividend Section, Hongkong, A/cs. Dady H.N.J. or A/c. Dady K.N.J., was only a formality which the Hongkong Bank performed in consequence of the instructions received by it from the Chartered Bank, Bombay. The Certificate of Foreign Inward Remittance dated 8-5-1979 as in the case of remittance of rupee equivalent of foreign dividend is also issued by the Bombay office of the Chartered Bank. This fact would clearly establish that for all intents and purposes it was the Bombay Office that was functioning effectively as the agent of the assessees and no other party was appointed or was functoining as the Substitute for the Bombay Office. If the Hongkong office of Chartered Bank was to do all things that the Bombay office could do, it was not necessary for the Bombay Office to have written the letter of authorisation that it did to the Hongkong Bank on 20-9-1978 giving details of shares held by both their constituents and authorising the Hongkong Bank to pay dividend on the shares to the Hongkong office. We are not, therefore, satisfied that the Hongkong office was in fact functioning as the Substituted agent for the assessees on the basis of the papers that have been placed before us.
10. Shri Dastur first relied on Supreme Court's decision in Turner Morrison & Co. Ltd.'s case (supra). This judgment, we find, only supports the case of the department. At page 161 of the report, the Supreme Court made the following observations :-
Section 42 only speaks of deemed income. The whole object of that section is to make certain income, profits and gains to be deemed to arise in India so as to tiring them to charge. The receipt of the income, profits and gains being one of the tests of liability, where the income, profits and gains are actually received in India it is no longer necessary for the revenue authorities to have recourse to the fiction and this has been held quite clearly in Hira Mills Ltd. v. Income-tax Officer, Cawnpore, and in Burugu Nagayya and Rajanna v. Commissioner of Income-tax, Madras.
In support of the argument that the first receipt of dividend income was in Hongkong and therefore was out of taxable territory and what was received in India was remittance of income, Sliri Dastur relied on the Bombay High Court decision reported in B.M. Kamdar, In re [1946] 14 ITR 10 and in particular on the observations at page 39. Bombay High Court no doubt, observed that it cannot be disputed that the words used in Section 4(l)(a) of the Indian Income-tax Act, 1922, related to the first receipt after the accrual of income. Once it is received by the party entitled to it in respect of any Subsequent dealing with the said amount, it cannot be said to be received as income on that occasion. There can be no dispute with this proposition of law. What we have to decide is when was the dividend income received by the assessees as income for the first time. When the dividend income was collected by the Hongkong office of the Chartered Bank, the assessee had no control over such income as long as it remained with that office. There was nothing with the assessees on the basis of which the assessees could enforce the remittances of the dividend by themselves directly from the Hongkong office of the Chartered Bank nor could the assessees withdraw the dividend income directly from the Hongkong office of that Bank. The assessees acquired control over this income only when its rupee equivalent was remitted to India. Therefore, we have to hold that the first receipt of income was in India. In that sense, the income was both received in India and deemed to be received in India within the meaning of Section 5(2)(a). Shri Dastur also relied on Hira Mills Ltd.'s case (supra). In that case, the assessee, which was a non-resident company carrying on business in Ujjain, then an Indian State outside British India, sold goods to Department of Supplies, Govt. of India, Delhi, under a contract, which provided that unless otherwise agreed between the parties, payment for the delivery of the stores will be made on Submission of bills in the prescribed form in accordance with the instructions given in the acceptance of tender by cheque on a Govt. Treasury in British India or on a Branch in British India of the Reserve Bank or the Imperial Bank of India transacting Govt. business. In Submitting its bill, the assessees wrote : "Please pay by cheque to the Imperial Bank, Indore". The question was whether the sale proceeds were received by the assessee in British India within the meaning of Section 4(l)(a) of the Indian Income-tax Act, 1922. The Bombay High Court held that the instruction as to payment merely constituted the Imperial Bank at Indore, a nominee of the assessees, to receive payment on its behalf and the words "at India" did not have the effect of constituting "Indore", the place of payment. As the assessee had instructed that the payment be made by cheques and the normal course of sending the cheques was by post, there was an implied request to send the cheques by post and the Post Office, receiving the cheques posted by the Supply Department, was the agent of the assessees receiving the payment of the bills. The sale proceeds received by the cheques were therefore received in British India within the meaning of Section 4(l)(a). However, as there was no request to make the payment by drafts, there was nothing to show that a request to make payment; by cheque was ordinarily understood in the commercial world to mean allowance to make payment either by cheque or by draft, the posting of the drafts in payment of the bills by the Govt. could not be said either on the express or implied request of the assessee. The facts here are clearly distinguishable from the facts before us. In Hira Mills Ltd.'s case (supra) the assessee had an account with Imperial Bank of India, Indore, and specific instructions to that Bank were given directly by the assessee. In the present case, there is nothing to indicate that any instructions were given by the assessees to the Chartered Bank at Hongkong either directly or through a power of attorney to collect dividend and remit them to their Indian Branch. It can never be said on the facts available before us that the Hongkong office of the Chartered Bank was functioning as an agent of the assessees when the Bombay office of the same Bank was doing all that it was required to do in the matter of collection of dividend from the Hongkong Bank and its remittance to India. The facts in this and other similar cases cited by Shri Dastur [Keshav Mills Co. Ltd.'s case (supra)'] are clearly distinguishable when we see that the relationship between the principal and the agent did not exist and therefore there was no privity of contract between the Hongkong Branch of the Chartered Bank and the assessees. We are therefore satisfied firstly that the income on shares of Hongkong Bank held by the assessees was received for the first time only when it was remitted to the assessees' accounts in India and that therefore it was taxable in the hands of the assessees Under section. 5(2)(a) of the Income-tax Act sis income which is received or is deemed to be received in India by or on behalf of the assessees. We are also satisfied that there is no evidence to establish that the Hongkong office was functioning, as what has been described by Shri Dastur, as Substituted agent of the assessees, that therefore there was nothing to establish that there was privity of contract between the assessees and the Hongkong office which was functioning only as a collecting agent for the Chartered Bank, Bombay, [or as a conduit pipe as described by CIT (A)] to facilitate the collection of dividend in Hongkong and its remittance to India on the instructions of the assessee's bankers in India, namely, Chartered Bank, Bombay. The whole arrangement, we are further satisfied, was made by prior design to ensure that no tax liability would arise if it is made to appear that this was the income earned by non-residents and was earned abroad. We would, in this view of the matter, confirm the order of the CIT (A) for asst. year 1980-81 and for the same reasons the order of CIT, City-XII, for the asst. year 1979-80.
11. In the result, both the appeals are dismissed.