P L D 1961 Dacca 602 (PLP)

CHOWDHURY, C. J.‑In this reference under section 66(4) of the Income‑tax Act, the Appellate Tribunal has referred the following questions to this Court.

2. Whether in the facts and circumstances of the case Messrs Howrah Trading Company (Private)'Limited is entitled to claim as a deduction under section 10 (2) (iii) of the Income‑tax Act from its income in Pakistan Rs. 49,637 for the year (assessment) 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.

3. The facts of the case as set out in the statement of the case are as follows.

4. Messrs Howrah Trading Company Ltd. is a private limited company with its registered office at 8, Dalhousie Square, East Calcutta. The company was a non‑resident foreign company during the two assessment years 1950-51 and 1951‑

52. The total number of share‑holders of the Company is four including two Director share‑holders Messrs D. N. Jalan and K. D. Jalan. The other two non‑director share‑holders are Mrs. Panna Jalan, wife of Mr. M. N. Jalan and Mrs. Chanda Bajoria, wife of Mr. C. L. Bajoria.

5. The Director share‑holders of the Company are among the nine partners of Messrs Surajmall Nargarmall and the two ladies non‑director‑share‑holders of the Howrah Trading Company are the wives of the two other partners out of the nine partners of Messrs Surajmall Nagarmall.

6. Messrs Howrah Trading Company Ltd., had no Managing Agent over them.

7. North Bengal Sugar Mills Ltd. and Setabganj Sugar Mills Ltd. are the two Sugar Mills in Pakistan and were being financed by Messrs Surajmall Nagarmall, the Managing Agent, of the two Sugar Mills. In 1949, Messrs Howrah Trading Company came on the scene as creditors of the two Sugar Mills in Pakistan The contract for loan advanced by Messrs Howrah Trading Company Ltd., to (1), Messrs North Bengal Sugar Mills Ltd., and (2) Messrs Setabganj Sugar Mills Ltd., both situated in Pakistan, were made in Calcutta in Indian Union and interest charged from the two Sugar Mills was at the rate of 3 % though Messrs Howrah Trading Company paid interest in India at the rate of 4 % to its creditors‑the eight Indian parties mentioned in the statement of the case. The Income‑tax Officer worked out the Pakistan income of the Company (Messrs Howrah Trading Company Ltd.) in Pakistan currency at Rs. 40,206 for the tax year 1950‑51 and at Rs. 1,26,431 for the year 1951‑

52. They are the two sums of interest paid by the two Sugar Mills in Pakistan to Messrs Howrah Trading Company Ltd. The above interest became payable 'in respect of the loan which was in the form of current account running through the two accounting years.

8. Messrs Howrah Trading Company Ltd. had admitted its liability to tax in Pakistan in respect of its income arising or accruing in Pakistan from interest received from the two Sugar Mills, but claims deduction under section 10 (2) (iii) of the Income‑tax Act of the interest paid to its creditors in India from whom it borrowed money in course of its business. The amounts of interest claimed by way of deduction were (1) Rs. 48,636 for 1950‑51 (2), Rs. 1,34,420 for 1951‑

52. The money received from the eight creditors in India formed a pool out of which loans were given to several concerns.

9. It may be mentioned here the two sugar mills while paying their income‑tax got deduction on account of interest paid to the Howrah Trading Company without deducting tax on those interests paid to non‑resident foreigner‑the Company. The Income‑tax Officer rejected the claim of Howrah Trading Company for deduction on the grounds :‑ (1) Pakistan income‑tax had not been deducted from the interest paid to the creditor in India in accordance with the proviso to section 10 (2) (iii). (2) That the activities of two Sugar Mills, Howrah Trading Co., Ltd., and the creditors were all under the control of Messrs Surajmall Nagarmall and the creditors had knowledge that the money sent by them would come to Pakistan with the result that the interest paid to the creditors attracted tax in Pakistan. The Appellate Assistant Commissioner as well as the Appellate Tribunal could not agree with the Income‑tax Officer that Messrs Surajmall Nagarmall exercised control on the creditors of Howrah Trading Company Ltd. and the appellate Tribunal held that any knowledge which a director of two companies possessed and which he acquired in his capacity as director of the 1st Company cannot be imputed as being knowledge in the possession of the second Company and "to hold otherwise would impunge on the corporate personality of the Company and strike at the root of tee principle that company is a separate entity from its share‑holders and directors" and that Messrs Howrah Trading Company, a Private Limited Company, lent money in India to the two Sugar Mills who brought the money to Pakistan to which Messrs Howrah Trading Company did not participate. According to the Appellate Tribunal, there are two phases in the transaction. (i) Borrowing by Messrs Howrah Trading Company Private Ltd. of money in India and then creating a pool of money in India and (ii) the transaction between the two Sugar Mills and Messrs Howrah Trading Company resulting in borrowing of the money and bringing the same into Pakistan by the Sugar Mills.

