P L D 1963 Supreme Court 352 (PLP)

S. A. RAHMAN, J.

I have had the advantage of seeing the s judgments proposed to be delivered in this case by my Lord the Chief Justice and by my brother Kaikaus. I was initially inclined to take the same view which has found favour with my Lord but, on further reflection, I have reached the conclusion that the judgment of the High Court in this case must be upheld, though for reasons somewhat different from those that prevailed with the learned Judges. The facts of the case are well‑settled and may be briefly summarized. The appellant is a limited company incorporated in India with its head office at Calcutta. On its own showing, it carries on money‑lending business. It receives deposits at interest from various creditors in India and out of the financial pool thus created it finances projects of others. In the instant case, we are concerned with advances made on interest by the appellant Company to the North Bengal Sugar Mills Ltd., and the Setabganj Sugar Mills Ltd., which acc also Indian companies but which have their business in Pakistan in the shape of two sugar factories. The money lent was utilized in these sugar factories and earned interest for the Howrah Trading Co. (Private) Ltd. The liability to income‑tax, in Pakistan, on the interest earned here, is not denied by the appellant. This income clearly fall within the purview of section 42 of the Income‑tax Act (hereinafter referred to as the Act). Money was lent by the appellant at interest and brought into the taxable territories and consequently the income that accrued on the advance, must be deemed to be income accruing or arising within the taxable territories, within the meaning of the section. The appellant claimed that it was entitled to deduct interest which it had to pay to its own creditors in India, from the taxable income that accrued to it here, under clause (iii) of subsection (2) of section 10 of the Act. This claim was disallowed by the Income‑tax Officer on the ground that the assessee had not complied with the proviso to this provision, in so far as it had failed to deduct the income‑tax due on the interest payable to its own creditors in India, under section 18 of the Act and the tax on that interest income had admittedly not been paid. The appellant's Indian creditors have no partner or agent in Pakistan. On appeal, the decision was reversed by an Assistant Commis sioner and his view was upheld by the Income‑tax Appellate Tribunal. On a reference made under section 66 of the Act, however, the High Court at Dacca decided against the assessee. The question referred to the High Court was couched in the following terms :‑ "Whether in the facts and circumstances of the case M/s. Howrah Trading Co. (Private) Ltd., is entitled to claim as a deduction under section 10 (2) (iii) of the Income‑tax Act from its income in Pakistan Rs. 48,637 for the assessment year 1950‑51 and Rs. 1,34,420 for the year 1951‑52 without deducting tax therefrom at source under the provisions of section 18(3‑A), now 18 (3‑B) of the Income‑tax Act," The answer returned to the question was in the negative. A certificate for appeal to this Court was, however, granted, in view of the valuation of the subject‑matter and the reason that a substantial question of law as to the interpretation of the provisions of the Income‑tax Act, arose in the case. The provisions of the Act so far as they are relevant to the instant case, are set out below: "Section 10.‑(1) 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, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely: . (iii) in respect of capital borrowed for the purposes 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 pay able 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 the case of a firm, for any interest paid to a partner of the firm." "Section 18 (3‑B).

