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Commissioner of Income-tax Vs. Lakshmi Lines Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 118 of 1971
Judge
Reported in[1976]102ITR196(Ker)
ActsIncome Tax Act, 1961 - Sections 9(1), 10(15), 36(1), 37(1), 40 and 195
AppellantCommissioner of Income-tax
RespondentLakshmi Lines Ltd.
Appellant Advocate P.A. Francis and; P.K. Raveendranatha Menon, Advs.
Respondent Advocate K. Sreedharan, Adv.
Cases ReferredWilliams v. Singer
Excerpt:
.....and 201 of income tax act, 1961- whether payment of interest of certain amount by assessee to non-resident company for unpaid purchase money of ship was an allowable deduction under section 37 (1) - under section 195 a person responsible for paying to non-resident any interest chargeable under act shall at time of payment deduct income-tax on such interest at relevant rates in force - section 201 provides for consequences for failure to deduct or pay tax and assessee shall be an assessee in default - under section 40 (a) he shall not be allowed deductions contemplated by sections 30 to 39 in computing his income - section 37 (1) is not available to assessee-company in so far it has not deducted or paid tax payable under section 195. - - 10,346 which represented the interest payable..........of this tribunal in similar circumstances.' 8. referring to section 42(1) of the earlier act, indian income-tax act, 1922, which corresponds to section 9(1) of the act, the supreme court in aggarwal chamber of commerce v. ganpat rai hira lal, : [1958]33itr245(sc) quoted with approval a passage from the decision of viscount cave in williams v. singer, [1920] 7 tc 387 which may usefully be extracted here :'the fact is that, if the income-tax acts are examined, it will be found that the person charged with tax is neither the trustee nor the beneficiary as such, but the person in actual receipt and control of the income which it is sought to reach. the object of the acts is to secure for the state a proportion of the profits chargeable, and this end is attained (speaking generally) by.....
Judgment:

George Vadakkel, J.

1. The Income-tax Appellate Tribunal, Cochin Bench, has referred the following question under Section 256(1) of the Income-tax Act 1961 (for brief 'the Act'):

'Whether, on the facts and in the circumstances of the case, and having regard to the provisions of Section 10(15)(iv)(c) of the Income-tax Act, 1961, the Tribunal is correct in holding that payment of interest of Rs. 10,346 by the assessee to the non-resident company, M/s. Avers and Arlt, Bremmen, Netherlands, for unpaid purchase money of the ship was an allowable deduction under Section 37(1) of the Income-tax Act, 1961 ?'

2. One Alagusundaram Chettiar purchased a ship by name 'Hugo Arlt' from M/s. Avers and Arlt, Bremmen, Netherlands. The purchase was with the approval of the Government of India. Alagusundaram Chettiar, thereafter, renamed the ship as 'M. V. Dhanalakshmi'. He had agreed to pay the purchase price to the non-resident vendor in instalments with interest on the unpaid purchase consideration at 6% per annum. The assessee is a company incorporated under the Indian Companies Act. The assessee-company purchased the ship from Alagusundaram Chettiar undertaking the liability to pay the installments due to the non-resident vendor. For the assessment year 1964-65, the Income-tax Officer disallowed an amount Q( Rs. 10,346 which represented the interest payable to the non-residentvendor of the ship on the ground that the assessee-company had failed to deduct tax as required by Section 195 of the Act. According to the Income-tax Officer Section 40(a)(i) governed the matter. On appeal, the Appellate Assistant Commissioner was of the view that since the ship was purchased by Alagxisundaram Chettiar with, the approval of the Government of India and since the Income-tax Appellate Tribunal, Madras Bench 'B', by annexure 'E' order, had allowed in the assessment proceedings relating to Alagusundaram Chettiar to deduct the payment of interest, the assessee-company is also entitled for deduction of the interest under Section 37(1) of the Act. The further appeal preferred by the revenue before the Tribunal was unsuccessful. The Tribunal by annexure 'D' order rejected the contentions raised by the revenue and held that the interest paid by the assessee to the non-resident vendor was not chargeable under the Act and for that reason the assessee was not obliged to deduct tax therefrom while making payment of the interest to the non-resident vendor. It is on these facts that the question extracted above has been referred to this court.

