A) ABSTRACT / HEADNOTE

The Supreme Court in Keshav Mills Ltd. v. Commissioner of Income-tax, Bombay [1953] SCR 951, interpreted the scope and application of Sections 4(1)(a), 4(1)(c), and 13 of the Indian Income-tax Act, 1922, to determine the tax liability of a non-resident company that maintained mercantile accounting and made sales in British India. The majority held that income arising from sales to British Indian merchants, though booked in the non-resident’s accounts outside India, was received in British India through agents and banks. Hence, it was taxable under Section 4(1)(a). This case carved out a distinction in applying mercantile accounting principles to non-residents, curtailing their ability to claim exemption based on notional receipts. The Court clarified that income “received” in India must be construed based on actual control and physical receipt, even if through intermediaries acting on behalf of a non-resident. The minority opinion by Justice Bose favoured computing income under mercantile accounting, asserting it should fall under Section 4(1)(c), not 4(1)(a), since the income was never actually received by the assessee in India. The decision established a crucial precedent on the taxation of cross-border commercial income and refined the interpretation of “receipt” and “deemed receipt” for tax purposes in Indian jurisprudence.

Keywords: Non-resident taxation, mercantile accounting, deemed receipt, Section 4(1)(a), business connection, income received in India, agency and tax law

B) CASE DETAILS

i) Judgement Cause Title
Keshav Mills Ltd. v. Commissioner of Income-tax, Bombay

ii) Case Number
Civil Appeal No. 151 of 1951

iii) Judgement Date
30 January 1953

iv) Court
Supreme Court of India

v) Quorum
Mehr Chand Mahajan C.J., S.R. Das J., Vivian Bose J., Bhagwati J.

vi) Author
Bhagwati J. (Majority Opinion); Dissenting Opinion by Vivian Bose J.

vii) Citation
[1953] SCR 951

viii) Legal Provisions Involved

• Section 4(1)(a), 4(1)(c), and 13 of the Indian Income-tax Act, 1922

ix) Judgments overruled by the Case
None expressly overruled. However, several prior rulings were distinguished.

x) Case is Related to which Law Subjects

• Taxation Law, Corporate Law, International Business Law, Commercial Law, Accounting Standards and Tax Computation

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The dispute arose from the assessment of a non-resident company, Keshav Mills Ltd., engaged in the manufacture and sale of textile goods at Petlad in the then Baroda State, outside British India. The company sold goods on an ex-mill basis, using brokers in Ahmedabad to guarantee sales. Though not physically operating in British India, the company earned substantial revenue from sales therein. The Income-tax Department taxed this income, claiming it was received in British India, while the assessee contested this, arguing that its mercantile accounting system and location outside British India shielded it from taxation on such income.

The central question was: Can income credited in a non-resident’s books but received on its behalf by agents or banks in India be taxed under Section 4(1)(a) of the Indian Income-tax Act, 1922?

D) FACTS OF THE CASE

Keshav Mills Ltd., a Baroda-registered company, manufactured and sold textiles ex-mill. It appointed Jagmohandas Ramanlal & Co. as guaranteed brokers who facilitated sales in British India. The company used mercantile accounting, whereby income was recorded when it accrued—not when actually received.

Three types of receipts were relevant to the tax year 1942–43:

1. Rs. 12,68,480 – collected through Jagmohandas & Co. from Ahmedabad merchants.

2. Rs. 4,40,878 – proceeds received via hundis and drafts sent to banks or shroffs in British India.

3. Rs. 6,71,735 – collected via cheques/hundis drawn on Indian banks but credited in Petlad.

The Income Tax Officer sought to tax the first two as income received in British India, invoking Section 4(1)(a). The company claimed that entries in its books, made under mercantile accounting, amounted to accruals outside India, not receipts in India.

E) LEGAL ISSUES RAISED

i) Whether Rs. 12,68,480 and Rs. 4,40,878 were received in British India within the meaning of Section 4(1)(a) of the Indian Income-tax Act, 1922.

ii) Whether the use of mercantile accounting by a non-resident company excludes the applicability of Section 4(1)(a).

iii) Whether entries in books of account outside British India suffice to constitute “receipt” for tax purposes.

iv) Whether such sums represent accrued income or income received in British India.

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that:

• The company, being a non-resident, maintained mercantile accounts, thus income had already accrued when recorded in their books, and no further tax liability arises on actual receipt.

