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Commissioner of Income-tax, Bombay City-ii Vs. Public Utilities Investment Trust Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 94 of 1963
Judge
Reported in[1983]143ITR236(Bom)
ActsIncome-tax Act, 1922 - Sections 4A
AppellantCommissioner of Income-tax, Bombay City-ii
RespondentPublic Utilities Investment Trust Ltd.
Advocates:R.J. Joshi, Adv.;S.E. Dastur, Adv.
Excerpt:
direct taxation - contingent dues - section 4a of income tax act, 1961 -assessee used to maintain book of accounts as per mercantile system - certain income accrue to assessee from foreign company subject to permission of foreign government - assessee did not make entry of said income in his book - department challenged act of assessee - debt which accrues and arises in foreign country becomes due and payable in our country as per agreement between parties but contingent debts neither become due nor payable - income could not be due or payable because of legislative restrictions - assessee not required to make entry of income in books of accounts. - - the debt of the debentures as well as the interest was payable in pounds sterling. 50 (of 26 itr). the relevant part of the quotation.....k.k. desai, j.1. in this consolidated reference under s. 66(1) of the indian i.t. act, 1922, the following three questions of law arise for decision : '(1) whether the inference of the tribunal that the assessee is a non-resident for assessment year 1952-53, and outside the mischief of section 4a(c)(ii) is legal (2) whether the inference of the tribunal that the brazilian interest receivable for 1953 was not assessable in 1954-55 as it could not be demanded is legal (3) whether the interest on the 3% sterling promissory note or the interest on the 3% indian rupee promissory note on which no tax was deducted at source under section 18 were at all chargeable to indian income-tax and whether the assessee was entitled to a deduction in respect thereof and, if so, from what income, indian,.....
Judgment:

K.K. Desai, J.

1. In this consolidated reference under s. 66(1) of the Indian I.T. Act, 1922, the following three questions of law arise for decision :

'(1) Whether the inference of the Tribunal that the assessee is a non-resident for assessment year 1952-53, and outside the mischief of section 4A(c)(ii) is legal

(2) Whether the inference of the Tribunal that the Brazilian interest receivable for 1953 was not assessable in 1954-55 as it could not be demanded is legal

(3) Whether the interest on the 3% Sterling Promissory Note or the interest on the 3% Indian Rupee Promissory Note on which no tax was deducted at source under section 18 were at all chargeable to Indian income-tax and whether the assessee was entitled to a deduction in respect thereof and, if so, from what income, Indian, foreign or world ?'

2. The facts appear in the statement of the case. The questions relate to the assessment years 1952-53 and 1954-55, the accounting years being calendar years 1951 and 1953.

3. The question No. (1) relates to the finding made that the income arising to the assessee-company without the taxable territories in the year of account 1951 was less than the income arising to the assessee-company in the taxable territories in that year. This finding was made in connection with the provisions in s. 4A(c) of the Act, which provides that 'a company is resident in the taxable territories in any year,...... if its income arising in the taxable territories in that year exceeds its income arising without the taxable territories in that year,......' The case of the Revenue against the assessee-company was that its income arising without the taxable territories was smaller than its income arising in the taxable territories in the year of account 1951. The case of the assessee-company was that in that year of account the assessee-company had earned on its holding of debentures of Southern Brazil Electric Co. Ltd. (hereinafter referred to as the 'Brazilian company'), in the aggregate pound 35,504-3-4 (Rs. 4,73,389). This income which had arisen without the taxable territories was far in excess of the net income of Rs. 3,43,661 which had arisen to the assessee-company in the taxable territories in the above year of account. The finding of the ITO was that out of the above sum of pound 35,504 odd, the sum of pound 12,152 odd (Rs. 1,62,033) had arisen in the year of account 1950. For that reason the income that had arisen without the taxable territories was approximately Rs. 3,11,356. This gross income was much less than the above net income that had arisen within the taxable territories and for that reason the assessee-company was resident in the taxable territories in accordance with the above provisions in s. 4A(c). In this connection, the Income-tax Appellate Tribunal by its order dated September 21, 1961, held in favour of the assessee-company that the above income of 12,152 had not arisen in the year of account 1950, but had arisen in the accounting year 1951. It accordingly held that the income of the assessee-company without the taxable territories was larger than that within such territories and the assessee-company was not a resident in the taxable territories for the year of account 1951. This finding of the Appellate Tribunal is now challenged on behalf of the Revenue and the facts relevant in that connection are as follows :

