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Reference Case No. 13 of 1964, decided on 30th November 1967.
S. 10(2)(iii) --‑ Business expenditure Assessee agent of non‑resident company‑Interest paid on capital borrowed in foreign country‑Capital not shown to have been utilised for purposes of "the business" of assessee Assessee, field, not entitled to deduction for interest paid on such capital.
Assessee company claimed that it had borrowed certain capital, by means of floating debentures for which interest had been paid in India and it therefore prayed that since the interest had been paid on the capital borrowed by it, the assessee should be entitled to deduction under section 10(2)(iii) of the Income‑tax Act, 1922:
Held, that this assertion does not take notice of the expression "the business" occurring in clause (iii) itself. Every capital borrowed by the assessee for which he might be, raving interest, would not entitle him to claim a deduction for the interest paid thereon by him. The capital borrowed must be a capital which was utilised "for the purposes of the business". The expression "the business" is significant. On this ground alone, it seems that the deduction is not permissible, for the money obtained by floating the debentures was not "the money lent at interest brought into Pakistan in cash or kind." It is, therefore, clear that the money has not been utilised for the purposes of "the business" of the Assessee, and as such he is not entitled to claim deduction under clause (iii) of subsection (2) of section 10.
The Howrah Trading Co. (Private.) Ltd. v. The Commissioner of Income‑tax, East Pakistan P L D 1963 S C 352 fol.
Md. Nurul Haque with Moksudur Rahman and M. Hasan for Appellant.
Afzalul Haque for Respondent.
Dates of hearing : 10th, 13th, 27th, 28th and 29th November 1967.
‑The following questions have been referred to us by the Income‑tax Appellate Tribunal, Dacca Bench, Dacca, for our opinion :‑
"1. Whether in the facts and circumstances of the case, the Darsana Branch of the assessee Company can be regarded as an agent of the non‑resident payee of the interest on the overdraft account who may be assessed under section 43.
2. Whether the interest payments on the debentures qualify for allowance under section 10(2) (iii) of the Income‑tax Act on the basis that . . . that the amount of the debentures does not in the facts and circumstances of the case, represent money lent at interest and brought into the taxable territories in terms of section 42 of the Income‑tax Act "
The facts insofar as they are necessary for determination of the questions referred to us are that the Assessee Company, Carew & Co. Ltd., Darsana, is a public limited Company having its registered office in Calcutta in India. The Company also carries on business at Darsana in Pakistan and during the assessment years 1949‑50 to 1955‑56, it claimed allowances in computing its profits or gains under clause (iii) of subsection (2) of section 10 of the Income‑tax Act (hereinafter called the Act') on account of the interest paid to the Imperial Bank of India for the accommodation granted to it by that Bank long before the independence. It is also claimed that the Assessee is entitled to such allowances for the interest paid on the debentures held by its creditors in India. The Income‑tax Officer rejected these claims for deductions for all the relevant seven assessment years.
On appeal, the Appellate Assistant Commissioner upheld the decision of the Income‑tax Officer. On further appeal the decision was confirmed by the Tribunal. The assessee there after prayed for reference of certain questions which arise out of the orders of the Tribunal. That prayer was also turned down. The Assessee then unsuccessfully invoked the aid of section 66(2) of Act and prayed for a direction to the Tribunal from this Court for stating and referring the questions which arise out of the order of the Tribunal. The assessee thereafter went on appeal to the Supreme Court and prayed for a direction to state the case and refer as many as five questions. The Supreme Court, however, reached the conclusion that there were questions of law and a direction for stating the case and referring certain questions was necessary. The Supreme Court then framed the questions set out above and asked this Court to direct the Tribunal for referring those questions. In compliance with the directions of this Court, the two questions quoted above, have been referred to us for our opinion.
It appears that the Assessee is a foreign company carrying on its business in Pakistan. Long before the Independence it borrowed certain amount of money from the Imperial Bank of India which granted it accommodation to enable to carry on its business. After partition of the Province of Bengal, the assessee carried on its business in Pakistan and utilised the accommodation granted to it by drawing money from the Dacca Branch of the said Bank. It has been noticed in the Judgment of the Supreme Court that in 1948, a part of the over draft limit, namely, a sum of 27 lakhs of rupees was transferred to the Dacca Branch of the Imperial Bank of India to be utilised in connection with the functioning of the distillary at Darsana.
