1929 (11) TMI 5 - Other - Income Tax

Summary

Issues:
1. Whether interest paid by a company to another company on loans is considered profits or gains accruing to the lending company?
2. Whether such interest is liable to Income Tax under the Indian Income Tax Act?
3. Whether the borrowing company can be treated as the agent of the lending company for tax purposes?
4. Whether the borrowing company can be assessed under the Act for income tax on the interest paid to the lending company?
5. Whether the relationship between the two companies as borrower and lender affects the tax liability of the borrowing company?

Analysis:

1. The case involved the Bombay Trust Corporation, Limited, borrowing money from the Hongkong Trust Corporation and paying interest on the loans. The Income Tax Officer assessed the Bombay Trust Corporation as agents of the Hongkong company for income tax purposes. The Commissioner upheld the assessment, leading to an appeal by the Bombay Trust Corporation to the High Court.

2. The questions referred to the Court included whether the interest paid is profits or gains accruing to the Hongkong company from a business connection in British India and whether it is liable to Income Tax under the Indian Income Tax Act. The Court answered affirmatively to both questions, citing relevant sections of the Act.

3. The Court, however, ruled against treating the Bombay Trust Corporation as the agent of the Hongkong Trust Corporation for tax assessment purposes. This decision was based on the fact that the Bombay Trust Corporation did not receive the interest on behalf of the Hongkong company as required by Section 40 of the Act.

4. Additionally, the Court determined that the Bombay Trust Corporation should not be deemed assessable under Section 42 of the Act for any income tax on the interest paid to the Hongkong Trust Corporation. The Court emphasized that the relationship between the two companies was that of borrower and lender.

5. The High Court's interpretation of the term "agent" in the Act was challenged by the Privy Council. The Privy Council held that the explicit language of Section 43 deems the Bombay Trust Corporation as the agent of the Hongkong company for tax purposes, even though they did not physically receive the interest. This interpretation was crucial in determining the tax liability of the Bombay Trust Corporation.

6. Ultimately, the Privy Council advised that the appeal be allowed, and the judgment of the Commissioner be restored. The Bombay Trust Corporation was directed to pay the costs incurred in the appeal process.