The assessee-company is incorporated in the United Kingdom. It is a subsidiary of the 'American & Foreign Power Co.' incorporated in the United States. This company is hereinafter referred to as 'the parent company'. Admittedly, the control and management of the parent company and the assessee-company is situated wholly outside the taxable territories. On March 6, 1934, the parent company sold and the assessee-company purchased from the parent company, shares of company registered in India of the name 'Consolidated Investment Trust'. In connection with the payment of the price of these shares the assessee-company executed a promissory note and agreed to pay the price with 6% interest. The transaction of sale between the parent company and the assessee-company, including the execution of the promissory note in respect of the price, was completed in New York. The whole of the holding of the assessee-company in the Consolidated Investment Trust was sold off in 1947 and the sale proceeds were invested by purchase of debentures of the above Brazilian company. These debentures were of two kinds, 6% prior lien debentures and 6% first mortgage debentures. Interest on the debentures was payable six-monthly on June 30, and December 31, each year. The debt of the debentures as well as the interest was payable in pounds sterling. The Brazilian company was in involved circumstances and filed to pay any interest up to 1949. The rate of interest was reduced by agreement of parties in the first instance to 4.1/2% and ultimately to 2.1/2% in 1950. Due to certain reasons the Brazilian Government imposed from 1946 exchange restrictions on remittances of pounds sterling and these restrictions prevented conversion of Brazilian currency to that of another country. The case of the assessee-company was that because of such restrictions prevented conversion of Brazilian currency to that of another country. The case of the assessee-company was that because of such restrictions and otherwise due to the fact that the Brazilian company was not possessed of pounds sterling, interest due was not paid during the year of account 1950. The restrictions were continued up to 1950, but they were reimposed in the later part of 1951 and had continued till November and December, 1955. The case of the assessee-company was that for the first time, upon restrictions being removed, payment of interest could be arranged and made by the Brazilian company in the last half of 1951. In connection with the involved circumstances of the Brazilian company, apart from the reduction in the rate of interest which was agreed to at earlier dates, by a deed of arrangement dated April 20, 1950, a copy whereof is annex. A to the statement of the case, an arrangement altering the obligations of the Brazilian company under the debentures issued by it was made. Under this altered arrangement, the Brazilian company agreed to hand over all its surplus cash (whether it was sufficient to cover the full interest charged or not) in pounds sterling to the Barclays Bank, London, to the credit of the interest suspense account to be operated by the trustees of debenture-holders. After the Brazilian company made payment in pounds sterling in the Barclays Bank, London, in pursuance of the above arrangement, to the credit of the interest suspense account operated by the trustees of the debenture-holders, an amount equal to Rs. 1,62,033-11-0 (as mentioned in para. 10 of the statement of the case) towards interest due for the year 1950. In the very year 1951 the assessee-company received further sums towards interest due for 1951.

4. Now, in connection with this amount, the case of the Revenue is that the assessee-company maintained its accounts in accordance with the mercantile system. In accordance with that system, it was obligatory on the assessee-company to make credit entries in its books of account for interest due at the rate of 2.1/2% in respect of its debenture-holdings on June 30 and December 31, 1950. This was obligatory, because, under the above system, accounts are not maintained on cash and/or receipt basis. Accounts maintained must show credits in respect of whatever accounts become payable to an assessee, though not received in fact. In that connection, reliance is placed on the provisions of s. 13 of the Act. Reliance is also placed on the observations of the Supreme Court as regards the true construction and effect of the word 'arising' as contained in s. 4A(c) and other sections of the Act in the case of CIT v. Ahmedbhai Umarbhai & Co. : [1950]18ITR472(SC) , Anglo-French Textile Co. v. CIT : [1954]25ITR27(SC) and E. D. Sassoon & Co. Ltd. v. CIT : [1954]26ITR27(SC) . The submission was that the observations of the Supreme Court in these cases go to show that the word 'arising' has been used in diverse sections of the Act in contradistinction to the phrase 'received'. The submission was that particularly in the matter of the assessees who maintained books of account on the mercantile system, receipt or collection of debts was not the relevant date for considering the arisal of income of these assessees. In respect of the assessees maintaining accounts in accordance with the mercantile system the true date of arisal of income was the date when the debt in respect of the income became due and/or the due date for payment in respect of such income. The submission was that interest on the debenture-holdings under the terms of the debentures themselves must be held to have become due for the accounting year 1950 on June 30 and December 31 of that year. As the sum of pound 12,152-10-10 (Rs. 1,62,033) was interest relating to the accounting year 1950, the assessee's case that the income of this interest had not arisen in that year should be negatived. A finding accordingly should be made that the above income had arisen in 1950 and the gross income from taxable territories without India in 1951 was accordingly Rs. 3,11,000 odd only.

