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Sri Meenakshi Mills Ltd., and Others Vs. Commissioner of Income-tax, Madras and Another. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 108 of 1960 (Reference No. 27 of 1960)
Reported in[1963]50ITR769(Mad)
AppellantSri Meenakshi Mills Ltd., and Others
RespondentCommissioner of Income-tax, Madras and Another.
Cases ReferredBank of Chettinad v. Commissioner of Income
Excerpt:
- srinivasan j. - this is consolidated reference made under section 66(1) of the indian income-tax act on the application of three different assessees covering three assessment years and three chargeable accounting periods under the excess profits tax act. the assessee are public limited companies engaged in the manufacture and sale of yarn at madurai. each of the assessee has a branch at pudukkottai for effecting sales of yarn. the madurai bank, which has its head office at madurai, has also a branch at pudukkottai. the sale proceeds of the yarn of the three assessees realised in pudukottai which was during the assessment years and chargeable accounting periods a native state, were being banked by the respective assessees with the pudukottai branch of the madurai bank. the accumulation of.....
Judgment:

SRINIVASAN J. - This is consolidated reference made under section 66(1) of the Indian Income-tax Act on the application of three different assessees covering three assessment years and three chargeable accounting periods under the Excess Profits Tax Act. The assessee are public limited companies engaged in the manufacture and sale of yarn at Madurai. Each of the assessee has a branch at Pudukkottai for effecting sales of yarn. The Madurai Bank, which has its head office at Madurai, has also a branch at Pudukkottai. The sale proceeds of the yarn of the three assessees realised in Pudukottai which was during the assessment years and chargeable accounting periods a Native State, were being banked by the respective assessees with the Pudukottai branch of the Madurai Bank. The accumulation of such sale proceeds was in the shape of fixed deposits with that branch. Interest was earned on these fixed deposits. Now it would appear that in the usual course of their businesses, the assessee-companies borrowed moneys from the head office of the Madurai Bank at Madurai on the security of the fixed deposits kept with the banks branch at Pudukkottai. The Income-tax officer held that the interest income realised by the assessees on their fixed deposits at Pudukottai was liable to be taxed as amounting to constructive remittances to the taxable territory, for the reason that the assessees by making the borrowals from the bank at Madurai had by that means brought that income into the taxable territory. Appeals were taken to the Appellate Assistant Commissioner whose view was that section 42 of the Income-tax Act applied, and justified the assessments. There were further appeals to the Appellate Tribunal; while the Tribunal appeared to be conscious of the fact that the weight of judicial opinion was against inferring any arrangement between the assessee and the bank preceding the transfer of funds from Pudukottai to the taxable territory, it was still induced to take the view that because Pudukottai did not appear to be a fertile area for the investment of the funds and because there was at least one common director of both the bank of and the assessee-mills, it was reasonable to conclude 'that the bank itself was started at Madurai and a branch of it was opened at Pudukottai only with a view to help the financial operations of Thyagaraja Chettiar and the mills in which he was vitally interested.' Dealing with the position occupied by the head office and the branch of both the bank and the assessee-mills at the two places, the Tribunal further observed :

'If the head office of the mill could use the fixed deposits made by its branch as security for borrowings made by it, to deny connection or acquaintance with the facts between the branches and the head office, on the one hand or of the bank and the mill on the other, seems to offend commonsense. It is on records that the head office of the bank at Madurai used moneys borrowed in the branches for making loans at Madurai. At any rate, whatever the validity or the sanctity of these principles may be as applicable to general law and the law merchant, they all give place to the all pervasive principle of income-tax law and that the Income-tax Officer can go behind the transactions and find out the truth for himself,'

And the 'principle' which the Tribunal apparently derived was that the department was entitled to draw the inference on the facts and circumstances, which will be amplified in greater detail in the due course, that there was an understanding between the assessee-mills and the bank that the money deposited with the branch at Pudukottai was to be brought over to the taxable territory and utilised for the purpose of the assessee-mills at Madurai; and the Tribunal Concluded :

'There is no doubt that the remittance of the moneys by the bank at Pudukottai and of its use at Madurai is constructive remittance.'