It was, however, urged that the payment of interest has always been made directly by the Assessee to the Imperial Bank of India which is now called State Bank of India. It is, there fore, claimed by the Assessee that it was entitled to the benefit of deductions from its profits and gains on account of the interest paid by it on its overdraft account to the said Bank. The first question deals with this part of the Assessee's claim.
It may, however, be mentioned here that the amounts paid by way of interest could naturally vary from year to year. It would not be necessary to refer to the said amounts, for, the question would be as to whether or not the assessee was entitled to allowance under section 10 (2)(iii) of the Act.
Second question relates to the claim of the Assessee that it is entitled to deduction for the interest paid on the debentures held in Calcutta. Here the point made by the Revenue is that' there being no nexus between the money lent and the taxable territory where the amount was utilised and no knowledge being attributed to the debenture‑holders that the amount would be utilised for the purposes of the business of the Assessee such a claim is not maintainable.
Mr. Nurul Haq who appears for the assessee company submits that the first question as framed has to be answered in the negative. He appreciates that he cannot say that Darsana Branch of the assessee company can be regarded as an Agent of the non‑resident payee of the 'interest on the overdraft account who may be assessed under section 43 of the Act. The Assessee company is Carew Company Ltd. Its Darsana Branch is not a branch of the non‑resident payee of the interest on overdraft account, that is, Imperial Bank of India. The expression "non‑resident payee of the interest on overdraft account" refers in this case to the Imperial Bank of India and he says that he cannot submit that it can be answered in the affirmative. In view of the language employed in framing of the questions, he has conceded that it has to be answered in the negative.
Learned Advocate for the assessee has also submitted that this case does not come within the ambit of section 43. We have ourselves also found that there is no finding to the effect that the income‑tax Officer served a notice under section 43 treating the asaessee as an agent of the non‑resident Bank. Mr. Nurul Haq, therefore, rightly submits that section 43 has no application in this case.
He, however, prays that the question should be reframed to the effect as to whether or not a non‑resident payee of the interest on the overdraft account, namely, the Imperial Bank of, India had an agent in Pakistan. Mr. Afzalul Haq, learned Advocate for the Commissioner of Income‑tax, however, rightly points out that the question has been framed by the Supreme Court in view of the argument advanced by Mr. Fazlur Rahman, learned Advocate for the Assessee company. Mr. Afzalul Haq, therefore, urges that it is not even open to .him to mention about reframing this question. Be that as it may, we are ourselves of the opinion that the first question should be answered in the negative.
We are now concerned with the question as to whether or not the Assessee is entitled to a deduction under section 10 (2)(iii) of the Act for the interest paid on the debentures. The Tribunal in its order dated 17‑6‑60, has found that it is admitted that the debenture loan was floated after April 1938. It is also an admitted position that no payment of interest was made in Pakistan, nor tax payable on such interest has been deducted in Pakistan. That being so, the taxing authorities in Pakistan, claimed that the Assessee company was not entitled to any allowance as visualised in clause (iii) of subsection (2) of section 10 of the Act.
Mr. Nurul Haq, however, submits that in this case amount received by floating debentures is not "money lent at interest and, brought in 'Pakistan in cash or kind" as contemplated in section 42 of the Act. He, therefore, claims that the interest paid on such loan is allowable under section 10 (2)(iii) of the Income‑tax Act, and he prays that the question should be answered in the affirmative.
Mr. Afzalul Haque however, submits that by reason of the said clause (iii) no deduction should be allowed, for exemption can be claimed "in respect of the capital borrowed for the purpose of the business," and in support of his contention he places his reliance on a decision of the Supreme Court in the case of The Howrah Trading Co. (Private) Ltd. v. The Commissioner of Income‑tax East Pakistan (P L D 1963 S C 352) Mr. Haq submits that the Assessee would not be able to claim deduction for want of knowledge that the money borrowed would be utilised for the purposes of this business. In support of his argument he places reliance on the judgment of S. A. Rahman, J. in the aforesaid case.
Mr. Nurul Haq sought to distinguish the aforesaid case from the one before us only on one ground. His contention is that the assessee in that case was the lender company, whereas in the case before us, the Assessee company borrowed money from the debenture holders. It appears that the contention of Mr. Afzalul Haq is supported by the following observation by S. A. Rahman, J. in that case :‑
"if, therefore, the assessee in the present case, claims a deduction on account of the interest he has to pay to his creditors in India under this clause, he must at the same time, make a representation that the money was expressly borrowed for the very business which has given rise to the assessable income."