5. In reply, Mr. Dastur for the assessee-company has submitted that in the assessment order made by him for the accounting year 1951, the ITO included the above sum of pound 12,152-10-10 as income arising to the assessee-company in the year of account 1951. It would be, having regard to that finding, not permissible for him to argue in connection with the question arising under s. 4A(c) that this income had arisen to the assessee-company in 1950. The question of the residence of the assessee-company and its liability to tax in respect of this sum of pound 12,152-10-10 was liable to be decided in the same manner. The finding of the ITO that the income of the above amount had arisen in 1951 is binding on him in connection with the question of the income arising to the assessee-company for ascertaining whether the assessee-company is resident within the taxable territories under s. 4A(c) in the accounting year 1950. The submission was that the phrase 'arise' is common to ss. 4(1)(b)(i) and (ii) and 4A(c). Relying upon the authorities cited by Mr. Joshi for the Revenue and the decisions in Kesoram Industries and Cotton Mills Ltd. v. CWT : [1966]59ITR767(SC) and CIT v. A. Gajapathy Naidu : [1964]53ITR114(SC) , Mr. Dastur submitted that 'arisen' has not the same meaning as 'accrued'. Income accrued earlier may arise at a later date. This always depends on the terms of the contracts between the creditor and the debtor. His emphatic submission was that income cannot be held to have arisen to an assessee unless it can be held in his favour that he was in a position to enforce his claim for the debt of that income in a court of law. His submission was that admittedly having regard to the foreign exchange restrictions prevailing in Brazil till the end of the year 1950, the assessee-company which was entitled to payment of interest on debentures in sterling was not entitled to institute any claim for the interest due against the Brazilian company. A suit filed by the assessee-company for recovery of interest was liable to be dismissed. The claim for interest was not enforceable at law. The submission was that the debt of interest was agreed to be payable only in pounds sterling. This debt was agreed to be payable in London. By the deed of arrangement dated April 20, 1950, interest due to debentures was made payable in London. This contract for payment of interest in pounds sterling at London through the Barclays Bank was, having regard to the foreign exchange restrictions prevailing in Brazil, not enforceable till after the expiry of the accounting year 1950. He, therefore, submitted that the debt in respect of the interest which was under the debentures payable on June 30 and December 31 had not arisen in 1950.

6. In connection with these rival contentions, it is convenient to refer to the case of E.D. Sassoon & Co. Ltd. v. CIT : [1954]26ITR27(SC) , in which the observations made by the Supreme Court in the case of CIT v. Ahmedbhai Umarbhai & Co. : [1950]18ITR472(SC) , and of Mukherji J. in the case of Rogers Pyatt Shellac & Co. v. Secretary of State for India ILR 52 Cal 1 [1925] 1 ITC 363 (Cal) , approved by the Supreme Court in the case of CIT v. Ahmedbhai Umarbhai & Co., are noticed. The assessee-company in that case maintained accounts in accordance with the mercantile system. The assessee-company were the managing agents of another company. Their remuneration as managing agents was payable, under the agreement with the principal company, on March 31 every year. The assessee company assigned their office as managing agents to another party on December 1, 1943. Having regard to the provisions of the deed of sale of the managing agency, the remuneration and commission payable to the assessee-company for the calendar year 1943 was in fact paid to the purchaser. The Revenue claimed that in connection with the remuneration which accrued due up to December 1, 1943, being the date of sale, the assessee-company was liable to pay tax. The submission on behalf of the Revenue was that the income of the commission had accrued to the assessee-company from day to day and in respect of the income earned up to the date of sale the assessee-company was liable to pay tax. In that connection, reference was made at p. 49 to the case of CIT v. Shaw Wallace & Co. , in which the Judicial Committee of the Privy Council made an attempt to define the word 'income'. Reference was then made to the decision of Mukherji J. in Rogers Pyatt Shellac & Co. v. Secretary of State for India ILR 52 Cal 1: [1925] 1 ITC 363, and a part of his judgment was quoted at p. 50 (of 26 ITR). The relevant part of the quotation runs as follows :

''The word (income) clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. 'Accrues', 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned, there can be no difficulty;... The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth of result. The three expressions 'accrues', 'arises', and 'is received' having been used in the section, strictly speaking 'accrues' should not be taken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable... It is clear, however, as pointed out by Fry L.J. in Colquhoun v. Brooks [1888] 21 QBD 52 ... that both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate.

One other matter need be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income'.'

7. The observations of Lord Justice Fry in the case of Colquhoun v. Brooks were cited at p. 51 (of 26 ITR). The observations are :

''In the first place, I would observe that the tax is in respect of 'profits or gains arising or accruing'. I cannot read those words as meaning 'received by'... I think, therefore, that the words 'arising or accruing' are general words descriptive of a right to receive profits.''