As stated, on the application of the assessees, the following question stands referred for determination by this court :

'Whether, on the facts and in the circumstances of the case, the taxing of the entire interest earned on the fixed deposits made out of the profits earned in Pudukottai by the assessees branches in the Pudukottai branch of the Bank of Madurai is correct ?'

It will be noticed from the brief narration of the facts set out above that while the Income-tax Officer brought the interest to assessment on the basis of constructive remittance, the Appellate Assistant Commissioner thought that the case came within the purview of section 42 of the Act. The Tribunal however does not appear to be very clear. It purports to adopt both the points of view and while the discussion in its appellate order deals with the applicability of section 42 of the Act, the concluding sentence in its order seeks to support the assessment on the basis of constructive remittance of moneys to the taxable territory.

We may however observe that both the assessees and the department have dealt with the matter on the basis of the applicability of section 42 of the Act in this reference and that is how we propose to deal with the question.

Section 42 of the Act, in so far as those aspects of it which have been canvassed before us are relevant, is extracted below :

'All income, profits or gains accruing or arising, whether directly or indirectly... through or from any money lent at interest and brought into the taxable territories in cash or in kind... shall be deemed to be income accruing or arising within the taxable territories.'

The other parts of this section do not concern us. This section accordingly requires that any money should have been lent at interest outside the taxable territory, and income, profits or gains should accrue or arise directly or indirectly from such money so lent at interest, and that money income should be brought into taxable territories. If these conditions obtain, then the section lays it down that interest shall be deemed to be income accruing or arising within the taxable territories, and it would follow that it is liable to be assessed to income-tax. Turning now to the facts of this case, we shall refer to one instance which is typical of the rest. During the assessment year 1946-47, the Sri Meenakshi Mills had an interest income of Rs. 1,08,843, from the fixed deposits with the Pudukottai branch of the Bank of Madurai. According to the details of fixed deposits in the Pudukottai branch of the bank furnished in annexure 'A', the volume of fixed deposits held by Sri Meenakshi Mills as on December 31, 1945, was Rs. 59.75 lakhs. The assessments order does not disclose what loans were taken by Sri Meenakshi Mills at Madurai from the head office of the bank. But from a statement placed before us, it appears that the assessee, Sri Meenakshi Mills, had a fluctuating account with the Madurai Bank, the balance of account sometimes resulting in its favour, but mostly it was in debit with the head office of the bank. It was indebted to the bank at the end of each of the months of the accounting year relevant to the assessment year 1946-47 in sums ranging from less than rupees one lakh to about rupees ten lakhs. In at least three months of the year, it had overpaid the loans and stood at credit with the bank. Actually, at the end of the month of September, 1945, it was at credit with the bank in a sum of Rs. 2,37,362. This statement is acknowledged to be typical of the transactions which each of the assessees had with the bank at Madurai. The view taken by the Income-tax Officer was, as has already been stated, that these borrowings on the security of deposits should be treated as constructive remittance of profits to the taxable territory, and since the remittance exceeded the sum of interest earnings on the fixed deposits, such interest earnings should be brought to tax under section 4 of the Income-tax Act as having been remitted to British India. In coming to this conclusion, the Income-tax Officer relied upon a similar assessment that had been made in the previous assessment year 1945-46. Though it does not carry any significance, we may mention that the assessment made in the assessment year 1945-46 on the basis of remittance of profits in identical circumstances was set aside on appeal.