10. Therefore, the Appellate Tribunal relying on the principle said to have been adumbrated in the case of A. H. Wadia v. Commissioner or Income‑tax, Bombay (AIR1949PC18) and followed in .the case of Porbander State Bank v. Commissioner of Income‑tax (AIR1950Bom.220) held that where a foreign Bank brings moneys of its depositors into the taxable territories the interest earned by the depositors is not an income deemed to accrue and chargeable as such unless the depositors had knowledge that their moneys would be taken into taxable territories and that bringing of money into taxable territories was an integral part of the transaction of deposit.

11. Following this principle, the Appellate Tribunal in agree ment with the Appellate Assistant Commissioner held that the income which arose to the creditors of Messrs Howrah Trading Company in India was not chargeable to income‑tax in Pakistan and allowed deduction under section 10 (2) (iii) of the Act. Hence the question under reference arose out of their orders.

12. It is contended on behalf of the assessee that income‑tax is levied under section 4 subject to the provisions of the Act, and one of the provisions and mandatory one, under section 10, is for giving allowance of the amount of interest paid in respect of borrowed capital in determining assessable income. So the assessee Company, i.e. Messrs Howrah Trading Company is entitled to the deduction, under section 10 of the Act, of the amount of interest paid to its eight creditors out of the income it derived by way of interest from the two Sugar Mills on the loan advanced to them by the Company.

13. It is contended that the proviso to section 10 (2) (iii) of the Act is not applicable in the present case because the interest paid to the eight creditors accrued and paid without the taxable territories is not an interest chargeable under the Act as it has not accrued or arisen nor can it be deemed to 'have accrued in the taxable territories, i.e. In Pakistan as the money lent by these creditors to the Company was in Calcutta and interest due to these eight creditors on the money lent also accrued in Calcutta and payment is also to be made or is made in Calcutta as such not chargeable under the Act, unless it is found that these eight creditors of the Company are aware that the money lent by them was intended to be invested in the taxable territories, i.e., there is a nexus or connection between the assessee and the taxable territories.

14. In that view of the matter, it is contended by Mr. Rahman, the learned counsel for the assessee, that the scheme of the Act is concerned only with the income, taxable, that is the income which accrues or arises or deemed to have accrued or arisen within the taxable territories. So; it is contended that under the International Law the principle is that taxing statute is to be confined within the territory of the national State and it has to be interpreted accordingly and the scope of the charging section is not to be extended beyond the taxable territory by interpretation.

15. It seems there is some confusion both in the argument advanced by the learned counsel and in the conception of law by the Tribunal and this confusion is due to the misread ing or misinterpretation of what has been said by the Federal Court of India in the case of A. H. Wadia v. Commissioner of Income‑tax. It is no doubt true that income‑tax is levied under section 4 subject to the provisions of the Act and one of the provisions of the Act and mandatory one, under section 10, is to give deduction of interest paid on borrowed capital in determin ing assessable income but it is subjected to the proviso to section 10 (2) (iii) of the Act which provides that no allowance shall be made for any interest chargeable which is payable without the taxable territories except interest on which tax has been paid or from which tax has been deducted under section 18.

16. It is contended that the interest of which deduction is claimed is not chargeable under the Act. In other words, charge ability is the criterion for the application of the proviso as contemplated in the proviso itself as well as in section 18 (3B) which provides that any person responsible for paying any interest to a person not resident in the taxable territories any interest or any other sum chargeable under the provisions of the Act shall, at the time of payment, deduct income‑tax at the maximum rate, etc.

17. Section 42 provides that all income, profits or gains accruing or arising, whether directly or indirectly, through or from any money lent at interest and brought in to the taxable territories shall be deemed to be income accruing or arising within taxable territories and where the person entitled to the income is not resident in the taxable territories shall be chargeable to income- tax.