8. The court, thereafter, mentioned several other cases, and observed (p. 51) :

'It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody... Unless and until there is created in favour of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him....... A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or, in other words a debitum in praesenti, solvendum in futuro, it cannot be said that any income has accrued to him.'

9. At page 55 (of 26 ITR) it was further observed :

'What has, however, got to be determined is whether the income, profits or gains accrued to the assessee and in order that the same may accrue to him it is necessary that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or though its materialisation may depend on the contingency that the making up of the accounts would show income, profits or gains.'

10. Having regard to the facts of that case, the finding was (p. 55) :

'The managing agents cannot, therefore, be said to have acquired a right to receive any commission unless and until the accounts are made up at the end of the year, the net profits ascertained and the amount of commission due by the company to the managing agents thus determined.'

11. The court held that no part of the managing agency commission had accrued to the Sassoons at the dates of the respective transfers of the agencies to the transferees.

12. These observations of the Supreme Court have been repeated in a different manner in the subsequent decisions relied upon on behalf of the assessee-company. Reference is necessary to be made to the case of Kesoram Industries and Cotton Mills Ltd. v. CWT : [1966]59ITR767(SC) , where, at p. 779, in connection with the true meaning of the word 'debt', the following was quoted from the judgment of the Supreme Court of California in People v. Arguello [1869] 37 Calif. 521 :

''Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds : solvendum in praesenti and solvendum in futuro... A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not a debt, or does not become a debt, until the contingency has happened.''

13. The Supreme Court observed (p. 779) :

'This passage brings out with clarity the essential characteristics of a debt. It also indicates that a debt owing is a debt payable in future. It also distinguishes a debt from a liability for a sum payable upon a contingency.'

14. Mr. Joshi for the Revenue Particularly relied upon the following passages at pages 780 and 784(of 59 ITR) :

Page 780 :

'All the decisions agree that the meaning of the expression 'debt' may take colour from the provisions of concerned Act : it may have different shades of meaning. But the following definition is unanimously accepted :

'A debt is a sum of money which is now payable or will become payable in future by reason of present obligation : debitum in praesenti, solvendum in futuro.' Page 784 : 'To summarize : A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro : debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened.'

15. Mr. Dastur particularly relied upon the following observations in the case of CIT v. A. Gajapathy Naidu : [1964]53ITR114(SC) , Where, after referring to the decisions in the case of E.D. Sassoon & Co. Ltd. v. CIT : [1954]26ITR27(SC) and Rogers Pyatt Shellac & Co. v. Secretary of State for India [1925] 1 ITC 363, the court observed (p. 118) :

'Under this definition accepted by this court, an income accrues or arises when the assessee acquires a right to receive the same. It is commonplace that there are two principal methods of accounting for the income, profits and gains of a business; one is the cash basis and the other, the mercantile basis. The latter system of accountancy 'brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed'. The book profits are taken for the purpose of assessment of tax, though the credit amount is not realized or the debit amount is not actually disbursed. If an income accrues within a particular year, it is liable to be assessed in the succeeding year. When does the right to receive an amount under a contract accrue or arise to the assessee, i.e., come into existence That depends upon the terms of a particular contract. No other relevant provision of the Act has been brought to our notice - for there is none which provides an exception that though an assessee does not acquire a right to receive an income under a contract in a particular accounting year, by some fiction the amount received by him in a subsequent year in connection with a contract, though not arising out of a right accrued to him in the earlier year, could be related back to the earlier year and made taxable along with the income of that year.'

16. On the question of the debt of the interest for the accounting year 1950 having not become payable in that year, Mr. Dastur relied upon the decisions in the cases of Vijayaraghavacharya v. CIT and De Beeche v. South American Stores Ltd., and Chilian Stores Ltd. [1935] AG 148. In the first case the question related to the tax liability of a pensioner who had completed service in India and was residing in London. He drew his pension in London and the money was no brought to British India. The question was whether the income of the pension grew or accrued to the assessee in British India. It was held that the words 'accruing or arising' involved the concept of deceivability or the right to receive it in a particular place and did not refer to the place where the source of income was situate. It was, therefore, held that the income of the pension which was the result of services rendered in India and the source whereof was situate in India had arisen at London where the right to demand the payment of the pension accrued to the assessee. In the second case, in connection with lease of lands situated at Santiago de Chile in the Chilean territories, the deed of lease provided for payment of the rents every month in advance in Santiago de Chile on the first day of each month by first class bills on London at 90 days sight. Admittedly, the bills thus to be delivered to the lessor were encashable in pounds sterling at London. Difficulty arose against the lessee in making the payments to be made in the above manner, because Chilean legislation supervened. The lessee was prevented from acquiring foreign exchange in Chile or from paying the rents in Chile by drafts on London without the authorization of the committee established by the legislation to control exchanges and the requests made by the lessees for such authorisation, from time to time, had been refused by the committee. In connection with an action instituted for recovering rents payable in the above manner, the Judicial Committee or the Privy Council (House of Lords) held in the above case that the law of England would not compel the fulfillment of an obligation whose performance involved the doing in a foreign country of something which the supervening law of that country had rendered illegal to do. The action for recovery of rents was accordingly not sustained. Mr. Dastur's submission was that these two cases related to the question of the interest having not become payable under the contract of debentures in question, because the agreed place for payment was London and the Brazilian legislation prevented the conversion of the Brazilian currency into pounds sterling, which was the currency in which the interest was agreed to be paid and received by the debenture-holders.

