Alfred Henry Lionel Leach, C.J.
1. The assessee derives income from immovable property, trade in cloth, money-lending h and other sources existing within the jurisdiction of the Income-tax Officer, Tanjore Circle. He is also the owner of considerable house property in Saigon in Indo China. For some years he has kept an account with the Saigon branch of the Banque Franco-Chinoise and has the' right to overdraw it to the limit of $50,000. On 1st April, 1935, his overdraft amounted to $20,149. It is unnecessary to embark on an inquiry into the purposes for which the $20,149 was used, but it is common ground that it was used in part for paying for repairs to the assessee's properties in Saigon and meeting taxes levied thereon. The period of account was the year from the 1st April, 1935, to the 31st March, 1936, and the assessee's net income from his Saigon properties during that year was $18,414. As the result of payments into his account of the income from these properties he had reduced his overdraft to $12,165 by the 30th November, 1935. On the 7th December, 1935, while the overdraft still stood at that9 figure, he withdrew from the account a further sum of $5,719 the equivalent of Rs. 10,000. The $5,719 represented a remittance which he made to British India, and the question which the Court is called upon to decide is whether this remittance represents a remittance of profits derived from his Saigon properties. After making the remittance the assessee continued to draw on the account for various purposes and to make payments in from the rents he received in Saigon. The payments in the account from the 7th December, 1935, to the end of the financial year amounted to $11,570 and the year closed with his overdraft standing at the figure of $9,441. It is conceded by the assessee that the $11,570 has been rightly treated as being net income. The assessee says, however, that the payments into his banking account both before and after the 7th December, 1935, should be treated as payments in reduction of the overdraft. He contends that inasmuch as throughout the year he was still overdrawn, in spite of his payments into the account from the income from his properties, the Income-tax authorities are bound to treat the remittance of $5,719 on the 7th December, 1935, as being a remittance of borrowed money. In the course of his argument Mr. Venkatarama Sastriar admitted that if the overdraft had been completely discharged by payments in of further profits after the new financial year commenced the position would have been different but the overdraft had not been paid off. On the other hand, the income-tax authorities say that the true position cannot be gathered by treating the payments into the account and the withdrawals as being entirely separate transactions. They maintain that the net result of the assessee's payments in and his withdrawals from the account is that he has 'reduced his overdraft by $12,695 and has remitted the balance of his total profits ($18,414 less $12,695) to British India.
2. I am unable to accept as being correct the contention of the assessee that payments into the account from his profits must be treated as separate transactions and regarded in toto as payments in reduction of the overdraft. I consider that the income-tax authorities are right in saying that the account must be examined as a whole and that when this is done the remittance cannot be treated merely as a remittance of the proceeds of a loan. The principles which govern this case are in my opinion to be found in the decisions in V.V.R. Firm v. Commissioner of Income-tax Madras : (1940)1MLJ543 , a Bench of three Judges of this Court considered the case of a Nattukottai Chetty firm which was carrying on a banking business in Rangoon and Saigon with headquarters at Karaikudt in the Madras Presidency. The assessee firm received in Rangoon, which was then in British India, a sum of Rs. 1,00,000 from its agent in Saigon. The agent had been instructed by the Office at headquarters to borrow and remit that amount to the Rangoon branch. The remitted sum was made up of borrowings amounting to $59,000 and the realisation of outstanding loans. The question was whether the $59,000 represented a remittance of foreign profits. It was found that the Saigon branch had accumulated profits which were more than sufficient to cover the remittance and that it had repaid the whole of the borrowed amount within 28 days. It was held/that the $59,000 represented in these circumstances a remittance from profits and not from capital. In Commissioner of Income-tax, Madras v. S. K. M.S.P. Meyappa Chettiar : (1940)1MLJ543 this Court applied the same principle.