It is necessary to refer in some detail to the reasoning adopted by the Appellate Assistant Commissioner in applying section 42 of the Income-tax Act. During the course of the appeal, the department shifted its stand and dropped the applicability of section 4 of the Act and relied upon section 42. The Appellate Assistant Commissioner agreed that the amounts brought to tax could not be regarded as remittances. He set out the position thus :

'In the case of the appellants, the money was first deposited in the Pudukottai branch of the Madurai Bank Ltd., Madurai, and thereafter these and other deposits were transferred to the head office at Madurai and used for lending at interest in British India. At this stage the learned representative appearing on behalf of the appellants contends that the Federal Court in the case in A. H. Wadia v. Commissioner of Income-tax, had held that if the borrower without the knowledge of the lender brought money into British India and that money earned income, then the lender was not liable to pay any tax on the interest which he received on the borrowed money. This was put on the principle that there must be some nexus between the taxing State and the assessee who is a foreigner and the nexus which the Federal Court had suggested is that a knowledge must be attributed to the lender that the borrower had borrowed the money for the purpose of taking it to British India and earning income in that money; the knowledge of the lender and the borrower that the money is to be taken into British India must be an integral part of the transactions. On these principles, the learned advocate hotly contends that although the money deposited in the Pudukottai branch of the Madurai Bank Ltd., Madurai, might have been transferred to the head office in British India, the other elements pointed out by the Federal Court viz., that the remittance by the State branch of the bank into British India could not be said to have taken place with the knowledge of the appellant company and, therefore, the provisions of section 42(1) would not apply to the facts of the case. In this connection, I have looked into the records and I find that the deposits in Pudukottai branch of the Bank of Madurai Ltd. amounted to Rs. 127.86 lakhs and out of this, the deposit made by the appellant company and the allied concerns amounted to Rs. 126.80 lakhs and the deposits made by other individuals amounted to a negligible sum of Rs. 1.06 lakhs. There is no dispute about the fact that these deposits were transferred to the head office in British India for the purpose of advancing the amounts on interest. From these, it is clear that the Pudukottai branch of Madurai Bank Ltd., Madurai, was started practically by the appellant company and its allied concerns for purpose of transferring the funds available there to the head office in Madurai in order to use them for lending to others on interest.'

We must mention here that we are concerned with only three mills and not with other concerns which are broadly categorised as the allied concerns. The extract relates to the assessment year 1947-48 and the true statement of deposits as seen from annexure 'A' is as below.

Assessees

Fixed deposits for the year ended 31-12-1947

Rs.

Sri Meenakshi Mills Ltd.

41.60 lakhs

Saroja Mills Ltd.

12.00 lakhs

Rajendra Mills Ltd.

10.70 lakhs

Eight other concerns and individuals

63.56 lakhs

Total

127.86 lakhs

The true position therefore is out of the total of Rs. 127.86 lakhs which was in deposit with the Pudukottai branch of bank, only the total sum of Rs. 64.30 lakhs related to the deposits of the three assessee-mills. Now where does the record disclose that any of the other concerns which made fixed deposits to the tune of Rs. 63.56 lakhs had anything to do with these three assessee concerns. At any rate, no facts appear in the records and none have been indicated as existing during the arguments before us to show that the nine other depositors who held the fixed deposits to the extent of Rs. 63.56 lakhs referred to had any connection with the three assessees. On the statement of fact, therefore, the Appellate Assistant Commissioner seems to have been in error in holding that practically the entire amount of fixed deposits belonged to the appellant company, that is, the Sri Meenakshi Mills, in that particular case and the allied concerns.