‑Any person responsible for paying to a person not resident in Pakistan any sum not being "Interest on securities" charge-able under the provisions of this Act, shall at the time of payment, unless he is himself liable to pay, any income‑tax and super‑tax thereon as an agent, deduct in case of a company, income‑tax at the maximum rate and the super‑tax at the rate applicable to a company and in other cases, tax in accordance with the provision of subsection (1) of section 17 :" "Section 42.--‑(1) 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 property in Pakistan or through or from any asset 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 . . . . . ." On behalf of the appellant, Mr. Meyer laid stress on the words "chargeable under this Act" occurring in the proviso to clause (iii) subsection (2) of section 10 of the Act and contended that the transactions between the appellant and its own creditors in India having taken place and been completed beyond the territory of this country and the interest being payable to those creditors in India itself, that interest was not chargeable to tax in Pakistan. It is argued that there would be no nexus between that income of the creditor, in India and the tax laws of this country. On the authority of two decisions from the Indian jurisdiction reported as "A. H. Wadia v. Income‑tax Commissioner (A I R 1949 F C 18) and Porbander State Bank v. Income‑tax Commissioner (A I R 1950 Bom. 220) it was urged that the expression "money lent at interest and brought into Pakistan" occurring in section 42 of the Act, must be interpreted to apply only to one composite transaction of lending the money and bringing it into Pakistan, so as to fix the creditor with the knowledge of the venue of investment of the money. If section 42 of the Act is interpreted according to its tenor, it is suggested that it will have an extra‑territorial effect against the principles of inter national law and to that extent the section would become void. The two Indian decisions have been fully analysed in the judgment of my Lord the Chief Justice. If I might say so, with respect, I agree with that analysis. As has been pointed out in that judgment, in both the Indian decisions on the facts, the nexus or connection between the creditor who actually advanced the money for investment in India, with the tax laws of that country, was clearly established, as the advances were made with the consciousness as to where they would be invested. The decision in the Commissioner of Income‑tax Karachi v The Nether-land Trading Society (P L D 1957 Kar. 167) appears to turn on a similar situation. The High Court has expressed the opinion that in cases coming under subsection (P L D 1957 Kar. 167) of section 42 of the Act, a nexus or connection is established between the taxable territories and the person who lent the money at interest, by reason of the fact simpliciter that the source of income is in the taxable territories. I agree with the comment of my Lord that this proposition is too widely stated. Such a view, if adopted, would bring within the purview of the Pakistan tax laws, income pertaining to a series of transactions that preceded the actual advance to a borrower who brings money for investment into Pakistan. Every such previous transaction need not necessarily be within the taxing provisions and such an inference would not probably be in conformity with the intention of the Legislature. I might observe that there is a presumption against any intention to frame a statute so as to contravene a rule of international law, which contemplates that the income of a foreigner should not be subjected to the tax laws of the country, without there being some link between him and that income or those laws. But this is a mere presumption and if the words of the statute are clear, mere regard for the comity of nations, would not justify the Municipal Courts in refusing to give effect to id Reference in this connection may be made to Cries on "Statute Law" Fifth Ed. pp. 430 and 435 and Halsbury: "Laws of England" Vol. 36, Third Ed. p. 414, para. 629 and the judgment of the House of Lords reported as Theophile v. Solicitor‑General (1950 A C 186, 195). But section 42 of the Act has to receive a construction which would be effective and it should not be held to include within its ambit persons or incomes beyond the reach of the Courts in Pakistan. I accept the dictum of my Lord the Chief Justice that order to make income arising within the taxable territories out of borrowed money which has been brought here, chargeable to income‑tax, it is necessary that it should be the very money that has been lent, which should be brought into the taxable territories. But, I find it difficult to go further and held that the words "money lent and brought" occurring in section 42 of u the Act, cannot be construed to cover more than one transaction of loan in respect of the same money taking place outside Pakistan, followed by a bringing into Pakistan. I venture to think the result may yet depend on the special facts and circum stances of each case. The creditors of the appellant in India are not before us as assessees in this case. Strictly speaking, therefore, whatever defence might be open to those creditors if they were called upon to pay tax in this country on the interest income earned by them on advances made to the appellant, the question under con sideration in the instant case has to be looked at from the point of view of the appellant alone, with reference to section 10 of the Act. If we carefully consider the provisions of that section, we find that deduction of the amount of the interest payable on borrowed capital, is only to be allowed "in respect of capital borrowed for the purposes of the business, profession or vocation" as is clear from clause (iii) of subsection (2) thereof. If, there fore, 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. If he contends as he has done in the present case, that it has brought its own, money out of a financial pool which it holds in India, without expressly borrowing from its creditors for its venture in Pakistan, then the condition of eligibility for the allowance would not be satisfied and he would be disentitled to such an allowance. 