4. The facts in the case of Fellowes Gordon v. Commissioners of Inland Revenue (1935) 19 Tax Cases 683 are very similar to the facts in the present case. The assessee there had plantations in Ceylon and during each of the years ending the 5th April, 1928, and the 5th April, 1931, was for more than six months resident within the United Kingdom. In the year ending the 5th April, 1928, he received from his agents in Ceylon for the credit of his account with the National Bank of India, Limited, in London, a total sum of 2,200, and in the year ending 5th April, 1931, a total sum of 1,400. His income from his plantations in Ceylon during these two years was more than sufficient to meet the cost of the remittances. During the whole of the time when the remittances were taking place the assessee was indebted to his agents in Ceylon with' whom he had an account. The account started with a debit balance of some Rs. 35,000 and ended with a debit balance of some Rs. 7,000. In the interval between the commencement and the end of the account there were very great variations, some upwards and some downwards, but at all material times the assessee had an overdraft with his agents. There were other transactions which affected the amount of the balance from time to time, but in so far as the balance was reduced, the reduction were due to no other cause than the payment into the account of income from the assessee's possessions in Ceylon. The case was decided by the Court of session in Scotland and the Lord President (Lord Normand) stated that he was unable to understand on what principle the assessee was to escape income-tax 'upon the income arising from his Ceylon possessions on the full amount of the actual sums being remittances received by him in this country and ultimately traceable to his income.' The Lord President went on to observe:
It is suggested that the mere existence of an overdraft precludes his liability to tax on the ground that any money paid out of an overdraft and remitted to this country is the money of the lender and not of the recipient. Learned Counsel for the appellant did not hesitate to say that that would apply although there was a very large income in Ceylon, and an overdraft was specially arranged for the purpose of bringing this alleged principle into play. I am quite unable to accept that proposition. A man may have an income in Ceylon and may receive remittances of that income in this country through an account in which he is debtor during the whole period in which the remittances are made. There is no difference between income arising from Ceylon and income arising from this country in that respect. A man may have an income and still be in debt, and the amount of his income may be remitted to him through the hands of his creditor. I can see nothing in the case of Kneen v. Martin (1935) 19 Tax Cas 33, which is in any way inconsistent with what I have just said. It is perfectly true that it may not be sufficient to say that you had an income in Ceylon and you have received remittances of less amount than that income in this country. But here the reasonable inference is that what was received in this country was not derived from some realisation of capital or from some capital account, but was in truth derived from the income arising from possessions in Ceylon, and I think that the Commissioners, on the facts of the case, were entitled to arrive at the conclusion at which they did arrive, and that the appeal should be dismissed.
5. As in that case the assessee in the present case had a debit balance with his bankers at the beginning of the period and a debit balance of lesser extent at the end of the period and it is not suggested, nor can it be, that the inference may here be drawn that the remittance was from the realization of capital. The assessee had made profits in Saigon far in excess of his remittance to British India. By merely increasing his overdraft to pay for the remittance does not mean that the remittance was in substance a remittance of borrowed money. Having made the remittance the assessee paid into the account out of his profits from his properties in Saigon far more than was necessary to meet the cost of the remittance. The Court must look at the substance of the transaction, and if it does that, I consider the proper conclusion to be drawn is that there was here a remittance of profits. If the assessee's contention was to be accepted it would mean that by manipulating an overdraft account kept abroad and keeping it permanently in debt an assessee would be able to escape taxation of his remittances of profits. The test is from where did the money for the remittance come and in the words of Lord Normand it must be ultimately traceable to his income in Saigon. I can see no difference in principle between the two cases.
6. I would answer the question referred by saying that on the facts of this case the remittance was properly assessed under Section 4(2) of the Indian Income-tax Act, 1922, as a receipt of foreign income in British India, and I would award the Income-tax authorities the usual costs granted by this Court, in such cases, namely, Rs. 250.
7. I agree.
Krishnaswami Aiyangar, J.
8. The question that has been referred for our decision is:
Whether on the facts of this case the sum of Rs. 10,000 was properly assessed under Section 4(2) as a receipt of foreign income in British India.
9. The amount mentioned represents a sum of money remitted to the assessee in British India from Saigon in French Cochin China on 7th December, 1935, a date which fell within the year of account 1935-36. The income-tax authorities have included this remittance in the assessable income of the assessee, on the ground that it represented foreign profits received in British India within the meaning of Section 4(2) of the Indian Income-tax Act, 1922. The assessee objected that the remittance was not of income liable to be taxed under the section but came out of capital being the proceeds of a loan borrowed in Saigon; and he there fore claimed that it should be excluded in the calculation of His assessable income. This contention has been negatived by the Department, but at the request of the assessee, the Commissioner of Income-tax has referred the question set out above for the opinion of this Court.