This observation was made in view of the provision of clause (iii) of subsection (2) of section 10 of the Act. We should at this stage set out subsections (1) and (2) as well as cause (iii) of section 10 of the Act, for; they would be necessary for discussion of the points involved in the case. They read as follows:
"10. (1) Subject to the provisions of this Act, the tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profits or gains of any business or vocation carried on by him.
(2) Subject to the provisions of this Act such profits or gains shall be computed after making the following allowances, namely,
(i)
(ii)
(iii) In respect of capital borrowed for the purpose of the business, profession or vocation the amount of the interest paid:
Provided that no allowance shall be made under this clause in any case for any interest chargeable under this Act which is payable without Pakistan not being interest on a loan issued for public subscription before the 1st day of April, 1938, except interest on which tax has been paid or from which tax has been deducted under section 18 or in respect of which there is an agent in Pakistan who may be assessed under section 43 or, in case of a firm for any interest paid to a partner of the firm.
We find that subsection (1) of the Section 10 provides that the tax is payable by the Assessee for the profits or gains of a business carried on by him. After having made that provision, it also laid down in subsection (2) that in computing such profits or gains certain allowances shall be made for matters contemplated in various clauses under the said subsection. We are in this case concerned with clause (iii) of subsection (2) of section 10. It appears that allowance is permissible under clause (iii) for the interest paid "in respect of capital borrowed for the purposes of the business, profession or vocation." The Assessee company claims that it has borrowed certain capital by means of floating debentures for which interest has been paid in India and it, therefore, prays that since the interest has been paid on the capital borrowed by it, the Assessee should be entitled to deduction under clause (iii) of subsection (2) of section 10. This assertion does not take notice of the expression "the business" occurring in clause (iii) itself. Every capital borrowed by the assessee for which he might be paying interest, would not entitled him to claim a deduction for the interest paid thereon by him. The capital borrowed must be a capital which was utilised "for the purposes of the business". The expression "the business" is significant. On this ground alone, it seems to me that the deduction is not permissible, for Mr. Nurul Haq had to say that the money obtained by floating the debentures was not "the money lent at interest brought into Pakistan in cash or kind." It is, therefore, clear that the money has not been utilised for the purposes of "the business" of the Assessee, and as such he is not entitled to claim deduction under clause (iii) of subsection (2) of section 10, and the passage quoted from the judgment of S. A. Rahman, J., clearly supports the contention of Mr. Haq.
Mr. Afzalul Haque also submits that the allowance is not permissible on another ground as well. That ground is that clause (iii) of, subsection (2) of section 10 is subject to sub‑section (3) of section 18 which, requires deduction of the tax at the source.
Subsection (3) of section 18 reads as follows :‑‑
"The person responsible for paying any income chargeable under the head "interest on securities" shall unless otherwise prescribed in the case of any security of the Central Govern ment, at the time of payment, deduct income‑tax on the amount of the interest payable at the maximum rate or the rate applicable to such amount, whichever is the greater."
It appears that subsection (3) of section 18 clearly lays down that a person responsible for paying any income chargeable under the head on "interest on securities" shall deduct income‑tax on the amount of interest at the rate indicated therein.
In this case assessee being responsible for paying the income, it was clearly a duty cast upon it by law to deduct the tax at the time of payment of interest so that it could pay the income -tax thereon. The assessee has to think itself if it has made payment contrary to law and its liability to make the payment ultimately does not thereby extinguish. But we have also to consider another argument of Mr. Nurul Huq in this behalf. His contention is that it would be a duty of the assessee to deduct tax at source if the income is chargeable under the Act.