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) O of subsection (2) of section 10 and consequently the provisions of section 18 of the Act, would be attracted thereto. I find p consequently that sections 10 and 42 of the Act 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 appellant. In my humble judgment, therefore, the appeal fails and ought to be dismissed. B. Z. KAIKAUS, J.‑--The facts of this case have been stated in the judgment of my Lord the Chief Justice and I will refer to them only to the extent that is necessary for the purpose of my own discussion. The Howrah Trading Company, the appellant before us, is a private limited Company incorporated in India. Its head office is in Calcutta. It has no branch at all in Pakistan. It carries on inter alia the business of lending money. It advanced in India by way of loan certain sums of money to two Mills operating in Pakistan, the North Bengal Sugar Mills Limited and Setabganj Sugar Mills Limited. This money is said to have come out of a common pool created by adding borrowed capital to the capital of the appellant. The year in which these loans were advanced to the Mills does not appear from the record though it has been stated by the appellant that the amount of these loans remained constant while the borrowings of the appellant had changed from year to year. For the assessment year 1950‑51 it filed a return in Pakistan and claimed a deduction on account of the interest it had paid to its own creditors in India. The only question for decision in this appeal is whether the deduction could have been claimed. This deduction is claimed under section 10 (2) of the Income‑tax Act. The relevant portion of section 10 runs as below: "10 (1) The tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profit or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances namely :‑ (iii) in respect of capital borrowed for the purposes 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 the taxable territories, 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 the taxable territories who may be assessed under section 43 or, in the case of a firm, for any interest paid to a partner of the firm ; The interest was in this case payable without the taxable territories. Admittedly income‑tax on this interest was neither deducted nor paid. The contention on behalf of the appellant is that this interest was not "chargeable under this Act" and, therefore, is not hit by the proviso to section

10. In order that interest may be chargeable under the Income‑tax Act, it should be income arising or accruing in Pakistan. As the loans had been advanced to the appellant by its creditors in India, ordinarily the accrual of this income would be in India. It has been held, however, to accrue or arise in Pakistan on account of section 42 of the Income‑tax Act, the relevant portion of which runs :‑ "42 (1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories, or through or from any property in the taxable territories, or through or from any asset or source of income in the taxable territories, or through or from any money lent at interest and brought into the taxable territories in cash or in kind or through or from the sale, exchange or transfer of a capital asset in the taxable territories, shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories shall be chargeable to income‑tax either in his name or in the name of his agent, and in the later case such agent shall be deemed to be, for all the purposes of this Act, the , assessee in respect of such income‑tax : The contentions of the appellant before us are :-- (i) that the money which had been borrowed by the appellant from its creditors in India had not been brought into Pakistan at all and, therefore, section 42 does not apply ; (ii) that even if the money was brought into Pakistan, the relevant provision in section 42 as it stands is ultra vires of the Legislature on account of its extra‑territorial operation and that we should import into the provision the requirement of knowledge on the part of the lender that the money was to be used in Pakistan, in order to render it intra vires. During the course of the argument another question arose as to whether the relevant provision related to only one transaction of lending and borrowing. It appears to me that the first ground taken by learned counsel is based on a fact which though it would exclude the operation of section 42 would otherwise debar the appellant from claiming deduction under section 10 (2). That fact is that the money which the appellant borrowed from its creditors was never brought into Pakistan. This means that the money which the appellant lent to the two mills has not been borrowed by the appellant from its creditors. Although in the earlier part of his concise statement the appellant had stated that a pool had been created of the money which it borrowed and the money lent to the Mill was out of this pool in the latter part of the concise statement and in the argument before us learned counsel for the appellant took up the position that the money invested in Pakistan was not the money borrowed by the appellant from its creditors. If the money which the appellant lent to the two Mills and from which he has received income as interest was not money which was borrowed by the appellant