In the extract above, the Appellate Assistant Commissioner thought that the fixed deposits made with the Pudukottai branch were transferred to the head office in British India for the purpose of advancing those amounts on interest. The balance-sheets of the Bank of Madurai, both of the head office and the Pudukottai branch, were produced before us. Before referring to the details of these balance-sheets, we may mention that it is not claimed by the department or established by any fact on record that there was any specific transfer of funds as such for the purpose of advancing moneys to these assessee mills. That is not the case of the department. What the department seeks to suggest is that because the bank, the head office and the branch thereof, form one unit, any internal transaction between the head office and the branch may be treated as indicating such transfer of funds. It seems to us that such a large inference or assumption is wholly out of place one considers the activities of a bank. Taking the balance-sheet of the Bank of Madurai, Pudukottai branch, the liabilities show the fixed deposits at the end of each year. Under an item 'head office investment and bills account' at the end of the calendar years 1945, 1946, 1947 and 1948, the head office was at credit with the branch in the sums of Rs. 37 lakhs, Rs. 63 lakhs, Rs. 105 lakhs and Rs. 101 lakhs. Similarly, on the assets side, taking only transactions with the head office into account, the branch had bills and other accounts transmitted to the head office for realisation, and the head office was at debit to the branch in much larger sums, the sums for the above years being Rs. 52 lakhs, Rs. 93 lakhs, Rs. 105 lakhs and Rs. 112 lakhs, respectively. The position is reflected in the balance-sheet of the office also. It is clear therefore that there were no doubt transactions between the head office and the branch, one sending its bills for realisation to the other and the latter on the realisation placing itself in debit with the other. But these undoubtedly represent ordinary banking transactions and it seems to us to be difficult to hold on these facts that the amount placed in fixed deposit with the branch were intended to and were in fact transferred to the head office, and what is more important for the purpose of lending them out to the depositor himself. Even apart from that, it cannot be stated that if at any point of time these assessees desired to close their fixed deposit account with the branch, the branch would have been unable to pay off the depositors excepted by calling for funds from the head office. The inference that the funds placed in fixed deposits at Pudukottai were intended and were in fact transferred to the head office for the purpose stated seems to have been very easily made on material which is noticeable for its absence.

What the real scope of section 42 is - that part of it which is relevant for our purpose - has been dealt with at length in A. H. Wadia v. Commissioner of Income-tax, by the Federal Court. The facts therein were that the Gwalior Durbar, which carried on a money-lending business in British India, advanced in Gwalior to a company incorporated in British India with headquarters in Bombay, a loan on the security of its first mortgage debentures. The interest was payable at Gwalior and the debentures were also deposited there. The company brought the borrowed money to British India and utilised it for the purpose of its business in British India. The Durbar, the lender, received the interest on the loan in Gwalior. The taxing department held that the loan formed part of the operations connected with the money-lending business of the Durbar, which was being carried on in British India, and brought it to tax. While the principal question that was canvassed before the Federal Court was as to the vires of section 42(1) of the Indian Income-tax Act, the scope of that section came in for detailed examination. Kania C.J. observed :

'The Commissioner of Income-tax has found that as the money lent was brought by the company into British India, the income therefrom is deemed to accrue or arise in British India by virtue of section 42(1) of the Indian Income-tax Act. Evidently, he has relied on the fourth sub-head of section 42 for his conclusion. The exact words used in the section are arising from any money lent at interest and brought into British India in cash or in kind. In my opinion, it is proper to read this as one head and as indicating one composite transaction. The interest must be the result of the loan of money and the money must be brought into British India in cash or in kind. Reading it in that way, the incident of bringing the money into British India in cash or in kind to the knowledge of the lender and borrower is an integral part of the transaction. After the money is brought into India, how it is used by the borrower, to my mind, is an irrelevant question.'

This passage therefore indicates that where the lending and the bringing into the taxable territory are independent and unconnected transactions, the relevant part of section 42(1) would not apply.

The above decision of the Federal Court has been explained by Chagla C.J. in Porbandar State Bank v. Commissioner of Income-tax. In that case, the Porbandar Bank was resident and ordinarily resident in British India. It had received deposits in Porbandar State and had claimed that the interest paid to the depositors was an allowable deduction under section 10(2)(iii). This claim was disallowed on the basis that as the interest was chargeable to tax under section 42 and was paid outside British India, the assessee should have deducted the tax at source. In dealing with the applicability of section 42, Chagla C.J. observed :

'The Federal Court in a recent judgment reported in A. H. Wadia v. Commissioner of Income-tax, had laid down that if the borrower without the knowledge of the lender brings money into British India and that money earns income, then the lender is not liable to pay any tax on the interest which he receives on the borrowed money. This is put on the principle that there must be some nexus between the taxing State and the assessee who is a foreigner, and the nexus which the Federal Court has suggested is that a knowledge must be attributed to the lender that the borrower has borrowed money for the purpose of taking it to British India and earning income on that money. That is the view taken by the learned Chief Justice of the Federal Court. The other two judges, Mr. Justice Mukherjee and Mr. Justice Mahajan, have gone further than that. Mr. Justice Mahajan has taken the view that there must be an arrangement between the lender and the borrower to bring the loan into British India, and Mr. Justice Mukherjee has further emphasised that point by expressing his opinion that it must be the basic arrangement underlying the transaction that the money should be brought into British India after it is taken by the borrower outside his territory. But all the three learned judges agreed that the knowledge of the lender and the borrower that the money is to be taken into British India must be an integral part of the transaction.'

