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TMI Blog1986 (9) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... ates of the assessee in India known as Bhamun, Hesam, Hingrijan, Khowang and Tinkong Estates; (b) The consideration for the said sale would be, subject to adjustment as provided, a sum of 6,77,000 pounds. (c) The said consideration of 6,77,000 pounds would be satisfied to the extent of 4,77,000 by the issue to the assessee of 4,77,000 pounds ordinary shares of I each of the increased capital of the subsidiary credited as fully paid-up at par and 2,00,000 pounds by the issue to the assessee of fully paid-up redeemable Unsecured loan stock of the subsidiary of 2,00,000 pounds bearing interest at the rate of 6% per annum. (d) The said consideration would be subject to adjustment in respect of items mentioned in Part III of the Schedule to the said agreement according to the amounts of such items in the books of account as if the date of sale and such adjustment would be effected by payment in cash by the parties inter se as required. Pursuant to the aforesaid, the assessee transferred and conveyed to the subsidiary the said tea estates and the subsidiary issued to the assessee shares of the former as agreed. The subsidiary also issued in favour of the assessee, the said redeem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the income of the assessee arising out of the interest payable on the unsecured redeemable loan stock was not assessable under section 9(1)(i) of the Income-tax Act, 1961 Following the said decision of the Tribunal, the Appellate Assistant Commissioner allowed the appeals of the assessee against the subsequent assessments. Being aggrieved, the Revenue preferred a further appeal before the Income-tax Appellate Tribunal against the order of the Appellate Assistant Commissioner. The Tribunal followed its earlier order in the case of the assessee in respect of the earlier assessment years and dismissed the appeals of the Revenue. The Tribunal noted that no fresh materials had been brought to light in the subsequent assessment years. On an application of the Revenue under section 256(1) of the Income-tax Act, 1961, the following question has been referred by the Tribunal, as a question of law arising out of its order, for the opinion of this court : " Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the agreement dated April 1, 1957, the Tribunal was right in holding that the interest on unsecured loan stock was not covered by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be payable. The Tribunal considered and construed the agreement dated April 1, 1957, on the basis of which transactions were had between the assessee and its subsidiary. The Tribunal also noted the relevant terms of the instrument dated April 16, 1957, executed by the subsidiary for the purpose of issue of the loan stock. Following the decision of the Supreme Court in CIT v. R. R. Ramakrishna Pillai [1967] 66 ITR 725, the Tribunal held that the transaction between the assessee and its subsidiary comprised of two transactions, the first being the sale of the tea estates and the second being the transactions regarding the satisfaction of the liability to pay the consideration. The Tribunal held that the issue of the said loan stock to the assessee by its subsidiary had to be considered as a separate transaction. The Tribunal held further that there was no dispute that the first transaction, viz., the sale of the tea estates by the assessee to its subsidiary, had been established. It was further established that the payment and receipt of interest against the loan stock were in England. The Tribunal noted that under the terms and conditions on which the loan stock was issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia (i) all income accruing or arising, whether directly or indirectly, through or from any business 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." Learned advocate submitted that the facts found in the instant case brought the assessee squarely within the mischief of section 9 of the Act of 1961. It was submitted that the interest had accrued to the assessee through its business connection in India. Such business connection was by and between the assessee and its subsidiary who were closely associated and the subsidiary was admittedly doing business in India by running the tea estates. The said tea estates could be held to be under the control of the assessee through its subsidiary. Learned advocate next submitted that interest had accrued or arisen in favour of the assessee through the tea estates which were properties situated in India. The said properties were also the source from which interest accrued to the assessee and such source was in India. He s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Malay. A loan was advanced by the Malay branch of the bank registered in the Indian State to the Malay branch of the bank registered in British India. The Malay branch of the bank registered in British India lent the amount so received from the other bank at Malay to its Rangoon branch. The bank registered in British India was assessed under section 42 of the Indian Income-tax Act, 1922, as an agent of the bank registered in the Indian State in respect of the interest received by the latter on the loans advanced to the bank registered in British India. The assessment was affirmed by the Privy Council