1. The petitioner is a Nattukottai merchant residing at Devakottai in the Ramnad District where he carries on a money-lending business. In the course of the business he lent moneys to persons in Ceylon and Strait Settlements on what is known as the Tavanai system. The Income-tax Officer assessed the petitioner on the footing that interest in respect of such loans must be taken into account in assessing the petitioner for the year Akshaya. Objection was taken that interest on sums lent to persons outside British India cannot be taxed as income arising within British India unless and until they are received in or brought into British India and that as the petitioner did not actually receive interest on the loans he could not be taxed simply because he was getting compound interest. These objections were overruled but on the request of the petitioner the following question was referred to us for decision:
Whether the sum of Rs. 5,578 can be taxed under Section 4 of the Income-tax Act as income accruing or arising or received in British India during the year of account, Akshaya.
2. It was asserted by the petitioner during the enquiry before the Income-tax Officer that the moneys were lent on the ordinary Tavanai system and we must take it that the usual incidents of a loan with an agreement to pay Tavanai interest apply. Under such a system interest is agreed to be paid at certain periods and in default of such payment interest remaining unpaid becomes part of the principal and the whole sum carries interest at the rate agreed upon. Debits and credits are made in the accounts on this footing and the amount is carried forward at the end of each Tavanai period. The effect is that at the end of each Tavanai period the interest due and unpaid at the end of each Tavanai is treated as having been received and added to the principal and relent on the rate of Tavanai interest agreed upon. In Narayanan Chetty v. Suppiah Chetty : (1920)38MLJ437 it was held by Wallis, C.J. and Krishnan, J., that in such cases interest unpaid and added to the principal is to be treated as a fresh deposit. In O.P. No. 129 of 1928, T.P. Pethaperumal Chettiar v. Commissioner of Income-tax, which was a reference under the Income-tax Act, Coutts Trotter, C.J., Beasley and Mackay, JJ., were of opinion that under a loan of Tavanai contract where at the close of each period the interest due, if payment in cash has not been demanded or paid, is added to principal sum lent and becomes merged in it and begins to bear interest as part of such principal; that means that interest is to be treated as having been paid and received and is added to the deposit itself to carry interest. We may in this connection also refer to the observations of Napier and Krishnan, JJ., in The Secretary to the Board of Revenue, Income-tax, Madras v. Arunachalam Chettiar : AIR1921Mad427 as to when interest will, though not actually received, be deemed to have been received. Reference has been made by petitioner's advocate to The Board of Revenue v. Pydah Venkatachalapathy Garu (1922) 16 L.W. 174 (F.B.), but that case went on the ground that there was nothing in the documents or evidence to show that there was any discharge of the interest due or constructive receipt of the sum. We are of opinion that the petitioner must for the purposes of assessment to income-tax be deemed to have received interest though it was not actually paid in cash.
3. The next question is whether he received it in British India within the meaning of Section 4 of the Income-tax Act. Under Section 4 profits and gains of a business accruing or arising without British India to a person resident in British India shall, if they are received in or brought into British India, be deemed to have accrued or arisen in British India and to be profits and gains of the year in which they are so received and brought. The explanation is to the effect that the mere fact that such profits are taken into account in the balance sheet prepared in British India will not bring the case within this Section.
4. In The Commissioner of Income-tax, Madras v. Subramaniam Chettiar : AIR1927Mad841 it was held that where a person who adopted the mercantile basis in his account and who carried on business in Rangoon and Penang advanced a sum of money from the Rangoon funds to the Penang business and credited interest on the advance in the Rangoon business though no amount was actually received from Penang, the interest in question was not profit or gain arising outside British India but was income which properly accrued or arose within British India within Section 4(1) of the Income-tax Act. Mr. Kesava Aiyangar for the petitioner wanted to canvass the correctness of this decision but we see no ground to dissent from the view taken by the learned judges.
5. In the present case it is not suggested that the petitioner was carrying on a separate or a branch business in Colombo and the Strait Settlements. He is a money-lender carrying-on business in British India and in the course of such business lends money to persons outside British India. It is therefore unnecessary for us to consider the cases cited which had reference to business having branches outside British India.
6. Reference was made to Gresham Life Assurance Society v. Bishop (1902) A.C. 287, Farmer v. The Scottish Widows' Fund Life Assurance Society 5 Tax Cases, 502 and Scottish Provident Institution v. Farmer 6 Tux Cases 34, where it was held that actual receipt of interest or profits is necessary and that a mere inclusion of the amounts in the balance sheet or accounts is not sufficient to make income received in foreign countries taxable. The explanation to Section 4 embodies the rule laid down in the decisions cited. In the present case we are of opinion that the explanation to Section 4 has no application as for the reasons given by us we think that there has been a receipt of the interest.
7. We are of opinion that the petitioner has been rightly assessed and answer the reference in the affirmative. The assessee will pay the Income-tax Commissioner's costs Rs. 250.