LEACH C.J. - This reference arises out of the assessment to income-tax and super tax for the year 1933-34 of the Bank of Chettinad Ltd., a company registered under the Indian Companies Act as the agent of the Chettinad Bank Limited company registered in the Native State of Pudukotta. I will refer hereafter to the Bank of Chettinad Limited as the Kanadukathan Bank and to the Chettinad Bank Limited as the Pudukotta Bank as the Commissioner of Income-tax has done in his statement of the case. The assessment proceeded on the basis that profits had accrued to the Pudukotta Bank from business connection in British India within the meaning of Section 42 (1) of the Indian Income-tax Act. In order to appreciate the position it is necessary to state how the two banks came into existence and what their course of business is.
Rajah Sir Annamalai Chettiar of Chettinad with his three sons had a large money lending business with many branches in Burma, Ceylon the Federated Malay States and French, Cochin, China. In 1929 they formed the Chettinad Bank (sic. Bank of Chettinad) Ltd., which has its headquarters at Kanadukathan in British India. Kanadukathan lies about two miles from the border of the State of Pudukotta and 18 miles from the town of Pudukotta the capital of the State. In 1930 they formed the Pudukotta Bank and also registered in Pudukotta a company called the Chettinad Corporation Limited, both of which have their registered offices at Pudukotta. The business carried on by the Rajah and his sons were wound up and all the assets and liabilities transferred to the three companies. The assets and liabilities of the branches in Burma (which until the 1st April 1937 was a part of British India) were transferred entirely to the Kanadukathan Bank. The assets and liabilities of the branches in the Federated Malay States were mostly transferred to the Pudukotta Bank. The assets and liabilities of the branches in Ceylon were transferred partly to the Colombo branch of them Kanadukathan Bank and partly to the branches of the Pudukotta Corporation Limited in Ceylon. Part of the value of the excess over liabilities was adjusted against the paid up capital of the three companions. The balance was apportioned and the sums treated as being deposits of the Rajah and other members of his family with these companies.
The nominal capital of the Kanadukathan Bank is Rs. 3,00,00,000 and the paid up capital is Rs. 1,00,00,000 divided into 20,000 shares of Rs. 500 each which are held as follows :-
(1) Rani Sithai Achi, wife of the Rajah. 6,950 shares
(2) The Rajah. 3,000'
(3) The Kumara Rajah Muthia Chettiar, the eldest son of the Rajah. 3,000'
(4) M. A. Chidambaram Chettiar the third son of the Rajah, a minor, represented by his father. 3,000'
(5) M. R. M. Ramanathan Chettiar, the second son of the Rajah adopted to the deceased brother of the Rajah.. 3,000'
(6) The Rajahs three married daughters and his unmarried daughter, a minor (250 shares each).. 1,000'
(7) The Kumara Rani Meyyammai Achi, wife of the Kumara Rajah.. 50'
The nominal capital of the Pudukotta Bank is Rs. 2,00,00,000. At first its paid up capital was Rs. 61,00,000 divided into 1,000 shares of Rs. 610 each, but on the 30th March 1933 it was increased to Rs. 1,70,00,000 divided into 10,000 shares of Rs. 700 each and 10,000 shares of 1,000 each which are held as follows :
(1) Rani Sithai Achi.. 8,402 shares
(2) The Rajah and his sons the Kumara Rajah and Chidambaram Chettiar standing in the name of their defunct firm 'S. RM. M. A.' Kualalampur.. 9,900'
(3) The Rajah in his individual name. 40'
(4) The Kumara Rajah in his individual name.. 484'
(5) M. A. Chidambaram Chettiar, in his individual name.. 475'
(6) M. R. M. Ramanathan Chettiar. 15'
(7) The Rajahs three married daughters (170 shares each).. 510'
(8) The Rajahs unmarried daughter.. 170'
(9) The Kumara Rani Meyyammai Achi. 1'
(10) K. M. S. KR. Karuppan Chettiar (General Manager of the Pudukotta Bank). 1'
(11) A. MR. M. P. Subrahmanyan Chettiar.. 1'
(12) K. RM. VR. Virappa Chettiar. 1'
The Kanadukathan Bank has 22 branches, 20 in Burma of which one is in Rangoon one at Bentong in the Federated Malay States and one at Colombo. The Pudukotta Bank does no money lending business in the Pudukotta State but it has a branch at Kualalampur, a distance of 30 miles from Bentong and another branch at Ipoh, which is also in the Federated Malay States. According to the books between September 1930 and February 1933 loans amounting to Rs. 1,32,86,888 were advanced by the Kualalumpur branch of the Pudukotta Bank to the Bentong branch of the Kanadukathan Bank. Almost the whole of this amount is show as having been lent by the Bentong branch to the Rangoon branch of the Kanadukathan Bank. Of the Rs. 1,32,86,888, Rs. 88,11,796 was retained for use at Rangoon and the balance Rs. 46,75,092 was transferred to the head office at Kanadukathan for use at Colombo. The Rs. 86,11,796 represents more than half of the paid up capital of the Pudukotta Bank. Except to the extent of Rs. 6,74,100 no moneys were actually remitted to Rangoon. The moneys were already there. Excluding the remittance of the Rs. 9,74,100, all that happened was that branch of the Pudukotta Bank passed hundis to the Bentong Branch of the Kanadukathan branch (sic. Bank) and Bentong Branch passed them on to Rangoon after crediting Kualalumpur and debiting Rangoon in its books.
