9911796707
TMI Blog1989 (11) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... arried on smoothly and efficiently, the assessee opened a branch and a bank account in India in or about December, 1965. Plant, machinery and other equipment needed for the purpose were of highly specialised nature. They had to be imported, from the U. K., U. S. A. and West Germany. The understanding originally was that the assessee would arrange for the purchase of necessary equipment for and on behalf of the Indian company and the Indian company would open a letter of credit therefor. Subsequently, it was found that it was difficult for the Indian company to immediately arrange for the necessary exchange. At the same time, it was realised that the delay in the purchase of plant, machinery and other equipment necessary for executing the contract work would adversely affect the interest of the Indian company. In the circumstances, an arrangement was reached whereby the assessee-company agreed to advance and/or make payment for the purchase of the plant, machinery and other equipment to be purchased by or on behalf of the Indian company to the foreign suppliers as and when necessary and charge interest on such payments at the rate of 9% per annum from the date of payments up to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee on behalf of SSJ is correct, did the Tribunal err in law in not even considering whether such advances could be treated as 'loans' so as to be comprised in the term 'money lent at interest' in section 9(1)(i) of the Income -tax Act ? 8. Whether the Tribunal's conclusion in its order dated November 22, 1974, in respect of the appeal heard in February 1974, that the interest paid by SSJ is assessable as income from money lent at interest and brought into India under section 9(1)(i) is based on surmises and conjectures and without consideration of the crucial issues which required determination ?" Initially, Shri Dastur, learned counsel for the assessee-company, sought to challenge the Tribunal's finding on the lines indicated in question No. 8 suggested by the assessee. However, after arguing at some length, he conceded that this court could proceed on the basis of the findings given by the Tribunal and he no longer proposed to challenge the findings. The findings given by the Tribunal as found in the statement of the case are as under : Pages 42 and 43 of the statement of case : (extracted from the Tribunal's appellate order, pages 120 and 121 of the paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and that interest was charged on the outstanding sale price of the machinery and plant so sold, the claim being based on the statement of invoices of the sale of plant and machinery at pages 213 to 221 of the paper book. However, it is considered desirable to refer to the assessee's letters dated February 27, 1957, and June 3, 1957, to the Indian company (pages 294 and 297 of the paper book), copy of the debit note 2-a of the assessee (pages 299 to 302 of the paper book) and the assessee's letter dated October 23, 1968, to the Income-tax Officer forwarding an extract from the Indian company's board resolution dated February 4, 1957 (pages 303 to 306 of the paper book), which was stated to be an agreement regarding interest payment. In our judgment, the aforesaid material fully justifies the Tribunal's conclusion that the assessee had not sold any machinery or plant to the Indian company as such. Further, it leads to the inevitable conclusion that the assessee had not merely arranged and/or facilitated the purchase of machinery and plant by the Indian company but had in fact made all payments to the foreign suppliers for the purchase of the machinery and plant and the payments or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruary 4, 1957." Extract from the resolution dated February 4, 1957. "The managing director informed the board that we have to decide the rate of interest on the amounts contributed by the participants in this company by way of loans and/or deposits. Resolved that interest at the rate of 9% per annum on loans or advances taken and/or advanced by the company from/to Shah Construction Co. Pvt. Ltd., to be paid with retrospective effect from the date as the loans or advances are received/or paid by the company." The letter clearly shows that interest is charged on the advance payments made by the assessee for the purchase of machinery and not for the delay in payment of sale price of the machinery. The letter discloses the names of the suppliers of the machinery and the dates on which the payments were made to them. If the assessee had in fact sold the machinery to the Indian company, there would have been no necessity of its giving the names of the suppliers and the dates of its payment to them. Again, the resolution of the board of the Indian company dated February 4, 1957, also authorises payment of interest on the amounts contributed to the Indian company by way of loans an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind or through the transfer of; a capital asset situate in India ; Explanation. - For the purpose of this clause -..." This clause brings within the ambit of the charging section income accruing or arising whether directly or indirectly in five situations. One such situation involved in this reference is "where income is accruing or arising, whether directly or indirectly, through or from any money lent at interest and brought into the taxable territories in cash or in kind". Admittedly, the situation contemplated herein is that the income arises outside India but by the statute, it is deemed to accrue or arise within the taxable territory. However, the deeming provision is not absolute It is applicable only if the conditions laid down therein are satisfied. On the face of it, this part of the clause can conveniently be divided into three parts, namely : (i) income accrues or arises, whether directly, or indirectly (ii) through or from any money lent at interest ; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd knowledge of the borrower and of the lender about the incident of bringing the money into India is an integral part of the transaction. The Supreme Court in CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 at page 614, also understood the Federal Court to say: "But all the learned judges agreed that the knowledge of the lender and the borrower that the money is to be taken into British India must be an integral part of the transaction. That is the ratio of the decision of the