10. The Commissioner's conclusion that the remittance was made out of profits available to the assessee in Saigon, is obviously in the nature of an inference drawn from facts proved, rather than a finding on a pure question of fact. There is no direct proof adduced to establish a connection between the profits available to the assessee in Saigon and the remittance in H question, in the sense that it was wholly or in part identifiable with those profits. But such identification is not necessary, if in substance the remittance is shown to have come out of the profits, and is traceable to that source. The only question, which is of course a question of law is whether the inference drawn can be said legitimately to follow from the facts found.
11. The facts found are these : The assessee, a resident of the Tanjore District in this Province, owns extensive immovable properties in Saigon, in French Cochin China, from which he derives income in the shape of rents. In connection with, these properties, he has to incur expenses, for taxes, repairs, etc. It also appears from the statement furnished by the Commissioner in response to the requisition contained in our Order dated 14th November, 1938, that the assessee also lends and borrows moneys in Saigon. His monetary transactions are carried on through the agency of the Banque Franco-Cinoise at Saigon which has allowed him an overdraft at first limited to $15,000 but subsequently increased to $50,000. Into his account with this Bank his receipts by way of income from his immovable properties are paid from time to time. Whenever the need arose he drew on the Bank, utilizing the money drawn mostly in Saigon but occasionally for remittance to this country for his use here. In the beginning of December, 1935, the assessee's account with the Bank shows that he had overdrawn his account by $12,165.23. The remittance in question was, as I have said, made by the Bank on 7th December, 1935 and appears as a debit in the account of $5,719-33 which is the equivalent of the Rs. 10,000. By reason of the remittances the overdraft swelled to $17,884. Further credits and debits followed according as the assessee paid in or withdrew monies, and the account shows that there was at the end of the account year, that is, on 31st March, 1936, a debit balance of $9,441.70 against the assessee.It has been found as a fact, that the net income of the assessee from his Saigon properties during the account year amounted up till the date of remittance to $10,184, the total income at the end of the year being $18,184 so that whichever date is taken, there was an available income far in excess of the amount remitted. But from this circumstance alone however, it is not right to infer that what the assessee received was income and not capital. The decision in Fellowes Gordon v. Commissioners of Inland Revenue (1935) 19 Tax Cas 683, most relied on by learned Counsel for the Income-tax Commissioner concedes this position. The Lord President has said in that case:
It is perfectly true that it may not be sufficient to say that you had an income in Ceylon and you have received remittance of less amount than that income in this country.
12. Any other view would inevitably result in consequences which the Statute could never have intended. A person who has income accruing to him in a foreign country is at perfect liberty to keep it there, or to spend or utilise it in that or any other country in any way he thinks fit.' His liability to tax arises not because he makes the profits, but because he brings or receives them here. It is not necessary that he should receive those profits in the exact form in which they were made, but he must receive them here substantially as profits. If the remittance is traceable, and is traced to the assessee's foreign profits there would be ground for holding that the Act is attracted, though even here it is necessary to exercise caution so as to avoid the error pointed out by the Privy Council in Income-tax Commissioner, Bombay v. Ahmedabad Advance Mills Ltd. (1940) 1 M.L.J. 137 : L.R. 67 IndAp 115 : 8 I.T.R. 95 , where machinery purchased in a foreign country with profits made in that country and imported into British India was held not to give rise to a case of profits received within the meaning of Section 4(2) of the Act. The illustrations given in the last paragraph of their Lordships' judgment are instructive, and indicate the danger of regarding traceability by itself as a conclusive circumstance. On the other hand, it is equally clear that the mere existence of an overdraft, cannot save foreign income from liability to taxation, as money paid out of the overdraft and remitted to this country is not necessarily the money of the lender, and may be that of the recipient. It is easy to imagine cases where under cover of an overdraft, income might in truth be remitted and received as such. A man might so manipulate his dealings with a Bank, as to leave a permanent debit balance against himself, and yet be held liable to be taxed on his remittances, if it appears that he took advantage of a banking facility as a convenient shield to conceal a receipt of profits. The position is not altered by the absence of deliberate intent, if the true nature and effect of the payments and withdrawals is such as to bring about the same result. There is no abstract rule of law to be applied generally to cases of this kind, and 1 do not understand the Court of Session to have laid down any such rule in the case cited. The question in each case is, what is the correct inference to be drawn and the Court is entitled to get behind appearances, in order to discover the truth.
