‘X’ a company which was registered in England was a Partner in a firm in India. The Indian Income-Tax Authorities sought to tax the entire income made by the company. Whether the levy of tax is valid? Decide with the help of relevant case-law.

Facts of the Case

‘X’ is a company registered and incorporated in England. The company entered into a partnership firm in India and earned income through business activities carried out within India. The Indian Income Tax Authorities sought to tax the entire income earned by the company from the partnership firm.

The company contended that since it was a foreign company and registered outside India, the Indian Government had no jurisdiction to levy tax on its income. The Indian authorities, however, argued that the source of income was located in India, and therefore, the income was chargeable to tax under Indian tax laws.

The dispute concerns the tax liability of a foreign-registered entity which participates in income-generating activities within the territory of India.

Issues in the Case

1. Whether a foreign company, which is a partner in an Indian partnership firm, is liable to pay income tax in India on income earned through the firm.
2. Whether the place of incorporation (England) exempts the company from Indian taxation laws.
3. Whether the territorial nexus principle applies to income earned from operations conducted in India.
4. Whether there exists a valid legal basis under the Indian Income Tax Act to levy tax on the income of such foreign entities.

Legal Principles Covered

1. Principle of Territorial Nexus
   Under the Indian Income Tax Act, income arising or accruing in India is taxable in India, irrespective of the residential status of the recipient.
   • Section 5(2), Income Tax Act, 1961: A non-resident is chargeable to tax on income that accrues or arises in India.
2. Foreign Company Liability Under the Income Tax Act
   A foreign company is considered a separate taxable entity, and if it earns income from an Indian source, it is liable for Indian taxation.
3. Relevant Case Law:
   Chiranjit Lal Chowdhury v. Union of India (1950) – Recognized corporate personality and liability under Indian law if economic operations occur in India. Re: Bangalore Woollen, Cotton and Silk Mills Co. (1962) – A foreign company having business operations or income source in India can be taxed in India. Universal Cargo Carriers Corporation v. CIT (1976) – The Supreme Court held that even a foreign company is taxable if income arises within India.
4. Partnership Act, 1932
   A foreign company may be a partner in an Indian firm, but its income share is assessed separately in accordance with the Income Tax Act.

Possible Judgment

The levy of tax is valid.

Since the source of income derived by the foreign company is located in India, and income was generated through a partnership business conducted within Indian territory, the Indian taxing authority has the jurisdiction to tax it.

The place of incorporation is irrelevant for determining tax liability when income accrues in India.

Conclusion

The Indian Income Tax Department is legally justified in taxing the income earned by ‘X’ company in India. The foreign status of the company does not exempt it from Indian tax laws. Therefore, the income earned by the company from the Indian partnership is validly taxable under Section 5(2) of the Income Tax Act, 1961.

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