17. Having regard to the decisions which we have notice above, there can be no dispute that the true construction and effect of the phrase 'arising' contained in s. 4A(c) and the phrase 'arise' contained in several other sections of the Act is in law settled and clear. It is convenient to summarise here what according to us is the result of the observations in the above decisions. Debt not only accrues but arises in all cases in which it becomes not only due but also payable under the terms agreed to between the parties in the contract binding between them. A contingent debt is neither due nor payable. In connection with the question of the debt having become payable, the agreed due date for performance is the real relevant date. The place for performance determines the territories in which the debt arises. Where by reason of subsequent alteration of an agreement or contract or by reason of intervening supervening legislation, performance of contract in the agreed manner is rendered uncertain, the original agree due date for performance becomes irrelevant. When the supervening law prevents performance of the agreed contract temporarily and the debt cannot be discharged in the agreed mode and manner, it ceases to be payable on the original agreed date. Such were the facts in the case in De Beeche v. South American Stores Ltd., and Chilian Stores Ltd. [1935] AC 148 just referred to. This result is the consequence of the law and the law courts refusing to enforce performance of a contract when it can be achieved only by breach of the law prevailing in the country from which performance is liable to be rendered.

18. The question is how the above law is to be applied to the facts of the present case. The facts on which reliance has been placed very strongly on behalf of the assessee-company are that though the debentures provided for payment of interest every six months on June 30 and December 31, the payment in the agreed mode and manner had been rendered impossible by the supervening Brazilian legislation. Now, it is true that there is no dispute between the parties that up to 1950 regulations issued by the Government of Brazil prevented the conversion of Brazilian currency to that of another country. The fact was that the Brazilian company was not itself in possession of and/or owner of any sterling pounds which it could transmit towards payment of interest dye under the debentures. Every attempt made by the Brazilian company to obtain permission from the Brazilian Government to convert the Brazilian currency in the possession of the company into pounds sterling for discharging debt of interest payable under the debentures was rejected. For the first time, upon the restrictions being removed, the Brazilian company was permitted only in 1951 to make remissions for payment of interest due under the debentures in the accounting year 1951. There can be no dispute that in connection with the liability to pay interest to the debenture-holders the agreement dated April 20, 1950, was made by the Brazilian Company with the trustees of the debenture trust deed. There can be no dispute that under the arrangement agreed to by the above deed or arrangement the Brazilian company firmly bound itself to pay all its surplus cash, whether it was sufficient to cover the full interest charged or not, in pounds sterling to the Barclays Bank, London, to the credit of the interest suspense account to be operated by the trustees of the debenture trust deed. This deed of arrangement must be accepted as an arrangement of alteration agreed to between the trustees of the debenture trust deed on behalf of the debenture-holders on the one hand and the Brazilian company on the other in respect of the liability of that company to pay interest to the debenture-holders. The debentures themselves provided that the principal and interest on these debentures must be paid in pounds sterling. The arrangement made in April, 1950, further provided for payment of interest in pounds sterling to the credit of the interest suspense account in the Barclays Bank at London. The interest was to be paid to the debenture-holders by the trustees of the debenture trust deed by operating on the suspense account which was credited from out of the remissions made by the Brazilian company. That no amount whatsoever could be remitted in pounds sterling and permission for such remission was not granted in the year 1950 was the case of the assessee-company, and that case has not been rejected. That permission for making remissions in pounds sterling for payment of interest in the above manner was for the first time granted in 1951, is the finding of fact by the Tribunal. The question is whether under the above circumstances the case made on behalf of the Revenue that the interest income amounting to pound 12,152-10-10 (Rs. 1,62,033) had arisen in 1950 has been rightly rejected by the Appellate Tribunal. Mr. Joshi in that connection repeatedly relied upon the following facts :