Federal Court with regard to the construction of section 42(1) of the Act." We will, therefore, proceed on the basis that the second and third parts of the clause are not really independent of each other. The first important judgment relied upon by Shri Dastur was that of the House of Lords in Potts' Executors v. IRC [1951] 1 All ER 76. The question involved in that case was whether the trustees of the settlement had paid any capital sum to the settlor within the meaning of section 40 of the Finance Act, 1938, the capital sum under that section meaning any sum paid by way of loan or repayment of loan. On the answer to the question depended the assessability of the capital sum paid as income in the ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question, it may be again stated, were made under an arrangement which existed prior to the date of the settlement and continued after the settlement between the company and the settlor. The nature of the arrangement had already been referred to in the earlier paragraph. The facts in the Chancery Division judgment in the case of Champagne Perrier-Jouet SA v. H. H. Finch Ltd. [1982] 3 All ER 713 were that a life director of the company, J, held about 10% of the equity shares of the company. He became greatly indebted to the company as a result of the payment by the company of his numerous bills on his behalf and also on account of supply of wine to a company controlled by him. It was held (headnote): "The defendant company had at no stage made a 'loan' to J within the meaning of regulation 10 of Part 1 of Table A in the 1948 Act since he had not been lent a sum of money but was simply indebted to the company in respect of the bills paid on his behalf and the stocks of wine passed over to a third party, I Ltd. Therefore, by virtue of regulation 11, the company had at all material times a lien over his shares and that lien took priority over the plaintiffs' equitable charge. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been a borrowing by K ; nor had there been a sale of foreign currency to K., and, therefore, the assigned indebtedness of K to T. V. was not affected by illegality under section 1(1) of the Exchange Control Act, 1947, nor prevented thereby from being the subject of set-off." The next judgment was of the Court of Appeal in Inland Revenue, Commissioners v. Rowntree and Co. Ltd. [1948] 1 All ER 482. The facts in that case were that in pursuance of arrangements covering a period of years, a company raised money for the purposes of its business by drawing sight bills, payable at four and six months, on an acceptance house, which accepted the bills in consideration of a commission paid to them by the company, and then, as agents for the company, discounted them in the market and remitted the proceeds to the company. Under the arrangement, the company was bound to put the acceptance house in funds shortly before the maturity dates of the respective bills. Money was raised in this way during the company's standard period. The Special Commissioners were of the opinion that the words "borrowed money" in para 2(1) should not be given a strained meaning and that in ordinary commercial usage, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilding contract with a building contractor. In terms of the agreement, the building contractor was to find money for the building and charge the building owner for the same interest at the rate of 9% per annum on the total amount discounted in advance. A question arose as to whether the money paid by the building contractor for the construction of the building was loan by him to the building owner. Rejecting the argument that, unless the money was given by the building contractor to the building owner as such it could not be loan, it was held that physical transfer of money was not necessary to constitute a loan. The relevant observations as found in the headnote are: "Ordinarily, in a building contract, the relationship of lender and borrower does not exist between the builder and the building owner. The parties to the contract may, however, so frame it as to create that relationship, e.g., where the builder agrees to find the money for the building and the building owner agrees to pay him interest on the money so found. If man finds money for another and expends it on that other's behalf and in accordance with his request, he is lending it although he never physically transfers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and partly by treating it as a loan. A question arose as to whether interest paid thereon was allowable as deduction under section 10(2)(iii) or under section 10(2)(xv) of the old Act. Holding that was not a case of capital borrowed, interest was held allowable under section 10(2)(xv). The court observed that an agreement cannot convert transaction into a loan, if factually it is not so. The decision in Shree Ram Mills Ltd.'s case [1953] 23 ITR 120 (SC), on the other hand, suggested that, by a proper agreement, unrealised managing commission can be converted into a loan. In that case, the managing agents had left their commission lying with the assessee. The question was whether the amount of commission so left was a loan. It was held that mere inaction on the part of the managing agents could not convert money due to them into a loan. In the case of Sri Meenakshi Mills Ltd., the Supreme Court made certain observations which speak for themselves. The observations are (at pages 615 and 616 of 63 ITR) : "It is well-established that in a matter of this description the income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contend that in every case where an unpaid vendor leaves the purchase money outstanding and agrees to accept it later with interest, the transaction amounts in substance to a loan. He said that the facts of each agreement had to be looked at to find out whether the agreement amounted in substance to a loan. Here, we have no other facts than those appearing on the face of the compromise decree and these facts do not, in our view, amount to an agreement to convert the outstanding purchase money into a loan by the vendor to the purchasers. All that we have here is an agreement by the vendor to accept payment of a portion of the moneys payable under the agreement for sale immediately and the balance in certain instalments and to be paid interest on the purchase money at the same rate which was provided in the agreement for sale." In view of the Privy Council decision in Beninson's case, AIR 1946 PC 145 and the Supreme Court