Mr. Nurul Haque elaborates his argument by saying that by reason of section 42 of the Act this interest not being chargeable under this Act he was not entitled to make the deduction. Therefore, subsection (3) of section 18 which imposes the duty of deduction at the source does not apply to this case. In order to appreciate the argument of Mr. Nurul Huq; material part of Section 42 should be quoted here:
"All income, profits or gains accruing or arising whether directly or indirectly, through or from any business connection in Pakistan or through or from any esset or source of income in Pakistan or through or from, any money lent at interest and brought into Pakistan in cash or in kind, or through or from the sale, exchange or transfer of a capital asset in Pakistan shall be deemed to be income accruing or arising within Pakistan---------"
Mr. Nurul Huq's contention is that the Assessee company paid interest to its creditors in India who are debenture‑holders in this case and the payment was made outside Pakistan and as such the interest was not chargeable in Pakistan for, it cannot be said that the interest paid was on account of "money lent at interest and brought into Pakistan in cash or in kind." If the assessee would have deducted the tax in Pakistan, it would have acted contrary to law inasmuch as the said income of its creditors was, not an income earned by them in this country. He, therefore, lays emphasis on the expression "money lent at interest and brought into Pakistan in cash or in kind" occurring in section 42.
This contention of Mr. Nurul Huq is contrary to what he argued earlier. He submitted earlier that the assessee is entitled to deduction on account of payment of interest for the capital borrowed by the Assessee company "for the business" ; It is understood how he can now say that he is not required to deduct the tax for the amount was not brought into Pakistan for the business in question. If he is right in his present contention that it is not money lent at interest and brought into Pakistan in cash, then it was not the money utilised for the business and therefore his claim for deduction under Clause (iii) of sub section (2) of section 10 is untenable. In the case referred to above his lordship S. A. Rahman; J. considered this situation in the following terms:
"The Assessee,' in my opinion, therefore, finds itself on the horns of a dilemma. If it makes out that the capital in question was not expressly borrowed for investment in Pakistan, then clause (iii) of subsection (2) of section 10, cannot be invoked to its aid. If, on the contrary it is admitted that the capital brought into the country was in fact borrowed for investment here, then the income that might accrue to the creditors by way of interest on the money lent, would seem to be covered by the expression "money lent at interest and brought into Pakistan" occurring in section 42. It would, therefore, be income chargeable in this country to tax, within the meaning of the proviso to clause (iii) of subsection (2) of section 10 and consequently the provisions of Section 18 of the Act, would be attracted thereto. I find consequently that sections 10 and 42 of the Act and re‑act on each other. Unless, therefore, in such a case either the tax on the interest income which has accrued to the Indian creditors, has either been paid or deducted under section 18, the allowances claimed would not be admissible. So whichever way the case is looked at, the decision must go against the applicant."
We have no doubt that the observation quoted above fully applies to the facts of this case and the only distinction sought to be made by Mr. Nurul Haque on ground of the assessee in this case being a borrower and not a lender, is untenable.
His Lordship Kaikaus, J., also observed in the aforesaid case of Howrah Trading Co., as follows:
"Section 10 speaks of capital borrowed for the purposes of the business'. "The business" referred to in section 10(2)(iii) has reference to the business which is mentioned in section 10(1) and the profits and gains of which are liable to tax. The business the income from which is liable to tax is the business which is being carried on in Pakistan. Capital under section 10(2)(iii) can refer only to the capital which is being used in Pakistan. It has no reference to capital which is employed in some other country and the income from which is not liable to the payment of the Income‑tax in this country. In order that the assessee may be entitled to a deduction under section 10(2)(iii) the assessee will have to allege and to establish that the capital on which he has paid interest is capital' which he invested in Pakistan."
In accordance with the law laid down by their lordships of the Supreme Court, we are clearly of opinion, that this contention of Mr. Nurul Huq is of no substance.
The only other point raised by Mr. Nurul Huque is that these debentures were floated in India long before Independence of the country and the debenture‑holders had no knowledge whatsoever that the money would be utilised subsequently in a foreign country. This is no ground for non‑payment of the tax, for the money is being now earned in Pakistan. We are of opinion that this contention is devoid of substance, for we are concerned with the seven assessment orders passed after the Independence of the country in accordance with law as it exists to‑day. It is urged by the assessee that because there was one country at the time of floating debentures, they have no knowledge that the money would be utilised for this business. This argument only supports our conclusion reached earlier in the judgment that by reason of the language employed in clause (iii) of subsection (2) of Section 10, no deduction is permissible, money not being utilised for this business. It was clearly the duty of the Assessee to deduct the tax at source. The second question should also be answered in the negative.
For the reasons stated above, we answer both the questions in the negative.
The assessee will pay costs to the Respondents including the costs of Appeals to the Supreme Court in pursuance of the directions of their Lordships of the Supreme Court.
‑I agree:
A. Q. Reference answered in the negative.
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