The debentures provided for payment of interest every six months of June 30 and December 31. The above interest for the year 1950, that was recovered by the assessee-company had, therefore, in his submission, become due in part in June, 30, and in the remaining part in December 31. The assessee-company maintained accounts in accordance with the mercantile system. The assessee-company had no right, having regard to the provisions of s. 13 of the Act, to alter that system for its own convenience. The provision for payment of interest in pounds sterling did not prevent the Brazilian company from making payment, because the debentures did not provide for payment in London. The interest could be paid to the debenture-holders, including the assessee-company, at the place of residence of the Brazilian company in Brazil. The true effect of the restrictions of foreign exchange that prevailed in the Brazilian country was temporary restriction for making payment outside that country and did not involve any moratorium of the liability to pay interest that became due. There was no legislation wiping off the liability of the Brazilian company in respect of its debts, including the liability to pay interest on debentures. This restriction, therefore, did not in any manner affect the accrual and arisal of the debt of the interest payable on June 30 and December 31. The assessee-company was, therefore, in accordance with the mercantile system of accounts maintained by it, bound to make usual entries in its books in respect of the interest that had become payable to the assessee-company for 1950 on June 30 and December 31. The failure of the assessee-company to make such entries was wrongful. If the entries had been made, it would have been apparent that the debt of interest had become due in the accounting year 1950 as submitted on behalf of the Revenue. He raised the question as to whether it would have been possible for the liquidator of the Brazilian company to argue that the debt of interest had not become due on June 30 and December 31, 1950. He also relied upon the fact that the Brazilian company itself had charged the interest on the debenture liability in each year in its own books of account and it had paid the local income-tax thereon by deduction on behalf of the non-resident debenture-holders in the manner required by the Brazilian laws.

19. Now, no doubt, these are strong arguments, but the difficulty in accepting these arguments results from the altered agreed terms for payment of interest as recorded in the agreement dated April 20, 1950. The interest was payable throughout in pounds sterling. That liability could not be discharged by making payment in any other currency. Payments in any event by the altered terms as from April, 1950, had to be made by remittance by the debtor-company in pounds sterling to the credit of the interest suspense account which was to be of the ownership of the trustees of the debenture trust deed. The account had to be maintained in and the remission had to be made to the Barclays Bank, London. The above represents the mode and manner in which the obligation for paying interest was to be discharged. Up to 1951, the legislative restrictions imposed by the Brazilian Government had prevented the debtor company from making payment in pounds sterling. The payment had been rendered impossible. In this connection, the facts of the present case were entirely similar to the facts in the case of De Beeche v. South American Stores Ltd., and Chilian Stores Ltd. [1935] AC 148 , we have referred to above. The debt of interest had, in our view, become due on June 30 and December 31. It had not remained payable on those dates due to the supervening legislation and the altered mode and manner of payment agreed to in April, 1950, as mentioned above. The supervening legislation so altered the situation that any claim made by the assessee-company for payment of interest accrued on June 30 and December 31, 1950, was not enforceable in law and could not have been sustained. As the interest which had become due had not remained payable, for the reasons mentioned above, we reject the submissions made by Mr. Joshi for the Revenue on this question.

20. Now, in this connection, it requires to be clarified that the alleged failure of the assessee-company in not making entries in connection with the interest which had thus become due on June 30 and December 31, 1950, following the mercantile system, was not a default which could not be justified. In other words, the assessee-company, being aware of the fact that interest had not remained payable because of the legislative restrictions, could not be wrong in not making credit entries in respect of the interest that had become due, even though it maintained accounts in accordance with the mercantile system. The fact that the Brazilian company charged interest on the debenture liability in cash year and paid local income-tax thereon by deduction on behalf of the non-resident debenture-holders also cannot make any difference to the above findings.

21. It requires to be recorded that Mr. Dastur sought to rely upon certain decisions where the question of the income-tax being tax on 'real income' is discussed. We have not referred to those authorities in this decision, because, in our view, the income of interest had accrued to the assessee-company and these decisions are irrelevant.

22. The second question relates to the year of account 1953, the assessment year being 1954-55. The ITO held that the sum of Rs. 3,16,486 that was received by the assessee-company in respect of the interest on its debenture-holdings in 1955 but towards interest due for the year 1953 was liable to be included as income of the year 1953 for computation of tax for that year. The case of the assessee-company was that the above sum of Rs. 3,16,486 had not become payable to the assessee-company and had not arisen or accrued in 1953. The case of the Revenue was the converse.