13. A man with profits available in a foreign country and wanting to bring them into this country may find it necessary as a measure of convenience to obtain a temporary overdraft, or resort to a temporary borrowing which he proceeds to make good immediately out of his profits. In such a case, the remittance though in forma specifica is a remittance of capital, it is in truth a remittance of profits, and is taxable as such. The loan or the overdraft as the case may be and its repayment by the assessee out of profits may be so connected together by proximity of time or otherwise, as to lead to the reasonable in ference that the remittance was in substance a remittance of profits though to start with, it might appear or is made to appear as if it came out of a capital source. The decision of this Court in V.V.R. Firm v. Commissioner of Income-tax (1931) 63 M.L.J. 227 and Commissioner of Income-tax Madras v. Meyappa Chettiar : (1940)1MLJ543 are illustrations in point. Granting that ordinarily a remittance of borrowed money is not to be deemed a remittance of profits, Beasley, C.J., in the former case held that the facts there present, namely, the existence of available profits, the fact of the money being borrowed and remitted on the instructions of the assessee, and its repayment within 28 days out of profits collected, justified the finding that it was a remittance not of capital but of profits.
14. In this connection it may be mentioned that learned Counsel for the assessee fairly conceded that a remittance out of borrowed money beginning in a capital source, would be turned into a remittance of profit, the moment profits were realised and applied to the discharge of the loan. Otherwise it would become possible for an assessee to evade, for ever the payment of tax on his foreign income again and again brought into this country by adopting the expedient every time of first borrowing and then utilizing his income for the repayment of the loan borrowed. The presumption underlying the decision in Scottish Provident Institution v. Allan (1901) 4 Tax Cases 409 , would come to the rescue of the department in such a case to prevent the Crown being cheated out of its revenue. If there are available profits more than sufficient to cover the remittance, the presumption to start with is that the remittances came out of the profits, though ultimately the question to a large extent is one of fact (19 Tax Cases 41). If I followed Mr. Venkatarama Sastriar aright, his only point was that the conversion of what was originally a capital remittance into a remittance of profits takes place not when the remittance is made but when the profits are applied to the discharge of the loan borrowed and remitted. In my judgment it is the proposition conceded, which I think was rightly conceded, that furnishes the true ground of decision in this case.
15. If we are to confine attention to the transactions of the assessee with the Banque Franco-Cinoise during the year of account only, the answer to the reference should in my view be in favour of the assessee. It should be mentioned at the outset that there is no suggestion in this case that the transactions with the Bank were other than what they purport on their face to be. There is no reason to think that the assessee has adopted a device or invented a scheme through the instrumentality of his banking account to find a way of escape from legitimate taxation. If an inference is to be drawn against him, it must be on a proper consideration of the transactions as disclosed in the account. That his ownership of the Saigon properties and his other affairs in that place rendered it genuinely necessary or expedient for him to spend or invest his money there is beyond question. As already mentioned he has had to incur expenses for repairs, taxes, etc., and has also lent and borrowed moneys in the foreign1 country. These are facts which have not been disputed, and indeed they plainly appear from the evidence before the Income-tax authorities. For these transactions he had drawn from his banking account in which all the withdrawals appear as debits against him. The debits amounted on 7th December, 1935, the date of the remittance, to the sum of $12,165. The whole of the assessee's income during the year, as found by the Commissioner being less than this sum, why is it to be presumed or inferred that the profits did not go in reduction of the overdraft, but were in part remitted to this country? I can see at least two reasons against such an inference being drawn, but none in its favour. It was perfectly open to the assessee to apply his income to the discharge of his debts to the Bank on his overdrawn account, with the double advantage of saving himself f nom the payment of interest to the Bank, and Income-tax to the Crown. In the absence of evidence to the contrary, a man must be presumed to have done that which was to his advantage, rather than that would result in a detriment. In the second place, and again in the absence of anything to the contrary, when there are debits and credits in an account, the credits should be appropriated towards the discharge of the earlier debits seriatim in the order of dates. This is the rule of appropriation laid down in Clayton's case (1816) 15 R.R. 161 : 1 Mer. 605 : 35 E.R. 781, arid embodied in Sections 59 to 61 of the Indian Contract Act, and if this rule is applied to the assessee's account with the Bank, there would still remain a debit balance even after appropriating the whole of the year's income towards the debits prior to the remittance. On this footing there would be a total absence of profits from which the remittance could be deemed to have come.
