P L D 1957 (W (PLP)

CONSTANTINE, J.

We have before us a case stated by the Income-tax Appellate Tribunal referring two questions of law for our decision. The assessee is the Netherlands Trading Society, which has its head office in Holland, and had various branches at different places in various countries, including two branches in Pakistan, at Karachi and Chittagong. The assessment year is 1951-52. The first question, which was referred at the instance of the Commissioner of Income-tax, is "whether the amount of Rs. 15,556 paid as contribution by the assessee to the pension fund maintained for the European staff was rightly admitted to deduction on the footing that section 10 (4) (c) was not applicable to the facts of the present case". The Tribunal has stated, "The facts connected with the question are very simple. The pension fund is maintained by the company in Amsterdam and it is governed by an irrevocable trust. The European employees had to make certain contributions to the fund whereas the company on its part made its own contribution for securing pension to the retired European employees of the Bank. The pension is payable in Guilders in Amsterdam at the time 'of retirement". The Tribunal then quoted regulations showing that pensions were payable monthly to retired employees and to widows and children of retired employees. The Income-tax authorities refused to make an allowance under section 10 (2) (xv) on the ground that the allowance was prohibited by section 10 (4) (c). This latter subsection prohibits an allowance in respect of the payment to a provi dent or other fund established for the benefit of employees unless the employer has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are taxable under the head "salaries". It is common ground that the assessee has not made any effective arrangement to secure that tax shall be deducted at source. The Tribunal held that section 10 (4) (c) does not apply to a case where the pension fund is maintained outside Pakistan and payments will be made in Guilders in a foreign country, and where consequently the recipient will not be taxable under the Income-tax Act. The Tribunal stated in its Appellate Order that "The pension fund maintained at Amsterdam is outside the scope of the Pakistan Income-tax Act and any payment out of this pension fund is not liable to be assessed under section 7 unless the non-resident makes arrangements to get the pension remitted to him in Pakistan". The Tribunal has in our opinion made a presumption that the likelihood of any payment from pension fund being liable to tax under the Income-tax Act is so remote as to be negli gible, and we think that this is a presumption of fact which we cannot dispute. The reasoning underlying the Tribunal's conclusion, therefore, is that since there will be no payments liable to tax, it is superfluous and unnecessary to make any arrangement to provide for payment of such tax, and that since the danger against which the prohibition guards does not exist, the prohibition does not apply. We agree Cessante ratione legis, ipsa lex cessat. The second question, referred at the instance of the assessee, is as follows: "Whether, in the circumstances of the case and on the facts found by the Tribunal the sum of Rs. 1,02,938 paid as interest by the assessee, the Netherlands Trading Society, Karachi, to the Bank at Amsterdam, was rightly disallowed by virtue of the provisions contained in the proviso to section 10 (2) (iii) read with section 18 (3-A) of the Act". The Branches in Pakistan have shown in their accounts sums remitted to the head office as interest upon sums advanced to the branches by the head office. It was contended by the assessee that interest is not payable by the branch to the head office since both the branch and the head office are parts of the same legal person and there cannot be any relation of creditor and debtor between the same person. They, there fore, argued that these sums shown as interest remitted to the head office were really interest payable to the depositors in Holland. The assessee therefore relied upon the judgment of the Bombay High Court in Forbandar State Bank v. Commissioner of Income-tax Bombay (181 T R134), which follows the judgment of the Federal Court of India in A. H. Wadia v. Commissioner of Income-tax (171 TR63). The Federal Court was considering section 42, the material portion of which is as follows: "All income profits or gains accruing or arising through or from any money lent at interest and brought into British India in cash or kind shall be deemed, to be income accruing or arising within British India". This section has to be considered in relation to section 10 (2) (iii) and its proviso. An allowance is to be made in respect of capital borrowed for purposes of the business for the amount of the interest paid, provided that no allowance shall be made in any case for any interest chargeable under this Act which is payable without British India, except interest on which tag has been paid or from which tax has been deducted under section 18 etc. Section 42 was assailed in the Federal Court on the ground that it was ultra vires of the Legislature. The Federal Court quoted the decision of their Lordships of the Privy Council in Wallace Brothers Co., Ltd. v. Commissioner of Income-tax ((1948) F C R 1: 16 I T R 240) "The resulting general conception as to the scope of Income-tax is that, given a sufficient territorial connection between the person sought to be charged and the country seeking to tax him, income-tax may properly extend to that person in respect of his foreign income . . . . . The result is that the validity of the legislation in question depends on the sufficiency, for the purpose for which it is used, of the territorial connection set forth in the impugned portion of the statutory test. Their Lordships propose to confine themselves to that short point and do not propose to lay down any general formula defining what territorial connec tion is necessary". Kanya, C. J. in the case in the Federal Court held that because the lender knew that the money was going to be, brought into British India, a sufficient territorial connection had been, established. In that case knowledge of the lender was clear. The learned Chief Justice of Bombay held that this was a decision that unless such knowledge was established, the territorial connection was not established. We doubt this reasoning. It appears to us that if the money lent by a foreigner and brought into British India earns profit irk Pakistan then there is a sufficient connection between Pakistan and that foreigner upon which Income-tax is properly to be extended. The result is that we answer both the questions in the affirmative. Since both the Commissioner of Income-tax and the assessee have failed, there is no order as to the costs. A. H. Reference Answered