It would accordingly appear that the mere fact that the lender might have known or believed that the money that he lent would be taken into British India is not sufficient. The requirement that the taking of the money must be an integral part of the loan arrangement or basic arrangement underlying the transaction which has been emphasised by the learned judges of the Federal Court indicates that the transference of the money must be the result of a definite arrangement entered into between the lender and the borrower and not the result of a casual act of the borrower without any reference to the lender. Mr. Ranganathan, learned counsel for the department, however, would seem to suggest that this interpretation of the relevant provision of the Act was adopted by the Federal Court only for the purpose of meeting the argument that the provision itself was ultra vires and that it should not be extended to cover a case where the taxing department is called upon to examine whether there was or was not in fact a transference of the funds from one area to the other; that is to say, while for supporting the validity of the provision and to establish the nexus between the taxing state and the subject who taxed, the learned judges held that if the arrangement to which the taxed subject was a party was that the money which he lent should be taken to the taxable territory, that would constitute the nexus, that interpretation is not necessary for the imposition of the tax. That is the argument advanced by learned counsel for the department. He would accordingly urge that the mere fact that the money so transferred, whether with the knowledge of the assessee or not, would be sufficient to attract tax liability. We are unable to accept this argument. What the learned judges had to consider was the proper interpretation to be placed upon the various parts of section 42 and though that interpretation was called for in the context of examining the constitutional validity of the provision, it cannot be contended that that interpretation should be disregarded when the section itself is sought to be applied. There is accordingly the positive statement of principle laid down by the Federal Court that the loan transaction and the transference of the funds must be parts of a single arrangement between the lender and the borrower, and unless it can be established that such an arrangement was arrived at between the two, section 42, which is a deeming provision, cannot be brought into play.

Mr. Ranganathan next claimed that the case could be brought within the scope of another part of section 42, that is to say, that the income accrued or arose directly or indirectly through or from any business connection in the taxable territories. Though we shall briefly consider this aspect of the matter also, we must point out that whether the income arose from any business connection in the taxable territories is not a question which arises from the order of the Tribunal. The matter was not dealt with from that point of view by the Income-tax Officer or the Appellate Assistant Commissioner. The entire order of the Tribunal proceeds only on the basis that it was a case of interest accruing from money lent at interest and brought into the taxable territories. It is not therefore open to the department to raise a question which though it has reference to the same provision of law, viz., section 42 of the Income-tax Act, deals with a totally different aspect, which was not adverted to either in the proceedings before the department or before the Tribunal.