from its creditors the appellant is not entitled to claim any deduction for the interest which he had paid in India. In Pakistan the appellant could claim a deduction only for payment of interest on the money from which the appellant is receiving income in Pakistan. If the money which the appellant borrowed has not been brought into Pakistan and the interest for which he claims a deduction is not interest paid on the very money from which he receives income in Pakistan the appellant is not entitled to claim that the interest he has paid should be deducted from his income in Pakistan. When confronted with this learned counsel for the appellant argued that the right of deduction does not arise from the fact that the particular capital which is being invested in Pakistan is borrowed capital and on it interest is being paid, but from the fact that the assessee is paying interest on some borrowed capital, wherever that capital may be invested. He contended that the only requirement of section 10 for a claim to deduction was the payment of interest on borrowed capital. When questioned as to whether the acceptance of his contention would not lead to absured results, for if the company had invested crores of rupees in India and it had invested only a lac of rupees in Pakistan the whole interest which it had paid on the borrowed capital would have to be deducted from its income in Pakistan, learned counsel replied that there should be a deduction of proportionate amount of interest in accordance with the proportions of the capitals invested in India and Pakistan. When it was pointed out to learned counsel that section 10 did not contain any reference to any proportion and the appellant would be entitled on his interpretation to the deduction of the whole of the interest, learned counsel replied that he was only making a concession and that in fact the appellant was entitled to a deduction of the whole of the interest in accordance with section

10. There can be little doubt that the contention put forward by learned counsel is without force. A look at section 10 will make the matter clear. 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 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. Not only has there been in this case no such allegation and proof but on a perusal of the concise statement I find a consistent case put forward on behalf of the appellant that the money it borrowed had not been brought into Pakistan. In the concise statement it was said "It is, therefore, submitted that the money which was lint by the creditors to the appellant cannot come within the ambit of "money lent and brought into Pakistan" since the very money which was actually lent by the creditors was not brought into Pakistan, nor was money brought into Pakistan either by the creditors or by the appellant. The words of section 42 (1) may cover the moneys lent by the appellant to the Sugar Mills, but not the moneys lent to the appellant by the Indian creditors. It is submitted that in any event in view of the facts of the case (as set out in paragraph 3 herein) the respondent has failed to discharge the burden which lay upon him to show that the very money borrowed by the appellant from any of the creditors was brought into Pakistan." Another passage said: "nor was the very money which was lent to the appellant by any of the creditors brought into Pakistan." In the face of the position taken up by the appellant I do not see how it can claim a deduction. As already observed, if a person wants a deduction for interest he must allege that on that very capital income which was being taxed he had paid interest, Here the appellant did not even disclose the year in which the loan was advanced to the Mills. The reply which the appellant gave to the objection that while it borrowed at 4% it lent to the Mills at 3% shows that the advance to the mills was probably long before the account year. That reply was that as the financial condition of the Mills was such that they would not be able to pay back even the principal much less than interest, the appellant was forced to charge interest at 3%. If the account year was the first year in which the loan was advanced this argument could not have been put forward. Instead of itself alleging and proving that it had paid interest on the very capital employed in Pakistan the appellant has taken up a position inconsistent with such an allegation and I would dismiss the appeal on this simple ground. As regards the second contention of the appellant it is not for the Municipal Courts of a country to hold legislation to be ultra vires on the ground of its extra‑territorial operation. I would respectfully agree with the Chief Justice that the objection as to extra‑territorial operation is irrelevant and that section 42 is to be interpreted according to its tenor irrespective of the existence of knowledge or nexus. I proceed now to consider the intention of the Legislature behind the words it has used in section

42. The proposition put forward is that "money lent and brought into Pakistan" refers only to one step in the chain of lenders and borrowers, that is, if "A" lends money to "B" and "B" to "C" and "C" brings the money in Pakistan then the interest paid by "C" to "B" is interest on money lent and brought into Pakistan but the interest payable by "B" to "A" is not within section