3. The finding of the Tribunal in annexure 'D' order is as follows:

'In conclusion, we hold that as the interest paid by the assessee is not chargeable under this Act, the bar created under Section 40(a)(i) is not attracted and the interest amount paid by the assessee is an allowable deduction under Section 37(1) of the Income-tax Act, 1961. The order of the Appellate Assistant Commissioner is confirmed.'

4. Section 37(1) allows deduction of any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession in computing the income chargeable under the head 'Profits and gains of business or profession' Sections 28 - 44 occurring in Chapter IV of the Income-tax Act provide for computation of total income under the head 'Profits and gains of business or profession'. Section 40(a)(i) provides that any interest chargeable under the Act and payable outside India shall not be deducted if tax has not been paid or deducted under Chapter XVII-B. The question to be considered is whether the interest paid by the assessee-company to the non-resident vendor of the ship is 'interest chargeable under the Act'. If it is, the assessee-company having not paid or deducted the tax thereon as provided in Chapter XVII-B is not entitled to deduct the interest payable to the non-resident vendor in computing its income chargeable under the head 'Profits and gains of business or profession'.

5. Under Section 4 of the Act, income-tax shall be charged in respect of the total income of the previous year or previous years of every person. Total income has been defined in Section 3(45) as meaning 'the total amount of income referred to in Section 5, computed in the manner laiddown in this Act'. Turning to Section 5 of the Act, we find that Subsection (1) thereof speaks of the total income of a resident, and Subsection (2) thereof deals with the total income of a non-resident person. Under Sub-section (2) all income from whatever source derived which-

'(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.'

is total income of a non-resident person. Section 9 says what all incomes shall be deemed to accrue or arise in India; and Section 9(1)(i) is as follows:

'9. Income deemed to accrue or arise in India.--(1) The following incomes shall be deemed to accrue or arise in India-

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind or through the transfer of a capital asset situate in India.'

6. The interest payable by the assessee-company to the non-resident is certainly an income coming within the purview of Section 9(1)(i) extracted above so far as the non-resident is concerned. The Tribunal also proceeded on that basis. In annexure 'D' order, the Tribunal said :

'The interest amount paid by the assessee to the non-resident shall be deemed to accrue or arise in India if such income accrues directly or indirectly through or from-

(a) business connection in India ;

(b) any property in India or any asset or source of income in India;

(c) money lent at interest and brought into India in cash or in kind; or

(d) the transfer of a capital asset in India.

7. It is not much in dispute that the income accrued to the non-resident in the present case does not fall under the categories (a), (b) and (d) enumerated above. The only question is whether such income can be said to fall under category fc). The Appellate Assistant Commissioner, in disposing of this contention, called in aid the earlier decision of the Income-tax Appellate Tribunal, Madras Bench, in 23797 to 23801 of 1967-68, in the case of Sri. Alagusundaram Chettiar who has sold this vessel to the appellant-company. The Tribunal summarised its findings as follows ;

'(1) The interest paid by the assessee to the non-residents is an income deemed to accrue or arise to the non-residents in India......'

Our task has been considerably lightened by the findings of this Tribunal in similar circumstances.'

8. Referring to Section 42(1) of the earlier Act, Indian Income-tax Act, 1922, which corresponds to Section 9(1) of the Act, the Supreme Court in Aggarwal Chamber of Commerce v. Ganpat Rai Hira Lal, : [1958]33ITR245(SC) quoted with approval a passage from the decision of Viscount Cave in Williams v. Singer, [1920] 7 TC 387 which may usefully be extracted here :

'The fact is that, if the Income-tax Acts are examined, it will be found that the person charged with tax is neither the trustee nor the beneficiary as such, but the person in actual receipt and control of the income which it is sought to reach. The object of the Acts is to secure for the State a proportion of the profits chargeable, and this end is attained (speaking generally) by the simple and effective expedient of taxing the profits where they are found.'

