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Issues:
1. Whether interest earned on Commonwealth Treasury Bonds by the assessee is liable to tax in India for the assessment year 1971-72? Analysis: The dispute in this case revolves around the treatment of interest earned by the assessee on Commonwealth Treasury Bonds for the assessment year 1971-72. The Income-tax Officer included the interest amount in the world revenue of the assessee, leading to a higher tax liability. The Appellate Assistant Commissioner upheld this view, stating that the interest should be considered part of the assessee's income liable to tax in India. However, the Tribunal accepted the assessee's submission that the interest income did not accrue or arise in India and therefore was not liable to tax. The key argument was that the interest earnings were not from any business conducted in India, as they were derived from investments in Australian Commonwealth Treasury Bonds, following the directions of the Australian Government. The Tribunal's decision was based on the premise that the income did not have any connection to operations in India. Moving on to the legal analysis, the court examined the relevant provisions of the Income-tax Act, 1961, specifically sections 5(2), 9, and rule 10. Section 5(2) defines the total income of a non-resident, including income received or deemed to be received in India, or income accruing or arising in India. Section 9 deals with income deemed to accrue or arise in India, specifying various scenarios where income is deemed to have arisen in India. Rule 10 provides guidelines for determining income in the case of non-residents. The court emphasized that for income to be deemed to have accrued or arisen in India, it must be connected to business operations in India or have a source in India. In this case, the court found that the interest earned on Commonwealth Treasury Bonds by the assessee did not have any direct or indirect link to business operations in India. The Revenue argued that the surplus invested in bonds included profits from all operations, including those in India. However, the court rejected this argument, stating that there was no evidence to establish a connection between the investment in bonds and income from operations in India. The court highlighted the distinction between income accruing in India and income deemed to accrue in India, emphasizing that the former follows general legal principles while the latter is subject to specific deeming provisions. Ultimately, the court ruled in favor of the assessee, agreeing with the Tribunal's decision that the interest income earned outside India on Commonwealth Treasury Bonds was not taxable in India. The court held that since the income did not accrue or arise from any business operations in India, it could not be treated as income falling under the head 'Profits and gains of business.' The judgment underscored the importance of establishing a clear connection between income and operations in India for tax liability to apply. In conclusion, the court answered the question in the affirmative, in favor of the assessee and against the Revenue, thereby confirming that the interest earned on Commonwealth Treasury Bonds by the assessee was not liable to tax in India for the assessment year 1971-72.
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