1968 (2) TMI 30 - HC - Income Tax

Assessee was banking company and has been assessed as a non-resident - interest were received by the assessee in the UK from Corporation, which was a company incorporated in England and was carrying on business in Calcutta - Tribunal was right in holding that the provisions of s. 42(1) of the IT Act, 1922, had no application to the interest received on overdraft granted to Corporation

Issues Involved:
1. Applicability of Section 42(1) of the Indian Income-tax Act, 1922, to the interest received on overdraft granted to Calcutta Electric Supply Corporation Ltd.
2. Legality of the computation of taxable interest amounts in the case of a tea company as confirmed by the Tribunal.

Issue-wise Detailed Analysis:

1. Applicability of Section 42(1) of the Indian Income-tax Act, 1922:

The primary issue revolves around whether the interest received by the assessee, a non-resident sterling banking company, from Calcutta Electric Supply Corporation Ltd. falls under the purview of Section 42(1) of the Indian Income-tax Act, 1922. The relevant assessment years are 1953-54 and 1954-55, with interest amounts received in the UK from the corporation, which carried on business in India but was incorporated in England.

The Income-tax Officer contended that the interest accrued on money brought into India "in kind" as the overdraft was used to purchase machinery in England, which was then brought to India. This interpretation was based on the assertion that the term "money in kind" included anything into which the money had been converted.

The Tribunal, however, disagreed, stating that Section 42(1) did not apply as the money lent was neither brought in cash nor in kind into the taxable territories. The electric generators and plants purchased did not retain the character of money or its equivalent in commercial terms. The Tribunal further noted that there was no composite arrangement between the assessee and the corporation to bring money into India as an integrated transaction.

The High Court upheld the Tribunal's decision, emphasizing that the expression "money in kind" in Section 42(1) should not be interpreted broadly to include goods or machinery purchased with the money. The court cited the Privy Council's decision in Commissioner of Income-tax v. Ahmedabad Advance Mills Ltd., which held that goods purchased abroad and brought to India did not constitute income received in India. The court also referenced the Federal Court's decision in A. H. Wadia v. Commissioner of Income-tax, which required an integral connection between the lending and the bringing of money into India.

The court concluded that the transaction in question was a simple loan with no obligation on the borrower to use the money in a specific manner that would create a nexus with the taxable territory. Therefore, the interest received by the assessee was not taxable under Section 42(1).

2. Computation of Taxable Interest Amounts in the Case of the Tea Company:

The second issue concerns the computation of taxable interest received from tea companies. The Appellate Assistant Commissioner had modified the Income-tax Officer's order, reducing the taxable interest amounts based on the interest accruing on the daily balance of the overdraft specifically used for purchasing plants and machinery brought to India.

The Tribunal confirmed the Appellate Assistant Commissioner's computation, which reduced the taxable interest to lb2,612 for the assessment year 1953-54. The revenue authorities challenged this computation method, arguing that it was not in accordance with the law.

The High Court found no fault with the Tribunal's computation, noting that the Appellate Assistant Commissioner had correctly calculated the net interest chargeable to tax after considering the proportionate cost to the head office of earning the interest. The court emphasized that the revenue failed to demonstrate how the computation violated any legal provisions.

Consequently, the court answered the second question in the negative, affirming that the computation of taxable interest by the Appellate Assistant Commissioner was in accordance with the law.

Conclusion:

The High Court concluded that Section 42(1) of the Indian Income-tax Act, 1922, did not apply to the interest received on the overdraft granted to Calcutta Electric Supply Corporation Ltd. The court also upheld the computation of taxable interest amounts in the case of the tea company as made by the Appellate Assistant Commissioner. The Commissioner was ordered to pay the costs of the reference, with a certificate for two counsel.

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