decision in Radha Kissen Chamria's case, AIR 1957 SC 743, it appears clear to us that it is not always necessary that, in order to constitute "money lent", money must actually pass from the lender to the borrower. Depending upon the facts and circumstances in ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove. Before proceeding to consider the next contention, it may be desirable to briefly refer to the other decisions relied upon by Dr. Balasubramanian which are not germane to the issue in this case. The Madras High Court in CIT v. S. Ramsay Unger [1947] 15 ITR 87 was dealing with the question whether the money remaining as the testator's estate in the hands of the assessee as the executor, could be regarded as borrowed capital. It was held to, be so without discussion. The Privy Council decisions in CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 and Raja Raghunandan Prasad Singh v. CIT [1933] 1 ITR 113, the Rangoon High Court decision in the case of CIT v. P. L. S. M. Concern, Minhla [1934] 2 ITR 417, the Madras High Court decision in Chidambaram Chettiar v. CIT[1936] 4 ITR 309 and the Allahabad High Court decision in Seth Kishori Lal Babulal v. CIT [1963] 49 ITR 502, involved a question as to the purport and scope of the word "income" in the context of the well-known dictum that income can be received in cash or in kind. It was held in all these cases that the expression "in kind" included received in money's worth. The Madras High Court decision in K. SP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other equipment. In reply, Shri Dastur stated that Justice Roy, as he then was, undoubtedly had referred to the factual aspect of the matter, but this he gave as an additional reason. The fact is that whatever observations he made, he made them while respectfully agreeing with the judgment delivered by Mukharji J. Thus, the observations made in the course of the judgment by Mukharji J. were the observations of the Bench and not of Mukharji J. alone. On going through the judgment carefully, it appears clear to us that the judgment delivered by Mukharji J. is the judgment of the Bench as Roy J. has prefixed his judgment with these words : "K. L. Roy J.-While respectfully agreeing with the judgment delivered and the answers given by my Lord to the questions referred, I wish to add a few words of my own." This being the only judgment cited having a direct bearing on this aspect of the matter, it is only reasonable that the judgment is properly appreciated. In the context of the meaning of the expression "money in cash or in kind", this is what the court observed (at pages 127 and 128) : "What then is the meaning of the expression 'money in cash or in kind' ? In the broades ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that money is not only technical money in the technical sense but also money in all kinds of converted forms including goods, plant or machinery purchased or sold, so that all worldly goods can be seen as the alter ego of money. For taxing purposes, we have no hesitation to come to the conclusion that that is not the meaning which can be adopted for the expression 'in cash or in kind', in section 42(1) of the Income-tax Act." However, the observations made in the Calcutta decision in National and Grindlays Bank Ltd.'s case [1969] 72 ITR 121, about the concept of 'money brought into India in cash or in kind" are not independent of the facts of the case. In the first place, the Calcutta High Court noted that the Federal Court decision in Wadia (A. H.) v. CIT [1949] 17 ITR 63 held section 42(1) of the 1922 Act to be not ultra vires on the ground of being extra-territorial in operation for the reason that the nexus was the bringing of the money into India with the knowledge of the lender and borrower giving the real territorial connection. It further noted that, referring to the aforesaid Federal Court judgment, the Supreme Court, in the case of Sri Meenakshi Mills Ltd. [1967] 63 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act." Finding, however, that the facts in the case before it were different, the court further observed "But then these are not the facts in this case. It was a loan simpliciter, a bank giving a loan to an old customer. The whole transaction of the loan was in England. The head office and the registered office of the lender and the borrower were both in London. The money was advanced in London. The interest was payable in London. There was nothing else left of this money, or interest which can connect it with the taxable territory in India. We are unable to hold that in this case the electrical generator plant is 'money in kind' within the meaning of section 42(1) of the Income-tax Act." Shri Dastur is, thus, not quite correct in stating that the fact that plant and machinery in that case had been purchased and brought into India long before the money was borrowed was not a consideration that weighed with the court in coming to its conclusion (see underlined portion of quotation from the judgment at pages 133 and 134). Nor is Shri Dastur very correct in drawing from the Calcutta decision an absolute proposition that the expression "money brought to India in cash o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany nor even the copies of the originals of invoices which could have thrown some light as to the exact nature of the transactions were made available. The only relevant and important material available in the paper book is the assessee-company's letter dated October 23, 1968, to the Income-tax Officer in which an extract of the board's (Indian company) resolution No. 6 dated February 4, 1957, was referred to as an agreement between the parties. The said extract clearly and categorically refers to the Indian company's payment of interest on loan and advances by the assessee-company. This is also the view of the Kerala High Court in the case of CIT v. Lakshmi Lines Ltd. [1976] 102 ITR 196. In that case, an Indian company had purchased a ship from a non-resident company and agreed to pay the purchase price in instalments with interest on the unpaid purchase consideration. The Indian company had paid interest but had not deducted taxes under section 195 of the Income-tax Act, 1961. The claim for deduction in respect of interest was disallowed on the ground that the tax was not deducted from interest payments. The question that arose in that context was whether the payment of interes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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