42. In the words used in section 42 there is no such limitation but it is argued that the only other interpretation is to apply the provision to the whole chain of lenders and borrowers whatever their number and this could not possibly be the intention. This interpretation which introduces a limitation into what are apparently wide words may appeal to one at first sight, but should not do so if the whole consequences of its acceptance are considered for it will render this provision in section 42 as of no effect whatsoever. If section 42 applies only to the last step in the chain of lenders and borrowers no income‑tax need ever be paid on the interest which foreign capital earns in Pakistan. A simple example will clarify the matter. "A" lends one lac of rupees at a place outside Pakistan, to "B" at 4 per cent and "B" lends the same amount to "C" on the same interest. "C" brings the money in Pakistan and uses it as capital. "C" claims and gets a deduction for the interest it has paid to "B" on this one lac of rupees. "C" even deducts the income‑tax payable on this amount of interest by "B". But then "B" files a return showing that he has no income at all because he borrowed at 4% and lent at 4 per cent and "B" gets back the income‑tax deducted by "C". Pakistan does not therefore get the benefit of income‑tax on the interest on foreign capital invested in Pakistan. If the capital was on the other hand Pakistani capital income‑tax would be paid on it however long the chain of borrowers and lenders. It will be said that this reasoning will apply only to a case where there is more than one borrower. That is so but let this be clear in the first place that in all cases where there is not just one lender and one borrower, but a chain of borrowers even if that chain be of two persons only the interest on capital would not be liable to the payment of any income‑tax. Now, if in the case of more than one borrower tax is not to be paid there could be no difficulty in the way of creating one more borrower. If "A" wants to lend money to "B" for use in Pakistan "A" will first lend to "X" and "X" will lend to "B" and by this simple device foreign capital will be immuned from tax. Lawful devices are always permitted. There will be a genuine deal between "A" and "X". So far as investment in Pakistan of capital lent by foreign banks is concerned it will never be liable to payment of income‑tax because the banks lend money already lent to them by some person and the position will be as I have explained above when "A" lends to "B" and "B" to "C". Learned counsel for the appellant has not been able to cite any authority for the proposition that this provision should apply to only one lender and one borrower. In fact the judgments which he relied upon on the question of nexus and which lay down that knowledge of lender as to the use of the money in the taxable territories is necessary would appear to support the imposition of tax even on more than one lender. If "A" lent money to "B" and "B" lent the same to "C" who brought it into the taxable territories then if both "A" and "B" knew that the money was being taken into taxable territories both would be liable for payment of income‑tax. But in any case there are only two alternatives before us. Either we render this part of section 42 useless or we interpret the words as they are. It is to be remembered that the words R are very wide and apply to the whole chain of lenders and borrowers and a limitation is being introduced because otherwise, it is said, the words will lead to unreasonable results. Can we indulge in such a process when we will thereby render the provision useless ? Can we impute an intention to the Legis lature of producing the results which I have indicated? There is another aspect of the matter. Referring to the words used in section 42 the Chief Justice has said "what the words say is also plain namely that income earned by money in Pakistan which was brought in by a borrower from outside Pakistan shall not reach the lender untaxed". So if the borrower brings the money into Pakistan then income‑tax is leviable on the interest which he pays. Two points arise here for consideration. If the appellant had itself brought the money into Pakistan and had then advanced it to the Mills obviously the interest which it paid to its creditors would in accordance with what is laid down by the Chief Justice be subject to income‑tax. Should it make any difference if instead of first bringing the money into Pakistan and then lending it to the Mills the appellant lent it to the Mills outside Pakistan? In either case the appellant would be himself investing the money in Pakistan. The fact that the borrower has instead of investing the money in industry invested it in a money lending business should make no difference. The borrower is making an income by investment and therefore interest on the capital he has invested is liable to payment of tax. We may remember that the appellant company is managed exclusively by two directors who are also the managing partners of Soorajmull Nagarmull, the managing agents of the Mills. On account of this close connection between the appellant and the Mills we can say that the appellant itself was bringing the money into Pakistan when it lent the money to the Mills. In any case having full knowledge of what was to happen to this money it is obvious that the borrower, that is the appellant, was deliberately investing it in Pakistan and if in Pakistan the investment (by way of lending to the Mills) earned income, then interest on the capital invested shall be liable to the payment of tax. The important point to be kept in mind is that the money lent by the creditors of the appellant is creating income in Pakistan. It makes no difference that it is creating income by being lent. If the appellant had invested it in Pakistan in some other way, interest on it would be liable to payment of tax and the form of investment should make no difference. I would dismiss this appeal but would leave the parties to bear their own costs. In accordance with the view of the majority, the appeal is dismissed and the paries are left to bear their own costs throughout. A. H. Appeal dismissed.