23. In connection with this question, the further facts which require to be noticed in addition to the facts already noticed are as follows :

The debentures in respect whereof interest was earned are the same as mentioned above. The interest on debentures was payable in pounds sterling and in the mode and manner as altered in April, 1950, as noticed above. From 1951 till 1955 the Brazilian Government reimposed restrictions preventing conversion of Brazilian currency to that of any other country. In spite of repeated attempts by the Brazilian company, interest which became due in the year 1953 and subsequent years could not be paid in the mode and manner agreed to between the parties. For the same reasons of facts and law as discussed in connection with the question No. 1, Mr. Dastur submitted that interest for the year 1953 had not become payable in that year. Mr. Joshi for the Revenue repeated the submissions made in connection with question No. 1 and argued that interest for 1953 had become due and payable to the assessee-company in that very year. For that reason, in his submission, question No. 2 should be answered in the negative. Now, we find it difficult to accept the submissions made by Mr. Joshi. The facts involved in this question are similar to the facts in respect of interest that became due for 1950 as discussed above. For the same reasons as in respect of interest that became due in 1950, we reject the submissions made by Mr. Joshi and accept the case made on behalf of the assessee-company. The second question will, therefore, be answered in the affirmative.

24. The third question relates to the claim made by the assessee-company for deduction of interest in the sum of Rs. 1,04,912 paid by the assessee-company to the parent company in respect of the debt due under a promissory note. The relevant facts in this connection are as follows :

On September 30, 1933, the parent company sold and the assessee-company purchased from the parent company a certain lot of shares of Tata Hydro Electric Agencies Ltd. In respect of the price of these shares the assessee-company executed a promissory note for pound 2,11,000 and agreed to pay interest thereon at 3%. The debt and interest was payable in pound sterling. Having regard to the purchase of this lot of shares in the year of account 1953, the assessee-company earned gross dividend income of Rs. 3,01,600. The assessee-company paid during the year of account 1953 interest on the above promissory note to the parent company. The interest came to Rs. 1,04,912. The ITO held that this expenditure of interest was not deductible and could not be allowed, because tax payable by the parent company in respect of this interest income had not been deducted under s. 18 of the Act by the assessee-company. The Appellate Tribunal in para. 15 of its order dated September 21, 1961, confirmed that finding of the ITO.

25. Mr. Dastur for the assessee-company, however, has argued that the provisions of ss. 18 and 42 were not applicable to the payment of the above sum as in trust by the assessee-company. Mr. Joshi for the Revenue has, on the contrary, relied upon the provisions of ss. 42, 18(3B) and 12(2)(b) of the Act and argued that the expense of Rs. 1,04,912 for payment of interest was not deductible, because the assessee-company did not collect tax due by the parent company in respect of its earning of the above interest amount.

26. Section 18(3B) provides :

'Any person responsible for paying to a person not resident in the territories any interest... shall, at the time of payment,... deduct income-tax at the maximum rate and super-tax at the rate applicable to a company...'

27. Section 12 relates to tax on income derived from 'other sources' and sub-s. (2), inter alia, provides that income from other sources 'shall be computed after making allowance for any expenditure... incurred solely for the purpose of making or earning such income,... Provided that no allowance shall be made on account of - (a)... (b) any interest chargeable under this Act which is payable without the taxable territories...... not being interest on which tax has been paid or from which tax has been deducted under section 18, or (c)...' Section 42 provides :

'42. Income deemed to accrue or arise within the taxable territories. - (1) All income, profits or gains accruing or arising, whether directly or indirectly... through or from any money lent at interest and brought into the taxable territories in cash or in kind... shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax : Provided that where the person entitled to the income, profits or gains is not resident in the taxable territories the income-tax so chargeable may be recovered by deduction under any of the provisions of section 18...'

