Patanjali Sastri, J.
1. This is a reference by the Income-tax Appellate Tribunal (Madras Bench) under Section 66(1) of the Indian Income-tax Act, 1922. It arises out of an application made by the Nattarasankottai Electric Supply Corporation, Ltd. (hereinafter referred to as the company) for refund of income-tax under Section 48 of the Act.
2. The company raised a loan in 1935-36 by issuing mortgage debentures of the total Value of Rs, 83,000 divided into 830 debentures of Rs. 160 each, bearing interest at 6 1/2 per cent, per annum, subject to tax payable on the 1st April and on the 1st October of each year. The existing and future property and assets of the company were charged with payment of the principal and interest due under the debentures. In August 1941, the company having arranged to purchase electrical energy in bulk from the Government Hydro Electric Works sold its superfluous plant and machinery for Rs. 28,000 and odd, and it was decided with the consent of the debenture holders that that sum should be utilised by the company for purchasing its own debentures in the name of the debenture trustee ' to be held by him on account of the debenture holders as security for them.' As regards the interest payable in respect of the debentures thus purchased by the company and lodged with the trustee as security, resolution No. 6 of the resolutions passed at the general meeting of the debenture holders provided as follows:
The interest accruing from time to time on the debentures purchased by the debenture trustee as security for the debenture holders or interest or yield from other investment, shall be credited to the account of the debenture trustee to be retained by him as part of the security.
In thus crediting the interest to the account of the debenture trustee every half year in respect of the debentures held by him, the company purported to deduct the tax payable on the interest and paid it to the Central Government. The total tax thus deducted and remitted to the Government for the five half years ending 30th September, 1943, amounted to Rs. 1,090-9-0.
3. Since 1940 the company had been sustaining losses and for the year 1943-44 the company's accounts still showed a net loss of Rs. 13,936 to be carried forward. No assessment was, therefore, made on the company during these years. In 1944 the company applied under Section 48 of the Act for refund of the sum of Rs. 1,090-9-0 on the ground that the said sum having been deducted in accordance with the provisions of Section 18 should be treated as income-tax paid under Sub-section (5) of that section. That sub-section, so far as material here, runs thus:
Any deduction made in accordance with the provisions of this section ...shall be treated as a payment of income-tax or super-tax on behalf of the person from whose income the deduction was made, or of the owner of the security....
It is to be noted that the tax deducted under Section 18 and paid to the Government is to be treated as paid on behalf of the owner of the security in respect of which the deduction was made.
4. The Income-tax Officer rejected the application on the ground that the company, having transferred the debentures in question to the debenture trustee, was no longer the beneficial owner of the debentures, and was accordingly not entitled to claim refund of tax deducted from the interest on such debentures. A letter from the debenture trustee stating that the debentures were registered in his name ' on behalf of the company ' and requesting the officer ' to treat the interest as the income of the company ' and refund the tax to the company, was regarded as not affecting the position. On appeal, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The company then appealed to the Income-tax Appellate Tribunal who, however, allowed the appeal. They held that the company which bought the debentures in question with its own funds in the name of the debenture trustee and deposited the same with him as security for the due fulfillment of the obligations under the debentures, was itself the beneficial owner of the debentures and as such was entitled to refund of the tax deducted at the source while paying interest on such debentures.
5. Thereupon the Commissioner of Income-tax applied to the Tribunal under Section 66(1) of the Indian Income-tax Act to state a case to this Court as a question of law arose, and the Tribunal accordingly referred the following question for our decision:
Whether on the facts and in the circumstances and on a proper construction of the resolution, dated 4th August, 194: and the instrument of trust, the Tribunal was right in holding that the respondent-company was entitled to claim refund of the tax deducted from the interest paid by the company to the debenture trustee on the debentures held by the trustee in his name.
