A) ABSTRACT / HEADNOTE

The Supreme Court of India in McGregor & Balfour Ltd. v. Commissioner of Income-Tax, West Bengal meticulously examined whether a repayment of excess profits tax received by a company incorporated in England but operating in India could be taxed under Indian law. The crux involved the interpretation of Section 11(14) of the Indian Finance Act, 1946. The appellant contended that since the repayment originated outside the taxable territory, it should not attract tax liability in India. However, the Supreme Court held that under the statutory fiction created by Section 11(14), the refunded amount was deemed income for Indian tax purposes and assessable in the year of receipt, regardless of its geographical origin. The judgment harmonized domestic statutory interpretations with corresponding English jurisprudence, reaffirming the Indian Income Tax Department’s jurisdiction in taxing such repayments. The Court extensively cited English cases like Eglinton Silica Brick Co. Ltd. v. Marrian (1924) 9 Tax Cas. 92 and A. & W. Nesbitt Ltd. v. Mitchell (1926) 11 Tax Cas. 217, which elucidated the character of repayments of excess profits duty as taxable income.

Keywords: Income Tax, Excess Profits Tax, Indian Finance Act 1946, Taxable Territory, Repayment, Statutory Fiction, International Taxation, Supreme Court of India, Tax Assessment, Double Taxation.

B) CASE DETAILS

i) Judgement Cause Title

McGregor & Balfour Ltd. v. The Commissioner of Income-Tax, West Bengal

ii) Case Number

Civil Appeal No. 265 of 1956

iii) Judgement Date

March 16, 1959

iv) Court

Supreme Court of India

v) Quorum

B. P. Sinha, J. L. Kapur, and M. Hidayatullah, JJ.

vi) Author

Justice M. Hidayatullah

vii) Citation

(1959) Supp. 2 S.C.R. 355

viii) Legal Provisions Involved

Section 11(14) of the Indian Finance Act, 1946
Section 4A(c)(b) and Section 66 of the Indian Income Tax Act, 1922
Section 12(2) of the Indian Excess Profits Tax Act, 1940
Section 28(1) of 4 & 5 Geo. VI, Ch. 30 (UK Finance Act, 1941)

ix) Judgments overruled by the Case

None.

x) Case is Related to which Law Subjects

Taxation Law, International Taxation Law, Income Tax Law, Double Taxation, Indian Constitutional Law.

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

McGregor & Balfour Ltd., a company incorporated under UK laws, operated both in England and India. The cross-jurisdictional nature of its operations subjected it to taxation under both Indian and English tax regimes, particularly concerning excess profits tax during war times. Following the end of hostilities and reconciliation of its financials, the company received a repayment of Rs. 2,31,009 from the UK tax authorities, representing excess profits tax overpaid in England. The Indian Income Tax Officer, relying on Section 11(14) of the Indian Finance Act, 1946, included this repayment within the company’s taxable income for the assessment year 1947-48. The issue escalated through several appeals, ultimately reaching the Supreme Court, demanding clarity on whether repayments received abroad could be taxed in India solely due to the statutory fiction created by Indian finance legislation.

D) FACTS OF THE CASE

The appellant, McGregor & Balfour Ltd., headquartered in the United Kingdom, simultaneously conducted business activities in India. During the previous financial years, it paid excess profits tax both in India and the UK. As per Indian tax regulations, it availed deductions on the amounts paid as excess profits tax under Section 12(2) of the Indian Excess Profits Tax Act, 1940 for calculating taxable profits in India.

For the assessment year 1947-48, corresponding to the financial year ending on October 31, 1946, the company received Rs. 2,31,009 as repayment of the excess profits tax from the UK government under Section 28(1) of the UK Finance Act, 1941 (4 & 5 Geo VI, Ch. 30). The Indian Income Tax Officer included this refunded amount in its Indian taxable income under Section 11(14) of the Indian Finance Act, 1946. Consequently, the company’s Indian income was assessed at Rs. 6,34,937 including the repaid sum, and its foreign income at Rs. 4,29,620.