and it was held that the bank registered in the Indian State had a business connection with the bank registered in British India in the relevant assessment years and that profits and gains accrued to the bank registered in the Indian State directly or indirectly through such business connection even though the loans were made and were to be repaid in Malay outside British India. (c) Caltex (India) Ltd. v. CIT [1952] 21 ITR 278 (Bom). In this case, the assessee, incorporated outside India, dealt in petroleum products and sold its products in India. Another company, also a non-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the price. It was not in dispute that sale of the tea estates by the assessee to its subsidiary had taken place and it was also found that the consideration for the said sale has been agreed to be satisfied by the subsidiary partly by issue of shares and the balance by issue of unsecured redeemable loan stock. The subsidiary has undertaken the liability to redeem the said loan stock ultimately and to pay 6% interest till redemption. Learned advocate for the assessee relied on the further facts found by the Tribunal, namely (a) Both the assessee and its subsidiary were incorporated in the United Kingdom. (b) The payment and receipt of interest were both in England. (c) The liability of the subsidiary to pay interest under the loan stock was absolute and without any reference to any profit being made by the subsidiary out of the tea estates in India. The said loan stock was transferable and the liability to pay interest thereon would remain whether the tea estates continued to be owned by the subsidiary or otherwise. Learned advocate, therefore, contended that there was no basis for holding that the interest payable on the said loan stock arose through or from any propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility to pay interest arose under the said loan stock and had nothing to do with the transfer of the tea estates which were the subject-matter of a separate transaction. The source of the interest was the loan stock and not the tea estate or the transfer thereof and, therefore, interest arising from the loan stock cannot be deemed to accrue or arise through the transfer of a capital asset in India. In support of his contentions, learned advocate for the assessee cited the following decisions : (a) CIT v. Currimbhoy Ebrahim Sons Ltd. [1935] 3 ITR 395 (PC). In this case, the assessee who carried on business in Bombay obtained loan of rupees fifty lakhs from the Nizam of Hyderabad. The assessee undertook to pay interest on such loan at Hyderabad and repay the principal amount in five years. The assessee furnished security in favour of the Nizam consisting of shares in joint stock companies and immovable properties in India. The mortgage of the immovable properties was effected by deposit of title deeds. The Nizam was entitled to appoint one or more representatives to look after and protect his interest in the securities and the assessee agreed to pay the remuneration of such repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 725 (SC). This decision of the Supreme court was cited for the following observations (p. 729): " A person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to the transferor. In that case, there are in truth two transactions one a transaction of sale and the other a contract under which shares are accepted in satisfaction of the liability to pay the price. " (d) CIT v. National Grindlays Bank Ltd. [1969] 72 ITR 121 (Cal). In this case, the Calcutta Electric Supply Corporation, to meet its liability incurred in connection with the building of a generating station in Calcutta, repayable within 18 months, obtained a temporary financial accommodation from the National Grindlays Bank Ltd. by way of an overdraft. The bank was sought to be assessed on the interest received from the Corporation in the relevant assessment years. It was contended that pursuant to the said loan, money had been brought into India in kind in the shape of machinery and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd. v. ITO [1971] 81 ITR 699 (Cal); Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) ; VDO Tachometer Werke v. CIT [1979] 117 ITR 804 (Kar) and CIT v. Fried Krupp Industries [1981] 128 ITR 27 (Mad). The said decisions do not Jay down any new or further principles and need not, therefore, be considered. First to be considered is whether the interest which is being paid by the subsidiary to the assessee against, the said loan stock is an income accruing or arising to the assessee through or from any business connection in India. It has not been found that the assessee is carrying on any business in India whatsoever. Previously, the assessee owned and ran the tea estates but the same have been transferred to the subsidiary and in the relevant assessment years the same were owned and run by the subsidiary and not by the assessee which is an entity separate and distinct from the subsidiary. Even otherwise, it has not been found as a fact that the assessee has undertaken any activity in the taxable territory in India in the course of its business. That there is no continuity of any business of the assessee in the hands of the subsidiary had also been established. Therefore, following ..... X X X X Extracts X X X X X X X X Extracts X X X X
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