1938 (11) TMI 28 - HC - Income Tax

Summary

Issues:
1. Interpretation of Section 26(2) of the Income Tax Act regarding taxation on profits remitted to British India.
2. Assessment of tax liability on the interest gained on a loan amount remitted to British India.

Analysis:

The judgment by the High Court of Madras involved a case where the assessee, a money lender, received a loan repayment from a foreign firm and retained the amount in Burma instead of remitting it to Singapore. The primary issues revolved around the interpretation of Section 26(2) of the Income Tax Act and the tax liability on the interest gained on the loan amount remitted to British India.

Regarding the first issue, the court considered the application of Section 26(2) to a foreign business of a person chargeable to income tax in British India. The Commissioner of Income Tax argued that the section only fixed the liability for tax payment, while the assessee contended that it also governed the computation of tax. The court noted conflicting interpretations in previous cases but ultimately held that Section 26(2) applied to the present case. The section deems the successor as the owner of the business for the entire previous year, impacting the computation of profits for tax assessment purposes.

On the second issue, the court addressed the tax liability on the interest gained on the loan amount remitted to British India. The assessee acknowledged liability for the interest gained on the loan amount. The court ruled that the assessee must be regarded as the lender of the loan and deemed to have received repayment of the principal and interest. Consequently, only the interest portion was deemed taxable, while the principal amount was not subject to taxation.

In conclusion, the court answered the reference in favor of the assessee, holding that the interest gained on the loan amount remitted to British India was taxable. The assessee was entitled to costs and the return of the deposit. The judgment provided clarity on the interpretation of Section 26(2) in the context of foreign business transactions and tax liabilities on remitted profits.