In Commissioner of Income-tax v. Bank of Chettinad, the question whether the income arose out of a business connection in the taxable territories was examined. Two banks, the Bank of Chettinad registered in British India and the Chettinad Bank registered in an Indian State, were under the unitary control of a single family. The British Indian Bank had branches at Rangoon in British India and at Bentong in the Federated Malay States. The non-resident bank had also a branch at Kualalumpur in the Federated Malay States. During the years 1930 to 1933, the Kualalumpur branch advanced moneys to the Bentong branch and the Bentong branch lent this amount to the Rangoon branch. The question was whether the British Indian bank could be assessed as the agent of the non-resident bank on the interest received by the latter on loans advanced to the former on the ground that there was a business connection between the two banks. The argument against such assessment was that as the transactions tooks place outside British India, there was no business connection in British India. In that case, it was held by this High Court that since a single entity owned almost all the interest in the two banks and had complete control of both the banks and further the main function of the non-resident bank was only to finance the British Indian bank and the loans advanced were also in excess of half the paid up capital of the non-resident bank and the loans were without security and for indefinite periods, the taxing department was entitled to hold that the income from the loans arose accrued to the non-resident bank through or from a business connection in British India. The learned judges observed that whether there is a business connection or not depends on the particular facts of the case, and the facts above-mentioned were treated as establishing for all practical purposes the identity of the two banks. The principal fact relied upon was that the non-resident bank was virtually created for the purpose of financing the resident bank and from that circumstances followed the irresistible conclusion that the moneys so advanced by the non-resident bank to the resident bank was to enable the use of that money in the business of the resident bank, thereby establishing the necessary business connection. This decision was affirmed by the Judicial Committee in Bank of Chettinad v. Commissioner of Income-tax. Even if this decision is to be applied to the facts of the present case, what has to be established is that the assessee mills earned the interest in question from a business connection in the taxable territory. Apparently, the contention of Ranganathan is that since the Pudukottai branch of the bank and its head office must be deemed to be a single unit, whatever connection the assessee mills might have with the branch at Pudukottai must be treated as establishing a connection with the head office at Madurai in the taxable territory. Had it been a case where the Pudukottai branch had no banking operations other than those connected with its head office and if all the funds deposited by its customers with the branch at Pudukottai were necessarily dealt with by the head office alone, it would be reasonable to infer that the branch was a mere conduit pipe for the transference of funds and that it had no real existence in the field of banking activity. It would be recalled that in the Chettinad Bank case referred to above, it was established that that bank itself was created only for the purpose of enabling finance to be obtained by the resident bank and that the control exercised by the Rajah of Chettinad was of such a far-reaching nature that the two banks were in reality one. Though in the view that we have expressed that this question does not arise out of the order of the Tribunal we are not finally deciding this issue, we must nevertheless state that there are no facts available in this case to establish that the present case would come within the ratio of the decision in the Chettinad case

Reverting to the principal question, was there a basic arrangement that the funds deposited by the assessee mills with the Pudukottai branch should be transferred to the taxable territory,, an arrangement which was come to between the lender and the borrower, it seems to us to be implicit in the decision in the Wadia case that it would not suffice to bring this part of section 42 into operation, merely if the lender was aware that the moneys which he deposited with the Pudukottai branch might be transferred to the taxable territory in the course of the normal banking activities of the bank. The decision requires something more positive than that. One of the learned judges, it would be recalled, held that that should be the basic arrangement of the loan transaction. It must therefore be established that the transference of the funds from one area to the other was contemplated by both the parties as the necessary consequence of the arrangement entered into. In this regard, it seems to us that there is very little evidence to support the view of the department or the Tribunal. There is a vague statement of the Tribunal that the Pudukottai branch itself was brought into existence for the purpose of the financing of these mills in which Thyagaraja Chetti had an interest. No material that would lend support to a conclusion on this head is apparent in the records. What the Tribunal observed is :

'We cannot also forget that Pudukottai is neither a cotton producing area nor has a market for cotton; except that it was a non-taxable territory, there was nothing else to recommend the carrying on of the business in cotton spinning and weaving there. There is yet another aspect to which our attention was drawn by the learned counsel for the assessee. That being a non-taxable area, there were many very rich men there with a flux of funds to invest in banks and industries. By the same token it appears to us it was not necessary for the Madurai Bank, which was after all a creation of certain people which started with a small capital of Rs. 32,800, to have gone to Pudukottai for opening a branch. If there was a flux of money in Pudukottai because of the finance, nobody would have agreed to have borrowed money from it. At any rate, it is clear it would have had no field for investment in Pudukottai, the only source of investment being outside Pudukottai.'

