Madhavan Nair, Officiating C.J.
1. The Income-tax Commissioner has referred to this Court the following questions for decision:
(i) whether, on the admitted facts of the case, the sum of Rs. 14,313 was assessable to income-tax as a remittance of foreign profits under Section 4(2) of the Income-tax Act.
(ii) whether, on the facts of the case, the initial presumption that the sum of Rs. 14,313 must be deemed to be a remittance of petitioner's foreign profits has not been fully rebutted and the assessment of the said sum legal or warranted by the provisions of the Income-tax Act.
2. The facts are these : One K.V.A.L., family became divided into three branches; K.V.A.L.R.M., K.V.A.L.A.L., and K.V.A.L.M. The petitioner, Ramanathan Chettiar, is the manager of the K.V.A.L.R.M., branch of the family. He carries on the business of banking in Madras, Quala Lampur and other places. His family is residing at Kottaiyur in Ramnad District.
3. In this case we are concerned with the assessment of the petitioner for the year 1931-1932, the year of account being 13th April, 1930, to 12th April, 1931. During this period a sum of Rs. 14,313 was debited to the 'urkadai' account of the petitioner in his Quala Lampur ledger. The present reference relates to his liability to pay income-tax with respect to this amount.
4. At the time of the partition on 11th January, 1929, it was decided that the K.V.A.L., family should give a sum of Rs. 41,842-8-0 for the construction of a Sivankoil at Kottaiyur. This amount was paid to the temple by means of ahundidrawn by K.V.A.L.A.L., one of the three branches, on his shop at Ouala Lampur. The hundi is in these terms:
Quala Lampur K.V.A.L.A.L. Somasundaram Chettiar shall pay to the person who presents this document the said sum of Rs. 41,842-8-0 at the rate of exchange then prevailing at Quala Lampur to the order of the trustees of the Tiruppani. viz., (1) A. M. A.S. Subbiah Chettiar and (2) K.V.S.V. Alagappa Chettiar with interest from 21st Thai, Sukla, at the Quala Lampur current rate of interest and get back this with the receipt of this amount duly acknowledged. (See Ex. C).
5. This sum of Rs. 41,842-8-0 was paid by K.V.A.L.A.L., on behalf of the entire family. One third of this amount, that is the amount involved in this reference, represents the petitioner's share of the contribution. From the finding submitted by the Commissioner after the first hearing of this reference, it appears that the Sivankoil trustees received the hundi in British India and sent it to M.S.M.S., Singapore, for collection. They got the money for it from K.V.A.L.A.L. Ouala Lampur. In order to pay his share to K.V.A.L.A.L., who had paid the whole' amount to the temple, the petitioner instructed his agent at Quala Lampur by letter to pay one third of Rs. 41,842-8-0 with interest to K.V.A.L.A.L., at Quala Lampur. The agent accordingly paid the amount by means of a cheque issued on the Mercantile Bank of India, Quala Lampur, in favour of K.V.A.L.A.L., Quala Lampur, and debited it to the petitioner's 'urkadai' account.
6. The petitioner contends that the circumstances show that what he had to pay was only a donation and not a legal debt, that, from the facts that the liability to pay, whatever its nature was, was transferred to be discharged out of British India and that the payment was made actually outside India, an arrangement to pay the amount in question outside India should be inferred and that therefore the payment outside British India should not be treated as a constructive or notional remittance into British India of the amount which could be assessed under Section 4(2) of the Act. On the other hand, the learned Counsel for the Income-tax Commissioner says that in the circumstances it must be held that this sum was brought into British India in order that it might be paid to the temple and that the petitioner has therefore been rightly assessed to income-tax. The question is which view is right.
7. In the first place, we are not satisfied that the petitioner had any legal debt to discharge in British India with respect to this amount. No doubt the family had agreed amongst themselves that it should pay the sum of Rs. 41.842-8-0 for the construction of the temple and that the petitioner had to pay one third of that amount. This contribution was only in the nature of a donation which the family had intended to make to the temple. Further, there is no evidence to show that the liability should be discharged in British India. On the other hand the facts lead to the inference that the parties arranged amongst themselves that the amount should be paid outside British India. It is true that the Sivankoil trustees received the hundi in British India but it was sent to M.S.M.S., Singapore, for collection and the amount was collected and credited at that place to the account of the trustees. On the face of it the hundi is a foreign bill payable outside British India. It is drawn on the Quala Lampur firm of K.V.A.L.A.L., which is outside British India at the rate of exchange prevailing at that place. Immediately after the issue of the Hundi, the petitioner wrote to his agent a letter in which he said:
As K.V.A.L., has drawn a hundi on K.V.A.L.A.L., of that place for payment of Rs. 41,842-8-0 with current rate of interest at that place for Timpani work of Sivankoil of this place, pay K.V.A.L. Somasundaram Chettiar our one third share of the amount at the time of the payment of the principal and interest of the hundi....
8. Accordingly, as already stated, the payment was made by the petitioner's agent by a cheque issued on the Mercantile Bank of India. From the facts that the actual payment of the amount was made outside British India, and the liability to pay was also outside British India, it may be inferred that there was an arrangement to pay the amount outside British India and not in British India. In this view the amount in question cannot be considered to have been received in British India within the meaning of Section 4 (2) of the Income-tax Act. In our opinion this case falls within the principle of the decision in Hall H.M. Inspector of Taxes v. Marians (1933) 18 T.C. 148. In that case, the respondent's wife, who lived with her husband in London, was entitled to a share of the profits of a business carried on in Colombo. Her share was paid into'her current account with the Colombo branch of a bank which was registered in the United Kingdom and had its office in London. On her instructions, these profits were invested in Indian bonds. Between May, 1926, and April, 1930, she borrowed certain sums from the Bank's head office in London. In April, 1930, she instructed the bank to transfer the loan to her current account with its Colombo branch; this was carried out by cross-entries in the books of the two offices. A small credit balance in Colombo was thereupon converted into a debit balance. A few weeks afterwards the overdraft and the interest accrued thereon were discharged out of the proceeds of the sale in Colombo of Indian bonds. The respondent was assessed to Income-tax under Rule 2 of Case V of Schedule D for the year 1931-1932 in a sum which included the amount of the overdraft transferred from the London office of the bank to the Colombo branch and discharged as before mentioned. The Crown contended that, when the proceeds of the sale of the bonds were credited to the Colombo account, the debt due to the bank from the respondent's wife was extinguished and this constituted a sum received by her in the United Kingdom from a remittance within the meaning of Rule 2 of Case V. This contention was overruled and it was held that the proceeds of the sale of bonds had not been received in the United Kingdom within the meaning of the rule. The case under consideration is in our opinion a stronger one than the case just mentioned. The liability of the family to pay the Sivankoil in the present case is not a a legal debt; even if it is treated as one, by arrangement the discharge of it must be understood to have been transferred to outside British India where it was ultimately discharged as in the case just mentioned. In the circumstances we think the petitioner is not liable to be charged with income-tax on the sum of Rs. 14,313. The second question does not need a separate answer.
9. The petitioner is entitled to costs of Rs. 250 and the return of the deposit of Rs. 100.