On behalf of the Commissioner of Income-tax it was urged that the view taken by the Tribunal as to the beneficial ownership of the debentures purchased in the name of the trustee was erroneous, and that, on a true view of the facts, the trustee must be regarded as holding the debentures on behalf of the general body of debenture holders who were therefore the beneficial owners. I am unable to agree. The funds utilised in the purchase of these debentures being the sale proceeds of the company's plant and machinery belonged to the company as part of its assets subject, no doubt; to the mortgage created under the debenture trust deed as substituted security. The position is essentially the same as if the company had purchased the Government bonds and lodged them with the trustee, as security for the debenture holders. The resolution passed at the general meeting of the debenture holders referred to already in pursuance of which the company purchased the debentures in the name of the trustee makes the position perfectly clear. The company therefore remained the owner of these debentures subject to the charge created in favour of the debenture holders, and the so-called interest paid by the company to the trustee was in truth a deposit with the trustee of part of its funds for purposes of security. Resolution No. 6 to which reference has been made already provided that such payments ' shall be credited to the account of the debenture trustee to be retained by him as part of the security.' In such circumstances there was no question of these payments being regarded as the income of the trustee on which tax had to be deducted at source; nor was the company entitled to claim a deduction of the half yearly payments which it made to the trustee as an item of expenditure in the assessment of its profits for income-tax purposes, though such claim appears to have been made and allowed by the income-tax authorities.
6. This view is supported by the recent decision of the Privy Council reported in Commissioner of Income-tax, Bengal v. Chowringhee Properties, Ltd. (1947) 2 M.L.J. 60 : (1947) I.T.R. 405. The assessee company in that case deposited certain of its bearer debenture bonds with its bankers as security for the overdraft in its current account, and the question arose, on the company's assessment to income-tax on its income from buildings which had been mortgaged under the debenture trust deed, whether the company was entitled to an allowance in respect of the interest payable under the debentures deposited with the bankers. Their Lordships in disallowing the claim, referred to the interest payable under the debentures as
a segregated asset of the company in the hands of the bank
being part of the charged property applicable in a particular way and as standing
from the bank's point of view in no different position from interest received by it from debentures of an outside concern lodged by the company as security.
That, essentially, is the position here. Mr. Rama Rao Saheb on behalf of the Commissioner of Income-tax submitted that the present case is distinguishable; as there was the interposition of the trustee in whose name the debentures were registered. I cannot see what difference that circumstance can make to the legal effect of the transaction. As I have already observed, it is clear from the resolution passed at the general meeting of the debenture holders that the debenture trustee was to hold these debentures only as security, and had more or less the same rights in regard to them as the bank had under the debentures deposited with it in the case before their Lordships.
7. Though the view taken by the Tribunal as to the beneficial ownership of the debentures registered in the name of the trustee be thus substantially correct, it does not follow that the company's claim to refund under Section 48 of the Indian Income-tax Act is well founded. That section, so far as material here, provides:
(1) If any ...company... Satisfies the Income-tax Officer or other authority appointed by the Central Government in this behalf that the amount of tax paid by him or on his behalf or treated as paid on his behalf for any year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of any such excess.
In the view, I have expressed above there would be no room for the application of Section 48 (1) to the facts of the present case. The 'interest' paid to the trustee was, not his income chargeable to tax under the Act, and no deduction at source fell to be made by the company under Section 18(5) of the Act. It is true that deductions on account of tax were, in fact, made and paid to the credit of the Central Government under that section; but they cannot be regarded as ' tax paid ' by the company in the sense of being payable and paid by it, nor be ' treated as paid on its behalf' for the period in question. The sums deducted and paid to the Government could be regarded if at all, only as the tax deducted and paid out of the income of the trustee, and he would be the person entitled to apply for a refund under Section 48. But, as I have already indicated, the interest out of which the deduction was made was not the income of the trustee, and he did not, in truth, suffer any tax by reason of the company deducting and remitting to the Government what it erroneously regarded as tax payable by the trustee.
8. In any view of the matter, therefore, the company's application for refund under Section 48 of the Act cannot be sustained, and the question referred to us must be answered in the negative. As the answer is however based on a ground, which does not appear to have been taken before the Tribunal, I make no order as to costs.
Frederick William Gentle, C.J.
9. I agree and have nothing to add.