The extract above is far from intelligible. Nor are we willing to subscribe to several of the speculative statements that are found there and given expression to as statements of incontrovertible facts. The Madurai Bank was no doubt started with a small capital and any bank has to be started by certain people. It was started in 1943, and if it extended its business and opened a branch in Pudukottai when it found that industrialists, particularly textile mills, established their industries in Pudukottai, it does not follow that the opening of the branch itself was intended for purposes other than those of normal banking business. We are not clear wherefrom the Tribunal drew the inference that there was no field for investment in Pudukottai. It is the normal function of the banks to collect the moneys lying idle in non-productive areas and to make the funds available for industrial or other production elsewhere. Even assuming that there was no scope for investment inside Pudukottai, that would only indicate that any investor with the local bank at Pudukottai would be aware that his funds would be utilised in some lucrative fields elsewhere. The extract above does not justify the conclusion that a mere knowledge that banking transactions might effect the transference of the money from place to place amounts to a basic arrangement between every depositor with the Pudukottai branch and that branch with regard to the transference of funds.

It appears undeniable that one Karimuthu Thyagaraja Chettiar is a person of some importance both in connection with Sri Meenakshi Mills and the Madurai Bank. It is also undeniable that the three assessees are themselves shareholders in the Madurai Bank. The extent of the interest of Thyagaraja Chettiar in each of the assessee-mills is not clearly specified anywhere. During the course of the arguments it was stated before us that Thyagaraja Chettiar was not a director of Saroja Mills, one of the assessees. The Tribunal observed :

'We cannot escape the fact that Thyagaraja Chettiar, his two sons and the three mills had a preponderant, if not the whole, voice in the creation running and management of the bank.'

Later :

'Faced as we are with the tremendous weight of authorities to which we have referred at the opening of this order, it would normally be difficult to hold that the knowledge attributable to Thyagaraja Chettiar as a director both of the bank and of the mills as to how deposits ought to be made and how the bank ought to use them cannot be ascribed to the mills. But having regard to the special position of Thyayagaraja Chettiar and the balance-sheets of the bank referred to above and the lack of investments in Pudukottai itself of the moneys borrowed there, it seems more reasonable to conclude that the bank itself was started at Madurai and a branch of it was opened at Pudukottai only with a view to help the financial operations of Thyagaraja Chettiar and the mills in which he was vitally interested.'

We are unable to subscribe to the above view. That Thyagaraja Chettiar occupied any special position apart from that of a director along with several others is not established by any material on record. With regard to the inference made that the bank itself was started at Madurai and a branch opened at Pudukottai only with a view to help the financial operations of Thyagaraja Chettiar and the mills, we have been unable to find any evidentiary fact in support. Even assuming that Thyagaraja Chettiar by reason of the position that he held in the Madurai Bank was enabled to cause transference of money from the branch at Pudukottai to Madurai, that by itself would not establish the existence of an arrangement between the lender, the assessee-mills and the borrower, the bank, whether at Pudukottai or at Madurai. In this regard, the Tribunal apparently purported to rely upon the circumstance that Thyagaraja Chettiar had some measure of connection with these mills. We are not satisfied that even if Thyagaraja Chettiar was a director of one or more of these mills and was also a director of the bank, this circumstance alone can lead to the inference that any basic arrangement required between the lender and the borrower can be deemed to exist.

Mr. Venkataraman, learned counsel for the assessees, has referred to In re David Payne & Co. Ltd. That was a case where it had to be considered whether when a director of a company knew in his private capacity that another company to which money was to be advanced intended to utilise that money outside the scope of its business, such knowledge could be imputed to the company of which he was a director. It was held that it could not be so imputed. It is not necessary to refer to the details of the reasoning of the learned judges. The position here is analogous and even if Thyagaraja Chettiar as one of the directors of the assessee mills knew in his capacity as the director of the Madhurai Bank that the money placed in fixed deposit by the mills would be transferred to the taxable territory, that knowledge could not be imputed to the assessee mills; much less can it be said that the transfer was part of the integral arrangement of the loan transaction.

We are accordingly of the view that no facts are available in these cases upon which the Tribunal could rightly conclude that the interest accrued through or from money lent at interest outside the taxable territories and brought into the taxable territories. The question is answered in the negative and in favour of the assessees. The assessees will be entitled to their costs. Counsels fee Rs. 250.


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