The Bentong branch of the Kanadukathan Bank did no money-lending business. The person put in charge of the office was given a power of attorney very widely drawn but he was forbidden to advance even small loans and was found fault with on one occasion for having purchased a sign board and an iron safe. His salary was about one-fifth of that of Rangoon agent and his only duties were to receive the hundis from Kualalumpur and pass them on to Rangoon after making relevant entries in the books. The Income-tax Officer has given an example of the course of dealing between the two banks. On the 12th March 1931 of firm of S. RM. M. A. which consisted of the Rajah and two of his some deposited with the Imperial Bank of India at Rangoon a sum of Rs. 5,24,191 to the credit of the Kanadukathan Bank. The Rangoon branch of the Kanadukathan Bank then issued a hundi, in favour of S. RM. M. A. firm on the Madras branch of the Kanadukathan Bank. This hundi was kept for twelve months when it was endorsed to Pudukotta Bank and sent to Pudukotta. The Pudukotta Bank endorsed it to its Kualalumpur branch which endorsed it in turn and passed in on to the Bentong branch of the Kanadukathan Bank for endorsement there and subsequent dispatch to Rangoon. On receipt of the hundi by the Rangoon branch of the Kanadukathan Bank an entry was made in the books debiting the Madras branch in order to cancel the original credit entry in favour of Madras. The money all the time remained in Rangoon and all that has been done meant nothing. Expect as regards the Rs. 9,74,100 some such procedure was adopted in respect of all the loans from the Pudukotta Bank to the Kanadukathan Bank. The loans were made without security and for indefinite periods.
There can be no doubt that the effective control of the two banks is in the Rajah and the members of his family in Kanadukathan. It is true that a minute book is kept in Pudukotta showing resolutions passed sanctioning loans by the Kualalumpur branch of the Pudukotta Bank to the Bentong branch of the Kanadukathan Bank. When such a resolution was to be passed the directors in Chettinad motored to Pudukotta for the purpose. The Pudukotta Bank does no real business in the Pudukotta State and the resolutions could just as well have been passed in Kanadukathan were the control is.
The Income-tax authorities have treated the two banks as distinct organisations and as I have already indicated have assessed on the basis of profit accruing to the Pudukotta Banks non resident company through a business connection in British India the tax being levied on the Kanadukathan Bank as the agent of the Pudukotta Bank. The Kanadukathan Bank, as the assessee, denies that the business connection exists in British India and says that as the transactions between the two Banks took place at Kualalumpur and Bentong the business connection must be deemed to be there.
The arrangement between the two banks was that the moneys advanced by the Pudukotta Bank to the Kanadukathan Bank should bear interest at the rate of 6 3/4 per cent. The Income-tax Officer determined the total taxable income to be Rs. 2,58,622 and issued a demand for Rs. 60,075-13-0 representing income-tax and super tax on this amount. The question which has been referred is as follows :-
'Whether on the facts of this case the Income-tax authorities were entitled to hold that the income from the first six items of loans referred to in paragraph 21 of the Income-tax Officers assessment order accrued and arose to the Pudukotta Bank directly or indirectly through or from a business connection in British India within the meaning of Section 42(1) of the Indian Income-tax Act between the Kanadukathan Bank and the Pudukotta Bank ?' These six items represented the Rs. 86,11,796 used in Rangoon out of the Rs. 1,32,80,888 shown as transfers from the Federated Malay States to Rangoon.
Section 42 (1) reads as follow :-
'In the case if any person residing out of British India all profits or gains accruing or arising to such person whether directly or indirectly through or from any business connection or property in British India and shall be deemed to income accruing or arising within British India and shall be chargeable to income-tax in the name of the agent of any such person and such agent shall be deemed to be for all the purposes of this Act the assessee in respect of such income-tax :
Provided that any arrears of tax may be recovered also in accordance with the provisions of this Act from any assets of the non resident persons which are or may at any time come within British India.'