9. Bearing this principle in mind we will examine the provisions of the Act in Chapter XVII. The chapter provides for collection and recovery of tax. The first provision that is to be noticed for this purpose of this case is Section 195. Under that section a person responsible for paying to a non-resident any interest (not being interest on securities) chargeable under the Act shall, at the time of payment, deduct income-tax on such interest at the relevant rates in force. Section 200 of the Act then provides that the person deducting the interest as provided for in Section 195 shall pay the tax within the prescribed time to the credit of the Central Government or as the Board directs. In the next section, Section 201, the Act provides the consequences for failure to deduct or pay the tax. That section says, if no such deduction is made or having made the deduction fails to pay the tax, the person liable to deduct and pay the tax shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of the tax. And under Section 40(a)(i) he shall not be allowed the deductions contemplated by Sections 30 - 39 in computing his income. Therefore, Section 37(1) is not available to the assessee-company in so far as it has not deducted or paid the tax payable under Section 195 in respect of the interest payable by it to a non-resident.

10. The learned counsel for the assessee-company argued that the assessee-company is an industrial undertaking and is, therefore, entitled to rely onSection 10(15)(iv)(c). Under that provision interest payable by an industrial undertaking in India on any moneys borrowed or debt incurred by itin a foreign country in respect of the purchase outside India of rawmaterials or capital plant and machinery, to the extent and subject to theconditions mentioned in that section is not to be included in computing the total income of the person carrying on the industrial undertaking. That provision reads:

'10. (15)(iv) interest payable--......

(c) by an industrial undertaking in India on any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India of raw materials or capital plant and machinery, to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or debt and its repayment.'

11. In our view the assessee-company is not entitled to invoke the aforesaid provision for the simple reason that it has not borrowed any money or incurred any debt in a foreign country. It is Alagusundaram Chettiar who incurred the debt in a foreign country. No doubt the assessee-company has undertaken to pay the debt incurred by Alagusundaram Chettiar in a foreign country when it purchased the ship from Alagusundaram Chettiar. But to attract Section 10(15)(iv)(c) the moneys must have been borrowed or debt must have been incurred by it, viz., the industrial undertaking in respect of purchase outside India of raw materials or capital plant and machinery. In this view we need not consider the argument advanced by the learned counsel that the assessee-company is an industrial undertaking and need not examine the authorities cited by him in support of that argument. The Madras Bench of the Tribunal in annexure 'E' order (which is relied on by the Tribunal in these proceedings) was dealing with the assessment proceedings relating to the income of Alagusundaram Chettiar. In that case the Madras Bench said that the assessee, Alagusundaram Chettiar, is carrying on an industrial undertaking. It was also found that the interest paid by him was at the rate approved by the Central Government as contemplated by Section 10(15)(iv)(c). It was held that 'though the income must be deemed to accrue in India, it has to be excluded for computing the income of the previous year of the nonresident'. We are not called upon to examine the correctness of the above finding. It is also not necessary for the present case, for that reasoning is not available to the assessee-company for the reason already stated, namely, the assessee-company has neither borrowed any money nor incurred any debt in a foreign country.

12. The learned counsel for the assessee-company then submitted that the assessee-company is entitled to invoke Section 36(1)(iii) of the Act which provides that any amount of interest paid in respect of capital borrowed for the purposes of the business or profession is liable to be deducted. The submission is that this is an amount which the assessee-company is liable to pay in respect of the capital borrowed by the assessee-company for thepurposes of business or profession. The argument would have had some force if the assessee-company was liable to pay the interest to Alagusundaram Chettiar from whom it purchased the ship. So far as interest payable to the non-resident which is taxable under the principle of 'taxing the profits where they are found', the assessee-company is not entitled to invoke Section 36(1)(iii). Further, even if it be assumed that the interest referred to in Section 36(1)(iii) will take in the interest payable by the assessee-company to the non-resident vendor of the ship, Section 40(a)(i) is a bar for invoking Section 36(1)(iii) in that, in computing the income of a person, no deductions can be made under Sections 30 - 39 if the assessee has not paid or deducted the tax due thereon as provided for in Chapter XVII-B of the Act. We need not, therefore, go into the elaborate arguments addressed at the Bar as to whether the claim based on Section 36(1)(iii) is a new point which the learned counsel for the assessee is not entitled to urge, or only another aspect of the matter within the framework of the question referred to us.

13. Our answer to the question is in the negative, i.e., in favour of the department and against the assessee. The assessee will pay the costs of this reference including advocate's fee of Rs. 250.

14. A copy of this judgment shall be sent under the seal of this court and the signature of the Registrar to the Appellate Tribunal.


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