18. Then it is contended by the learned counsel that in the word "lent" and brought in section 42 ; the word "and" is conjunctive. So the liability of the tax depend not only on the lending alone but also on the bringing of the money in taxable territories, and the knowledge of the lender and the borrower should form the integral part of the transaction. So, according to the learned counsel, it logically follows that the money lent to Messrs Howrah Trading Company Ltd. cannot be said to be money lent and brought and it is found as fact that the eight creditors lent money to the Company in Calcutta and the Company in its turn lent it to the two Sugar Mills at Calcutta and they, the two Sugar Mills, brought the money into the taxable territories and the eight creditors of the Company is not party to it, nor do they know about it and as such there is no nexus or connec tion between the taxable territories and the assessee. So, the interest payable to the creditors is not chargeable under section 42 of the Act.

19. The provisions of section 42 speak only of income accruing or arising through or from any money lent at interest and brought into the taxable territories and do not concern so much with the person. who lent and who brought the money into the taxable territories as of the income out of the borrowed capital accrued or deemed to have accrued in taxable territories. If there is an income out of that borrowed capital, it shall be deemed to have accrued or arisen within the taxable territories and as such chargeable to income tax. (Here Messrs Howrah Trading Company Limited borrowed money from the eight creditors and lent the money to the two Sugar Mills on interest to be invested in Pakistan and in fact invested in Pakistan, i.e., the taxable territories. Therefore, the interest derived by the Company from the money lent is the income in taxable territories and as Messrs Howrah Trading Company is entitled to such income and not being resident in taxable territories, such income is chargeable to Income‑tax). So also is the case with eight creditors of the Company who lent money at interest and that money brought into the taxable territories and the income or profits by way of interest accrued has been through or from money lent and brought shall be deemed to be income accruing or arising within taxable territories and as such chargeable to income‑tax under section 42 of the Act as those creditors are non‑residents in the taxable territories.

20. If the Company wants to pay interest to its creditors in India out of the income derived by way of interest that would be deemed to be an income accrued or arose in the taxable territories out of the money lent by them to the Company and brought into the taxable territories. Of course in the present case, the Company and its eight creditors are non‑resident foreigners. But section 18(3‑B) speaks of "any person responsible for paying to a person not resident in the taxable territories any interest." It is an interest chargeable under the provisions of section 42 of the Act and as such under section 18 (3‑B) the Company is bound to deduct income‑tax out of it. When the Company has not deducted it, the proviso to section 10 (2) (iii) will come into play and under that proviso no allowance shall be made.

21. There is a fallacy in the argument that it is an income of the eight creditors of the Company that accrued and arose in India out of the money lent in India and it is also payable in India without the taxable territories and the eight creditors had no knowledge about bringing of the money into taxable territories to have a nexus or connection between them and the taxable territories and as such it is not an income accruing or arising through or from money lent and brought into Pakistan to be chargeable under section 42 of the Act as it accrued without taxable territories. So, it is contended that under International Law, the principle is that the taxing statute is to be confined within the national State and by interpretation it should not be extended beyond it and against the assessee.

22. Under the Act, the Income‑tax Authority is concerned with the income of the assessee, who claims deduction of interest payable by him to a non‑resident foreigner. We are to see whether it is an income or profits by way of interest through pr from any money lent and brought into taxable territories, no matter who lent it and who brought it.

23. Under section 42 of the Act it is not absolutely necessar3 that the knowledge of the lender and borrower about bringing of the money into taxable territories should be integral part of the transaction. If knowledge of both is an integral part of the; transaction, it is well and good, if not, even then the provisions of the section would equally apply, because if the money lent at interest in India and brought into taxable territories and earned profits out of which interest is to be paid in India though it accrued in India, it shall be deemed to be income accruing or arising within taxable territories though actually it did not and shall be chargeable to Income‑tax under section 42 of the Act.

24. This section itself does not contemplate that the knowledge of the lender and borrower bringing the money into taxable territories should be an integral part‑of the transaction. The word "and" between the words "lent at interest" and "brought into taxable territories" may be used conjunctively to mean a composite transaction of the bringing of the money lent at interest but it does not necessarily mean only the participation of the lender in the fact of bringing the money into taxable territories. If we read the section in the way suggested, then we are to read something which is not in the section and thereby restrict the application of the section only in those cases where the lender participated directly or indirectly in the fact of bringing the money into the taxable territories. It is the bringing of the money lent at interest into taxable territories which makes the provision of section 42 applicable. So the interest payable by the Company to its non‑resident creditors out of the income of money lent at interest and brought into taxable territories is chargeable under section 18 (3‑B) of the Act. In this view of the matter, there is no question of extending the scope of Income‑tax Act by interpretation beyond the national State and against the assessee. The provision as to income and profits through or from money lent at interest and brought to taxable territories, though not accrued or arose in the taxable territories, under section 42 it shall be deemed to be income accruing or arising within the taxable territories. When the pro vision in the Act is so clear, it is not a question of extending the scope or operation of the Act by interpretation beyond the national State or against the assessee. It is not correct, in view of the provision that it shall be deemed to be an income accrued and arose in the taxable territories, to say that the interest payable by the Company to its Indian creditors is an interest accrued or arose in India out of the money lent in India and which is also payable in India and as such it cannot be said to be an income accrued or arose in taxable territories to be chargeable to income- tax. The words in section 42 are : "All income etc. through or from money lent at interest . . . . . . shall be deemed to be accrued, accruing or arising within taxable territories."