As the result of the decision of the Privy Council in The Commissioner of Income-tax, Bombay v. Currimbhoy Ebrahim & Sons Ltd., this section is to be regarded as a taxing section and not merely as providing machinery as held in The Secretary, Board of Revenue, Income-tax, Madras v. The Madras Export Company Ltd.
Section 43 states that
'Any person employed by or on behalf of a person residing out of British India or having any business connection with such person, or through whom such person is in the receipt of any in come, profits or gains upon whom the Income-tax Officer has caused a notice to be served of his intention of treating him as the agent of the non resident person shall, for all the purposes of this Act, be deemed to be such agent.'
There can be no doubt that if the Pudukotta Bank has a business connection in British India within the meaning of Section 42 (1) its agent is the Kanadukathan Bank and the assessment was rightly made on the Kanadukathan Bank. In fact it has not been contended to the contrary.
It is not necessary for the purpose of forming a business connection in British India that contracts between the statutory agent and the non-resident company should be entered into in British India or that the profit should accrue to the non-resident company in British India. Transactions outside a country may lead to a business connection within it as the decision of the Privy Council in The Commissioner of Income-tax v. Remington Typewriter Company (Bombay) Limited shows. There a company registered in New York manufactured and sold typewriting machines to threercompanies registered in British India. The Indian companies bought and paid for in New York typewriters which were shipped to India for sale here. The respondent company, the company doing business in the Bombay Presidency,had purchased from the American company for shares the goodwill of that company in the Bombay Presidency and adjoining territory. The American company held all its shares except threeissued to that companys nominees. The two other Indian companies stood in the same position towards the American company as the Bomby company. It was held that this consituted a business connection within the meaning of Section 42(1) and Section 43, and the Bombay company was chargeable to income-tax in respect of profits made by the American company. The decision of the Bombay High Court in The Commissioner of Income-tax Bombay Presidency and Aden v. The National Mutual Association of Australasia Ltd., is also in point. In that case the premia received by the National Mutual Association of Australasia, Ltd., in Bombay were remitted to the Association in Australia and there invested. It was held that the profits made by the Association from these investments represented profits made out of a business connections in British India, although they accrued in Australia.
Guidance as to what is a business connection is to be obtained from the judgment of Privy Council in The Commissioner of Income-tax v. Currimbhoy Ebrahim and Sons Ltd. In that case the Nizam of Hyderabad had lent a larger sum of money to a company carrying on business in British India. The transaction was an isolated one and there was no evidence of a course of dealing between the parties. It was held on these facts that there was no business connection between the lender and borrower. In delivering the judgment of the Judicial Committee SIR GARAGE RANKIN observed :-
'It is not shown that the Nizam has at any time had an interest direct or indirect direct or indirect in the respondent company. There is no evidence of a course of dealing between the parties such as might fairly be described as a business connection previously subsisting between them There is no element in the present case which justifies a comparison on the facts with the position of the parties in the case of The Commissioner of Income-tax, Bombay v. Bombay Trust Corporation.....'
This is a negative statement but it shows that a business connection may be implied from a course of dealings.
In The Commissioner of Income-tax v. Remington Typewriter Company (Bombay) Limited, LORD RUSSELL OF KILLOWEN observed :
'Although no contractual obligation exist by which the Bombay Company is compelled to purchase any of the manufactures of the American Company, the flow of business between the two companies is secured by the fact that ultimate and company which owns all its shares'.
Therefore in that case the business connection was held to exist from the fact that the ultimate and complete control of the Bombay Company was vested in the American Company'.
Whether there is a business connection depends on the particular facts of each case, and the facts in the present case may be summarized as follows :- The Rajah and his family own all the shares in the Kanadukathan Bank and all shares but three in the Pudukotta Bank; (2) the control of both the banks is in the Raja and his family at Kanadukathan in British India; (3) the main function of the Pudukotta Bank is to finance the Kanadukathan Bank; (4) the loans advanced by the Pudukotta Bank of the Kanadukathan Bank represent more than half of the capital of the Pudukotta Bank; (5) the Bentong branch of the Kanadukathan Bank merely enters into nominal transaction; (6) the flow of business between the two companies is secured by the fact that the complete control of the two companions is vested in the Rajah and his family and (7) the loans are made without security and for indefinite periods. On these facts the only conclusion between the two companies and that this business connection existed in British India in the year of assessment. Accordingly we answer the question referred in the affirmative.
The Commissioner of Income-tax is entitled to the costs which we fix at Rs. 250.
Reference answered in the affirmative.