1927 (5) TMI 1 - HC - Income Tax

Summary

Issues:
1. Taxability of interest on loans or advances made by the assessee to a partnership firm in Penang under the Indian Income-tax Act.
2. Determining if the income is taxable in British India if it arises outside British India to a person resident in British India.

Analysis:

The judgment addresses two key issues. Firstly, it delves into the taxability of interest on loans or advances made by the assessee to a partnership firm in Penang under the Indian Income-tax Act. The assessee, engaged in a business in Rangoon and a money-lending business in Penang, transferred a sum to Penang, with interest credited in the Rangoon books. The assessee argues that the interest earned outside British India is foreign income, not taxable under Section 4 of the Act. However, the court holds that the interest is not a profit arising outside British India. The Income-tax Commissioner assessed the Rangoon business's profits under Section 10, following Section 13, which allows for the mercantile basis of accounting. The court emphasizes that once an assessee adopts the mercantile basis, assessment must align with this basis alone, precluding arguments based on actual receipt of income in British India.

Secondly, the judgment tackles the issue of whether income arising outside British India to a person resident in British India is taxable in British India. The court rejects the assessee's contention that the interest, treated as profit in the accounts, was not received in British India. By adopting the mercantile basis for all entries, the assessee cannot selectively switch to the cash basis for specific entries. The court highlights that interest chittas were sent to Penang, reinforcing the treatment of interest as profits. The judgment distinguishes a precedent case involving foreign income, asserting that the interest in this case properly arises under Section 4 of the Indian Income-tax Act.

In conclusion, the court affirms the taxability of the interest on loans or advances made by the assessee to the partnership firm in Penang under the Indian Income-tax Act. The court's affirmative response to the first question renders the second question moot. The assessee is directed to pay the costs of the reference to the Commissioner of Income-tax.