LexKESHAV MILLS LTD versus COMMISSIONER OF INCOME-TAX, BOMBAY
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• 195:: J anuar,Y .10. 950 SUPREME COURT REPORTS [1953] KESHAV MILLS LTD.' v. COMMISSIONER OF INCOME-TAX, BOMBAY [Mmm CHAND MAHA.JAN, S. R. DA~, VrnAN BosE and BHAGWATI JJ.) Indian Income-ta.•r Act (XI o/1922), ss. 4 (1) (a) and (c), 18- J\-ron-resident-Accoz~nts in 11icrcantile systern-Sale of goods in British Inrli<t throuah agents-Assessability of profits derived front wch sale-Provision of law apvlicable to such cases-Inc01ne-tax outhori.ties, whether bound to compute incorne according to mercantile .•11stein-Avvlicablit?1 of s.13 to non-1·esidents. A non-resident company manufactured textile goods at Pout- side British India and sold the goods ex-mills. A firm, R & Co., guaranteed the sale-price of goods sold ex-mills by the company to purchasers at Ahmedabad within British India. As the com- pany maintained its accounts according to the mercantile system, the company debited R & Co., with the price of goods sold and credited the sales account with the amount of \be bills. R & Co., collected the amounts of the bills from the purchasers on behalf of the company and c1·edited the snms realised in the company's "°count with banks at Ahmedabad and also disbursed them to creditors of the company in British India. These payments were credited by the company to R & Co. During tbe relevant account- ing year the company thus received Rs. 12,68,480. The company also received Rs. 4,40,878 from sales to purchasers· in British India. The amount of the sales bills for which hundis were drawn on \lie purchasers in favour of banks were debited by the company to the accounts of the respective merchants and credited to the ~ales account and the sums roceivec1 by the ba.nks fro1n the pur- chasers against delivery of tho rail,vay receipts \Vere credited by the company to the accounts of the respective purchasers. In either case there \Vas no change in the relationship of vendor and purchaser bet\veen the company and the purchasers by reason of the entries made in the company's hooks. The question as re- framed by the High Conrt was whether these two sums were sale proceeds of the goods sold by the assessees to merchants in British India and whether they were received in British India and could be included in the assessable income of tho company in British India: Held, per llfelw Chand Mahajan, S. R. Das and Bhagwati J J., (Vivian Bose J. dissenting) that tbe two amounts in question were sale proceeds of the goods sold and delivered by the company to merchants in British India; that they were neither received by the company nor could be deemed to have been received by it w!ien the entries were µiacje in the books of account at P but \iad • .. • S.C.R. SUPREME COURT REPORTS 951 196J merely accrued ot arisen to it there; that they were first received by R & Co. and by the banks through whom the railway receipts were negotiated on behalf of the company in British India; <tnd Kesliav Mills that they were therefore liable to t<tx under s. 4(1) (a) of the Lt4, Indian Income.tax Act as having been t•eceived in 13ritish India on v. its behalf. Oonunissioner of Though it is true that in the case of residents, if the assessee employs the mercantile system regularly it is obligatory on the income-tax authorities to compute the income according to that system, it is doubtful whether that position would be available to a non-resident who maintains his books of account outside British India according to the mercantile system. Section 13 would only he relevant where the total profits of the assessee have to be computed and in that event the assessee would he entitled to claim that they should be computed according to the system of accounts maintained by him ; it would not be relevant v.'hen stray iten1s of income are sought to he assessed in the taxable territories as received in the taxable territories by a non-resident. Bvse J.-In the case of accounts kept in the mercantile system, the profit or loss at the end of the accounting year is based not on a difference between \Vhat \Vas actually received and what was actually paid out, but on the difference between the right to receive and the liability to pay. 'I1he taxation in such cases is not on income, profits or gains which \Vere received but on profits which "accrued or arose" to the assessee in the accounting yea.r. This view excludes s. 4(1) (a) and this means that a resident is taxed in such cases under s
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