25. In support of his contentions, the learned counsel relied on the case of Probander State Bank Limited v. Commissioner of Income‑tax, Bombay City, which followed the decision of the Federal Court of India in the case of A. H. Wadia v. Income‑tax Commissioner, Bombay. Facts of the case of A. H. Wadia reported .in A I R 1949 F C 18 are that the appellant A. H. Wadia was the agent of Gowaliar Durbar. The Durbar was participating in various trade and business operations in and outside the Gowaliar State. The material facts, shortly stated, in the statement of the case are as follows :‑

26. A company styled the Provident Investment Co. Ltd. was incorporated in British India with head quarter in Bombay. It was practically one‑man company as all its shares were either owned by the Gowaliar Durbar or its nominees. In 1933, the Durbar advanced to this company a loan of Rs. 50 lacs on security of its mortgage debentures of an equal nominal value. The loan was advanced in Gowaliar; the interest was payable there and the debentures were also deposited there. Admittedly the Provi dent Investment Company brought the borrowed money into British India, and utilised it for the purpose of its business in British India. The interest on the loan received by the Durbar for the accounting year amounted to Rs. 2,59,

726. It was receiveable and actually received at Gowaliar.

27. It was contended on behalf of the appellant in that case that the income did not accrue to the Durbar in British India and therefore not liable to income‑tax. The Commissioner found that as the money lent was brought by the Company into British India the income therefrom is deemed to accrue or arise in British India by virtue of section 4 (2), Income‑tax Act. Kania, C. J. at page 25 of the report observed "The exact words used in the section are `arising from any money lent at interest and brought into British India in cash or kind.' In my opinion it is proper to read this as one head and as indicating one composite transaction. The interest must be the result of the loan of money and the money must be brought into British India in cash or kind. Reading it in that way, the incident of bringing the money into British India in cash or kind to the knowledge of the lender and borrower is an integral part of the transaction. After the money, is brought into India how it is used by the borrower, to my mind is an irrelevant question. The short question to be decided is whether income arising out of a transaction with these incidents establishes some real territorial connection between the person and British India or not. In my opinion the answer is in the affirmative, because the source, i.e., the source from which the income accrues to the lender is known to be going into British India in cash or kind and this incident is an integral part of the money lending transaction." With reference to the facts of that case the learned Chief Justice is perfectly right in the view he has taken. But it does not necessarily follow that the learned Judge is laying down a general principle of law on the point dissociated from the facts of that case that it is only the knowledge of the lender which is essential to establish nexus or connection between the taxable territories and the assessee nor it is held that in all cases it is necessary that incident of bringing the money into taxable territories should be to the knowledge of the lender and borrower though such a knowledge was found as a fact, with reference to the facts of that case, to an integral part of the‑ transaction. What the learned Chief Justice intended is quite clear from what he has said "In my opinion it is proper to read this as one head and as indicating one composite transaction. The interest must be the result of the loan of money and the money must be brought into British India in cash or kind" which is in consonance with section 42 which only speaks of any money lent at interest and brought into taxable territories in cash or kind and all income arising out of it shall be deemed to be income accrued or arisen in the taxable territories and shall be chargeable. It has got no reference to the knowledge or intention of the lender. It means that if borrowed capital is brought into taxable territories and the interest payable on the borrowed capital to the non‑resident foreigner the interest that accrued on that borrowed capital shall be deemed to be an income accrued or arising in the taxable territories. I have already said that the section does not concern much with the person who lent the money and‑ who brought it, for the purpose of taxability of the income as with the fact of lending at interest and of bringing it into the taxable territories. The lender may or may not have the knowledge of the fact of bringing the money lent at interest into the taxable territories. If they know, well and good, if not, it does not matter because the source of the income is in taxable territories.

