1928 (3) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Business connection between the Bombay Company and the Hongkong Company.
2. Assessability of the Hongkong Company under Indian Income Tax Act.
3. Liability of the Bombay Company as an agent under Sections 40, 42, and 43 of the Indian Income Tax Act.
4. Receipt of income by the Bombay Company on behalf of the Hongkong Company.
5. Interpretation of Sections 40, 42, and 43 of the Indian Income Tax Act.

Detailed Analysis:

1. Business Connection Between the Bombay Company and the Hongkong Company:
The court examined the relationship between the two companies, noting that the Hongkong Company lent large sums of money to the Bombay Company without security and at a fixed interest rate. The business operations were substantial, involving transactions amounting to fifteen to sixteen crores of rupees annually. The court found that there was a "strong business connection" between the two companies, as the Hongkong Company's financial interests were deeply intertwined with the Bombay Company's business welfare. The failure of the Bombay Company would have led to the ruin of the Hongkong Company, indicating a significant business connection.

2. Assessability of the Hongkong Company Under Indian Income Tax Act:
The court held that the Hongkong Company was carrying on an assessable business within British India. It regularly lent money in British India and received interest from these operations. The offers were sent to Bombay, accepted there, and the interest was earned in Bombay. Thus, the income accrued or arose in British India within the meaning of Section 4 of the Indian Income Tax Act. The court distinguished this case from others where foreign companies did not carry on business within the country but merely traded with it.

3. Liability of the Bombay Company as an Agent Under Sections 40, 42, and 43:
The court discussed whether the Bombay Company could be deemed an agent of the Hongkong Company under Sections 40, 42, and 43. The primary question was whether these sections should be read together or disjunctively. The court agreed with the majority view in the Imperial Tobacco case, which held that these sections should be read together. This interpretation necessitates that the agent must be in receipt of income on behalf of the non-resident to be liable.

4. Receipt of Income by the Bombay Company on Behalf of the Hongkong Company:
The court found that the Bombay Company was not in receipt of any interest on behalf of the Hongkong Company. The relationship between the two companies was that of debtor and creditor, not principal and agent. The Bombay Company paid interest to the Hongkong Company, but it did not receive any income on its behalf. Therefore, the Bombay Company could not be held liable under Section 40 as it was not in receipt of income on behalf of the Hongkong Company.

5. Interpretation of Sections 40, 42, and 43 of the Indian Income Tax Act:
The court held that Sections 40, 42, and 43 should be read together. Section 40 necessitates that the agent must be in receipt of income on behalf of the non-resident. Section 42 extends the definition of income to include profits accruing through business connections in British India, and Section 43 extends the definition of an agent to include persons having business connections with the non-resident. However, the court concluded that even with these extensions, the agent must still be in receipt of income on behalf of the non-resident to be liable.

Conclusion:
The court answered the questions submitted as follows:
1. Yes, the income arises from a business connection and directly under Section 4(1) and Section 6(iv) or (vi).
2. Yes, the Hongkong Company is carrying on an assessable business within British India.
3. No, the Bombay Company is not in receipt of any such interest on behalf of the Hongkong Company as required by Section 40.
4. No, the Bombay Company is not liable as it is not in receipt of income on behalf of the Hongkong Company.
5. The relationship between the two companies was that of borrower and lender, and the Bombay Company should not be assessed as they were not in receipt of income.

Costs:
The court directed the costs of the Bombay Company to be paid by the Commissioner, to be taxed by the Taxing Master, Original Side, as on the Original Side scale.