The company contested this inclusion, arguing that since the refund was received outside India, it fell beyond the Indian tax authorities’ jurisdiction. The dispute passed through the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal, both of which dismissed the appeal. The matter finally reached the Calcutta High Court, which upheld the inclusion. Dissatisfied, the company secured a certificate for further appeal to the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the repayment of excess profits tax received from the UK could be deemed “income” for the purposes of Indian taxation under Section 11(14) of the Indian Finance Act, 1946?

ii) Whether the location of receipt—outside the taxable territory—exempted the repaid amount from Indian tax jurisdiction?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that Section 11(14) of the Indian Finance Act, 1946 lacked applicability for the assessment year 1947-48. They argued that since the provision was not specifically reenacted in subsequent Finance Acts or incorporated permanently into the Income Tax Act, its authority could not extend automatically beyond the year of enactment.

ii) The company stressed that even if Section 11(14) applied, its language did not create a separate charging provision. Instead, it merely characterized the repayment as income but did not establish the situs or taxability within India.

iii) The appellant argued that since the refund occurred outside India, and the company’s foreign income stood segregated from its Indian income under Section 4A(c)(b) of the Indian Income Tax Act, 1922, the Indian tax authorities had no right to assess it.

iv) Counsel also invoked principles of territorial nexus, arguing that mere statutory fiction could not override the physical fact of the receipt occurring outside the Indian taxable territory.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that Section 11(14) independently created a taxing fiction that rendered any repayment of excess profits tax “income” for Indian taxation.

ii) The department asserted that the provision eliminated any requirement to establish where the income arose, rendering geographical considerations irrelevant.

iii) The government emphasized that the Indian legislation sought to mirror UK provisions under Rule 4(1) of Schedule D of the Income Tax Act, 1918 (UK), which treated such repayments as taxable income upon receipt, regardless of location.

iv) The Solicitor-General argued that allowing territorial arguments to undermine Section 11(14) would defeat its legislative objective of plugging tax avoidance loopholes involving foreign repayments.

H) RELATED LEGAL PROVISIONS

i) Section 11(14) of the Indian Finance Act, 1946 — Created a statutory fiction treating repayments of foreign excess profits tax as Indian taxable income in the year of receipt.

ii) Section 4A(c)(b) of the Indian Income Tax Act, 1922 — Addressed global income assessments and the situs of income receipts.

iii) Section 12(2) of the Indian Excess Profits Tax Act, 1940 — Allowed deductions for excess profits tax paid abroad from taxable income in India.

iv) Section 28(1) of 4 & 5 Geo VI Ch. 30 (UK Finance Act, 1941) — Governed repayments of excess profits tax under UK law.

I) JUDGEMENT

a. RATIO DECIDENDI

The Supreme Court upheld the reasoning of the Calcutta High Court that Section 11(14) creates two distinct legal fictions:

• First, it deems the repayment as income for Indian tax purposes.

• Second, it mandates the assessment of such income in the year of receipt, irrespective of situs.

Justice M. Hidayatullah observed that this statutory fiction rendered the situs of receipt irrelevant. The Court cited English precedents where identical language had been interpreted to create direct tax liability on repayments irrespective of location.

Key reliance was placed on:

• Eglinton Silica Brick Co. Ltd. v. Marrian (1924) 9 Tax Cas. 92.

• A. & W. Nesbitt Ltd. v. Mitchell (1926) 11 Tax Cas. 217.

• Kirke’s Trustees v. Commissioners of Inland Revenue (1926) 11 Tax Cas. 323.

The Court emphasized that the statutory phrase “shall be treated as income for the purposes of assessment” possessed strong charging characteristics. As Lord Sumner explained in Kirke’s Trustees, the term “treated” denotes legislative intent to impose a charge independent of conventional principles of income characterization.

Thus, the appeal failed entirely.

b. OBITER DICTA 

The Court rejected the preliminary argument that Section 11(14) did not apply to the assessment year 1947-48, observing that the provision’s language applied automatically to subsequent years unless repealed.

c. GUIDELINES 

• Statutory fictions may impose standalone tax liabilities.

• Geographical situs is irrelevant where statutory language so prescribes.

• Repayments of foreign excess profits tax constitute taxable income in India under the Indian Finance Act, 1946.

• Foreign precedents may be persuasive where statutory language is derived or mirrored from foreign tax regimes.

J) REFERENCES

a. Important Cases Referred

i) Eglinton Silica Brick Co. Ltd. v. Marrian (1924) 9 Tax Cas. 92

ii) A. & W. Nesbitt Ltd. v. Mitchell (1926) 11 Tax Cas. 217

iii) Kirke’s Trustees v. The Commissioners of Inland Revenue (1926) 11 Tax Cas. 323

iv) Olive and Partington Ltd. v. Rose (1929) 14 Tax Cas. 701

b. Important Statutes Referred

i) Indian Finance Act, 1946, Section 11(14)

ii) Indian Income Tax Act, 1922, Sections 4A(c)(b), 66

iii) Indian Excess Profits Tax Act, 1940, Section 12(2)

iv) UK Finance Act, 1941 (4 & 5 Geo VI, Ch. 30), Section 28(1)