28. I think, it can be said with perfect propriety that in cases coming under this clause of section 42 a nexus or connection is established between the taxable territories and the person who lent the money at interest, by reason of the fact that the source of income is in the taxable territories. The person who is taxed here is not the borrower but the lender whose source of income is the money which he lent and which in its original form or converted form is actually in existence in the taxable territories. In the case of Probandar State Bank, Chagla, C. J., held that in A. H. Wadia's case it has been laid down that if the borrower without knowledge of the lender brings the money into British India and that money earns income then the lender is not liable to pay any tax on the interest which he receives on the borrowed money and that this is put on the principle that there must be some nexus between the taxing State and the assessee who is a foreigner and that nexus suggested by the Federal Court is the knowledge. It is true, the Federal Court in‑that case has said so with reference to the fact of that case and did not limit it to knowledge of lender in all cases. I have already said with reference to the fact of that case that it is perfectly justified. Nowhere it is suggested that for nexus it is only the knowledge of the lender that is necessary and that the fact that the money was brought and invested in taxable territories is not a nexus. Similar is the view taken in the case of the Commissioner of Income‑tax Karachi v. Netherland Trading Society, Karachi (P L D 1957 Kar. 167.).

29. It is no argument that if money is lent at interest in India, the interest is accrued in India and it is also payable in India as not an income accrued or arisen in Pakistan to be chargeable, in view of the provisions of section 42 that all income etc. accrued or arisen directly or indirectly through or from any money lent at interest and brought into taxable territories, shall be deemed to be an income accrued or arisen in the taxable territories and shall be chargeable.

30. The new words" through or from any money lent at interest and brought into the taxable territories in cash or kind" were included to guard against any subterfuge which can be adopted for the purpose of escaping income‑tax by showing that money was lent outside the taxable territories, though to all intents and purposes it is money lent for the purpose of taxable territories and these new words were introduced after the Privy Council decision in the case of Commissioner of Income‑tax and Aden v. Currimboy Ebrahim & Sons Ltd. (63IA1=AIR 1936PC1), where it has been held that where loan was an isolated transaction, there was no business connection in the taxable territories and the lender could not be taxed. If we hold that there is no nexus except in the case of knowledge of the creditor, who lent money at interest and in the absence of such knowledge, the income out of the money lent though that income accrues or arises out of that money invested in the taxable territories, cannot be taxed, then the very purpose for which these words are introduced would be frustrated and defeated at the cost of the State as in every case of money lent at interest and brought into the taxable territories, every creditor of the first decree or second decree or third decree and so on, as in the present case, will plead ignorance or manage things in such a way that it will be difficult to establish such knowledge and thereby to establish nexus or connection between the taxable territories and the lender, though in fact income by way of interest is paid out of the income of that borrowed money invested in taxable territories.

31. If the income accrues or arises or deemed to be an income accrued or arose in taxable territories it does not matter wherein it is received or paid, whether in or without the taxable territories. In this connection. reference may be made to the case of Commissioner of Income‑tax, Bombay v. Bansilal Motilal (A I R 1930 Bom. 380). So also it is held in the case of Messrs Octavious Steel & Co. Ltd., Calcutta v. The Commissioner of Income‑tax, Dacca (1960 P T D 1064= P L D 1960 S C (Pak.) 371.), that receiv ability is not always the criterion for taxation. If it accrues in the taxable territories; no matter where you have received it.

32. It is contended on the basis of case of Banu Mal v. Munshi Ram (A I R 1935 Lah. 599), that the money lent at interest became the money of the borrower who brought it into taxable territories and that it may be lost on the race course ; it., may be spent in debauchery or stolen or thrown away and may not profitably be invested, still the borrower is to pay interest. It is said that when the lender has lost all control over it and his ownership in the money lent outside taxable territories, no real connection could be held to exist between the lender and the country where the money is brought when particularly the interest on that money is payable without the taxable territories. Such argument was advanced in A. H. Wadia's case in course of argu ment on the question of ultra vires of the Legislature to enact that new provision "through or from any money lent at interest and brought into taxable territories" in section 42 of the Act. I do not understand how that argument is feasible on the point of chargeability of the income accrued etc. through or from the money lent at interest and brought into the taxable territories which shall be deemed to be an income accrued or arisen in Pakistan. If the money is lent at interest and brought into the taxable territories and if it is lost without profitable investment, there is no income accrued in taxable territories, so no question of income‑tax can arise. If the lender lost ownership in the money lent, how can we claim interest on the money lent ? He might have lost, control and possession of it but not the ownership.

33. In the result, the ‑question referred to this Court is answered in the negative. The Commissioner of income‑tax will have the costs of his reference. SIDDIKY, J.‑I agree with my lord the Chief Justice. Question answered in negative