28. Now, the submission of Mr. Joshi for the Revenue was that the above income of interest was earned by the parent company in the taxable territories. This was the result of the fact that the above promissory note relating to the purchase of the shares of Tata Hydro Electric Agencies Ltd., was 'money lent at interest and brought into the taxable territories in 'kind''. Since this was the income earned by the parent company in the taxable territories, it was obligatory on the assessee-company, before paying the interest income to the parent company, under s. 18(3B) to deduct from that interest the tax calculated in the manner mentioned in the sub-section. Since there was an obligation on the assessee-company to deduct interest and since admittedly tax had not been deducted under s. 12(2)(b), this expenditure of interest amounting to Rs. 1,04,912 was not allowable. Admittedly, if the tax payable in respect of the above sum by the parent company had been collected before paying the interest amount, the deduction was allowable. The whole of the basis of Mr. Joshi's contention is the provisions of s. 42 whereunder a non-resident foreigner becomes liable to pay tax for income earned within the taxable territories. The basis of Mr. Joshi's contention was that the above promissory note relating to the purchase by the assessee-company of the shares in Tata Hydro Electric Agencies Ltd., represented a money loan at interest. This loan was brought into India in kind, i.e., by bringing in the shares of the Tata Hydro Electric Agencies by the assessee-company. The interest payable in respect of this promissory note was, therefore, income earned by the parent company in the taxable territories and the parent company was liable to pay tax thereon. We find it extremely difficult to accept this submission of Mr. Joshi. The transaction in respect whereof the promissory note was executed by the assessee-company was the transaction of sale by the parent company of its holding of the shares of Tata Hydro Electric Agencies Ltd. In respect of the liability of the assessee-company to pay the price of pound 2,11,000 the parent company agreed to defer payment of price. The consideration for the promissory note was the delivery of shares sold. This transaction never involved, directly or indirectly, a transaction of loan between the parent company and the assessee-company. The transaction was wholly completed in New York. The interest was payable in New York. The holding of the shares purchased that was brought into India by the assessee-company was not bringing of a loan in kind into India. For acquiring the promissory note the parent company disposed of the ownership of the holding of the shares. The facts of these transactions clearly represent a transaction of sale which does not involve, directly or indirectly, any transaction of loan at interest. To these facts the above provisions of s. 42 were accordingly not applicable. The interest earned by the parent company was income earned by the parent company without the taxable territories. In respect of this income the parent company was not liable to pay income-tax under any of the sections of the Act, and it was, therefore, not obligatory on the assessee-company under s. 18(3B) to collect any amount by way of tax. In the result, the expenditure of the sum of Rs. 1,04,912, which was interest in respect of the above promissory note, was allowable for the year of account 1953 as claimed on behalf of the assessee-company. The answer to the part of question No. 3 relating to the interest on 3% sterling promissory note will be on the footing that tax was not liable to be deducted under s. 18(3B) in respect of the interest paid to the parent company and the assessee-company was entitled to have the expense of interest deducted from the Indian income for 1953. The assessee will be entitled to deduction from its total income because in the year of account 1953, admittedly, it is taxed as resident.

29. It requires to be recorded that the 3% sterling promissory note mentioned in this question represents a debt for the price of the holding in Tata Hydro Electric Agencies Ltd. These are shares of a company situate in India. From these shares the assessee-company earned dividend income in both the years of assessment 1951 and 1953. As interest expenditure in respect of this sterling promissory note is directly connected with the dividend income earned by the assessee in the taxable territories, this expenditure is attributable to the income earned in the taxable territories. Expenditure of interest in respect of the sterling promissory note will, therefore, be deductible from the dividend income earned in India.

30. The facts relating to the interest on 3% Indian rupee promissory note mentioned in the question are as follows :

On March 6, 1934, the parent company sold and the assessee-company purchased the shares in the Consolidated Investment Trust, a company incorporated in India. In connection with the sale of these shares the assessee-company executed the above rupee promissory note. The holding of the shares in the Consolidated Investment Trust was sold and from the sale proceeds above referred to, the debenture investment was made by the assessee-company. The promissory note was executed in New York. The investment resulting from the promissory note is now converted into an investment in debentures. Income from this investment is payable in London and is earned without the taxable territories. The expense of interest on the rupee promissory note is, therefore, not attributable to any income earned within the taxable territories. In the year of account 1951, the assessee will now be assessed as non-resident. In that year Rs. 24,000 was paid as interest to the parent company in respect of this promissory note. The expense of interest in the above amount being not connected with any income earned within the taxable territories cannot be deductible from the dividend income earned by the assessee-company in India in that year. In the year of account 1953, the assessee-company has been admittedly assessed as 'resident'. In the result, as resident, the assessee-company's income is bound to be assessed in the manner mentioned in s. 4B in respect of income that accrued or arose in the taxable territories and without the taxable territories. As the total income of the assessee-company will be taxable as resident in that year, the expenditure of interest amounting to Rs. 24,000 in respect of this rupee promissory note will have to be deducted from the total income of the assessee.

31. In the result, our answers to the questions are as follows :

Question No. 1 : In the affirmative.

Question No. 2 : In the affirmative.

Question No. 3 : Tax was not payable on Rs. 1,04,912 paid as interest on 3% sterling promissory note in the year of account 1953. Similarly, tax was not payable in respect of the interest paid for the 3% sterling promissory note in the year of account 1951. Expenditure of interest relating to 3% sterling promissory note was deductible from the dividend income earned in India. The interest paid on 3% Indian rupee promissory note was not deductible from the dividend income earned in India in the year of account 1951 when the assessee-company has been assessed as non-resident. Interest paid in respect of this promissory note in the year of account 1953, was deductible expense from the total world income of the assessee-company, as it was assessed for that year as resident.

32. The Commissioner will pay costs.


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