• Section 13 mandates that income computation must follow the regularly employed accounting method, hence receipts recorded under mercantile system can’t be taxed again on physical receipt.

• The proceeds collected by Jagmohandas & Co. and banks were not receipts in India, but remittances sent from customers, which had already accrued as income outside India.

• Reliance was placed on Commissioner of Income-tax v. Mathias [(1939) 66 I.A. 23] and Subramaniyan Chettiar v. CIT [(1927) 2 I.T.C. 365], to argue that notional entries under mercantile accounting establish accrual sufficient to escape Section 4(1)(a).

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that:

• Income was actually received in India through banks and agents on behalf of the appellant. This first receipt in India attracts tax under Section 4(1)(a).

• Even if entries were made earlier outside India, the realisation of funds in India through Indian agents and intermediaries represents receipt in British India.

• Section 13 governs only the method of computation, but Section 4(1)(a) determines taxability based on place of receipt. Hence, accrual and receipt are two different bases.

• Reliance placed on Commissioner of Income-tax v. Chunilal Mehta [(1938) 6 I.T.R. 521] and Commissioner of Income-tax v. Kameshwar Singh [(1933) 1 I.T.R. 94] to differentiate accrual from receipt.

H) RELATED LEGAL PROVISIONS

i) Section 4(1)(a), Indian Income-tax Act, 1922 – Income received or deemed to be received in British India is taxable.

ii) Section 4(1)(c) – Income accruing or arising to a non-resident in British India is taxable.

iii) Section 13 – Income must be computed according to regularly employed accounting method.

iv) Section 42 – Deems income to accrue/arise through business connection in India.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The majority (Mahajan C.J., Das J., Bhagwati J.) held that income was received in British India by agents and banks on behalf of the company, even if the entries were made outside India.

ii) Mercantile accounting does not preclude the operation of Section 4(1)(a) for non-residents. It governs computation, not chargeability.

iii) The company first received income in British India, through its agents, hence it is chargeable to tax under Section 4(1)(a).

iv) Entries in books outside India cannot replace actual receipt in India when Indian agents or banks physically receive money.

b. OBITER DICTA 

i) The term “deemed to be received” must relate to statutory provisions and cannot arise from volitional entries in books maintained abroad.

ii) Mercantile entries do not transform the legal character of a sale transaction or change vendor-purchaser relationship to debtor-creditor.

c. GUIDELINES 

• Receipt by an agent or bank in India on behalf of a non-resident is treated as receipt by the non-resident in India.

• Book entries under mercantile system do not alter the actual legal position regarding receipt.

• Section 13 is applicable only for computation of income, not to determine place of receipt.

• Where income is earned through business connection in India, even indirect or mediated receipt in India can be taxed.

J) CONCLUSION & COMMENTS

The judgment remains a landmark precedent in Indian tax jurisprudence on the distinction between accrual and receipt of income in cross-border transactions. It narrows the protection offered to non-resident companies under mercantile accounting. The Court adopted a substantive economic approach, focusing on the actual flow of money into India, regardless of notional book entries. The dissenting opinion of Justice Bose is notable for advocating a purist accounting-based computation under Section 13 and focusing on accrual rather than receipt, which remains a point of scholarly debate. Overall, this decision plays a pivotal role in shaping taxation of non-resident entities, especially where agency and indirect receipt mechanisms are involved.

K) REFERENCES

a. Important Cases Referred

1. Commissioner of Income-tax v. Mathias, (1939) 66 I.A. 23

2. Subramaniyan Chettiar v. Commissioner of Income-tax, (1927) 2 I.T.C. 365

3. Ahmed Din Alladitta v. Commissioner of Income-tax, [1934] 2 I.T.R. 369

4. Kanwal Nayan Hamir Singh v. Commissioner of Income-tax, Ajmer-Merwara, [1938] 6 I.T.R. 675

5. Commissioner of Income-tax v. Chunilal Mehta, [1938] 6 I.T.R. 521

6. Commissioner of Income-tax v. Kameshwar Singh, [1933] 1 I.T.R. 94

7. Pondicherry Railway Co. v. Commissioner of Income-tax, [1931] 58 I.A. 239

8. B. M. Kamdar, In re, [1946] 14 I.T.R. 14

b. Important Statutes Referred

1. Indian Income-tax Act, 1922, Sections 4(1)(a), 4(1)(c), 13, 42, 10(2)(xi)

2. Sale of Goods Act, 1930 (for context on sales and delivery)

3. FEMA (for comparison in present context of cross-border tax rules)