16. With very great respect, I am unable to agree that Fellowes Gordon's case furnishes a parallel governing the decision of the present case. It was proved and found in that case as in this, that the assessee had derived profits in Ceylon in the years there in question to an amount in excess of the remittances. The account produced there unlike in the present case was of a fragmentary character, showing the debit balances on the various dates of the remittances against the assessee with no information regarding the dealings in the intervening periods. It does not appear from the statement of account there produced, whether or not the whole of the opening balance on 27th April, 1927 and 5th July, 1930, would be wiped out if the revenue receipts for those years had been appropriated in accordance with the rule in Clayton's case, whereas in the present case it is quite clear, it is the other way about. This difference in fact strikes me as a material one capable of affording a legitimate ground of distinction. It is also to be observed that the chief arguments on behalf of the assessee in that case were (i) that the account showed a debit balance at the date of each of the remittances and (ii) that it was not material to know from what source the advances made by his agent, were repaid. I may say at once that the first point affords insufficient basis for a correct inference. The second ignores what is to my view an essential source of material information. Against these arguments, the Crown contended, I think quite rightly, that the fact that his current account with his agent was overdrawn at the dates when the remittances were made was not sufficient evidence that the remittances were from a capital source. There are indications in the judgment of the Lord President that this insufficiency influenced the decision. He has drawn pointed attention to it by observing as follows:
The account starts with a debit balance of some Rs. 35,000, and it ends with a debit balance of some Rs. 7.000. In the interval between the commencement and the end of the account there were great variations, some upwards and some downwards. We are not exactly informed what other transactions took place in Ceylon which affected the amount of the balance from time to time, but this much is certain, that, in so far as it was reduced, the reductions were due to no other cause than the payment into the account of his agents, of income from the appellant's possessions in Ceylon. It therefore appears that the income in Ceylon was in excess on the whole, of the total amount of the remittances received in this country by the appellant. That being so, I am unable to understand on what principle he is to escape income-tax upon the income arising from his Ceylon possessions on the full amount of the actual sums, being remittances received by him in this country and ultimately traceable to his income. (The italics are mine).
17. There is no reference in this judgment to the principle of appropriation arising by reason of the rule in Clayton's case or the presumed intentions of the party, as the necessary material for the application of the principle was not available. In its absence it would be perfectly legitimate, to hold that the presumption arising from Allan's case had not been rebutted, and I think that this was the real basis of the Lord President's conclusion. Otherwise it will be difficult to reconcile the decision with what the Lord President himself stated lower down in his judgment where he pointed out that the existence of profits, and the fact of a remittance are by themselves insufficient.
18. If the matter stood there, I should be prepared to answer the question referred in favour of the assessee. But the matter does not rest there. From the additional information furnished by the Commissioner it appears that in the year 1933-34, the assessee received a remittance of $8,000 from Saigon through his Bankers and out of this amount debited in the account, a portion only, namely, $1,680 or Rs. 2,300 had been taxed in 1934-35 as a remittance of profit, leaving a balance of $6,320 untaxed in that year. According to the proposition of law conceded by Mr. Venkatarama Sastriar and referred to already, if this balance has been wiped out by the revenue receipts of the year 1935-36, it is automatically turned into a remittance from an income source though in origin it was from a capital source. The income during the account year was admittedly sufficient to discharge the whole of that balance and certainly to the extent of the whole of the remittance sought to be assessed to tax. It is this fact, which in my judgment turns the scale in favour of the Crown and I accordingly agree in the answer given by my Lord though as I have explained, I rest my decision on a different ground.