TMI Blog1970 (3) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... nt years 1952-53 and 1954-55, the accounting years being calendar years 1951 and 1953. The question No. (1) relates to the finding made that the income arising to the assessee-company without the taxable territories in the year of account 1951 was less than the income arising to the assessee-company in the taxable territories in that year. This finding was made in connection with the provisions in s. 4A(c) of the Act, which provides that " company is resident in the taxable territories in any year ....... if its income arising in the taxable territories in that year, exceeds its income arising without the taxable territories in that year ....... .. " The case of the Revenue against the assessee-company was that its income arising without the taxable territories was smaller than its income arising in the taxable territories in the year of account 1951. The case of the assessee-company was that in that year of account the assessee-company had earned on its holding of debentures of Southern Brazil Electric Co. Ltd. (hereinafter referred to as the " Brazilian company "), in the aggregate pounds 35,504-3-4 (Rs. 4,73,389). This income which had arisen without the taxable territories wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inds, 6% prior lien debentures and 6% first mortgage debentures. Interest on the debentures was payable six-monthly on June 30, and December 31, each year. The debt of the debentures as well as the interest was payable in pounds sterling. The Brazilian company was in involved circumstances and failed to pay any interest up to 1949. The rate of interest was reduced by agreement of parties in the first instance to 4 1/2% and ultimately to 2 1/2% in 1950. Due to certain reasons the Brazilian Government imposed from 1946 exchange restrictions on remittances of pounds sterling and these restrictions prevented conversion of Brazilian currency to that of another country. The case of the assessee-company was that because of such restrictions and otherwise due to the fact that the Brazilian company was not possessed of pounds sterling, interest due was not paid during the year of account 1950. The restrictions were continued up to 1950, but they were reimposed in the later part of 1951 and had continued till November and December, 1955. The case of the assessee-company was that for the first time, upon restrictions being removed, payment of interest could be arranged and made by the Brazili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go to show that the word " arising " has been used in diverse sections of the Act in contradistinction to the phrase "received ". The submission was that particularly in the matter of the assessees who maintained books of account on the mercantile system, receipt or collection of debts was not the relevant date for considering the arisal of income of these assessees. In respect of the assessees maintaining accounts in accordance with the mercantile system the true date of arisal of income was the date when the debt in respect of the income became due and/or the due date for payment in respect of such income. The submission was that interest on the debenture-holdings under the terms of the debentures themselves must be held to have become due for the accounting year 1950 on June 30 and December 31 of that year. As the sum of pounds 12,152-10-10 (Rs. 1,62,033) was interest relating to the accounting year 1950, the assessee's case that the income of this interest had not arisen in that year should be negatived. A finding accordingly should be made that the above income had arisen in 1950 and the gross income from taxable territories without India in 1951 was accordingly Rs. 3,11,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment in pounds sterling to the Barclays Bank, London. The interest was made payable in London. This contract for payment of interest in pounds sterling at London through the Barclays Bank was, having regard to the foreign exchange restrictions prevailing in Brazil, not enforceable till after the expiry of the accounting year 1950. He, therefore, submitted that the debt in respect of the interest which was under the debentures payable on 30th June and December 31 had not arisen in 1950. In connection with these rival contentions, it is convenient to refer to the case of E. D. Sassoon Co. Ltd. v. CIT [1954] 26 ITR 27 (SC), in which the observations made by the Supreme Court in the case of CIT v. Ahmedbhai Umarbhai Co. [1950] 18 ITR 472 (SC), and of Mukherji J. in the case of Rogers Pyatt Shellac Co. v. Secretary of State for India, ILR 52 Cal 1 ; [1925] 1 ITC 363 (Cal) [FB], approved by the Supreme Court in the case of CIT v. Ahmedbhai Umarbhai Co., are noticed. The assessee-company in that case maintained accounts in accordance with the mercantile system. The assessee-company were the managing agents of another company. Their remuneration as managing agents was payable, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out by Fry L.J. in Colquhoun v. Brooks [1888] 21 QBD 52 at p. 59 (CA) ... that both the words are used in contradistinction to the word " receive " and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate. One other matter need be referred to in connection with the section What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called "income .... .. (Emphasis supplied.) The observations of Lord justice Fry in the case of Colquhoun v. Brooks were cited at p. 51 (of 26 ITR). The observations are : " 'In the first place, I would observe that the tax is in respect of" profits or gains arising or accruing ". I cannot read those words as meaning received by "...I think, therefore, that the words " arising or accruing are general words descriptive of a right to receive Profits.' " The court, thereafter, mentioned several other cases, and observed (P. 51): " It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds: solvendum in praesenti and solvendum in futuro ... A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at future time. A sum payable upon a contingency, however, is not a debt, or does not become a debt, until the contingency has happened. The Supreme Court observed (p. 779): " This passage brings out with clarity the essential characteristics of a debt. It also indicates that a debt owing is a debt payable in future. It also distinguishes a debt from a liability for a sum payable upon a contingency. " Mr. Joshi for the Revenue particularly relied upon the following passages at pages 780 and 784 (of 59 ITR) Page 780: " All the decisions agree that the meaning of the expression 'debt' may take colour from the provisions of the concerned Act: it may have different shades of meaning. But the following definition is unanimously accepted: 'A debt is a sum of money which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Dastur relied upon the decisions in the cases of Vijayaraghavacharya v. CIT [1936] 4 ITR 317 (Lah) and De Beeche v. South American Stores Ltd. and Chilian Stores Ltd. [1935] AC 148 (HL). In the first case the question related to the tax liability of a pensioner who had completed service in India and was residing in London. He drew his pension in London and the money was not brought to British India. The question was whether the income of the pension grew or accrued to the assessee in British India. It was held that the words " accruing or arising " involved the concept of receivability or the right to receive it in a particular place and did not refer to the place where the source of income was situate. it was, therefore, held that the income of the pension which was the result of services rendered in India and the source whereof was situate in India had arisen at London where the right to demand the payment of the pension accrued to the assessee. In the second case, in connection with lease of lands situated at Santiago de Chile in the Chilean territories, the deed of lease provided for payment of the rents every month in advance in Santiago de Chile on the first day of each m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vening supervening legislation, performance of contract in the agreed manner is rendered uncertain, the original agreed due date for performance becomes irrelevant. When the supervening law prevents performance of the agreed contract temporarily and the debt cannot be discharged in the agreed mode and manner, it ceases to be payable on the original agreed date. Such were the facts in the case in De Beeche v. South American Stores Ltd. and Chilian Stores Ltd. [1935] AC 148 (HL) just referred to. This result is the consequence of the law and the law courts refusing to enforce performance of a contract when it can be achieved only by breach of the law prevailing in the country from which performance is liable to be rendered. The question is how the above law is to be applied to the facts of the present case. The facts on which reliance has been placed very strongly on behalf of the assessee-company are that though the debentures provided for payment of interest every six months on June 30 and December 31, the payment in the agreed mode and manner had been rendered impossible by the supervening Brazilian legislation. Now, it is true that there is no dispute between the parties that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een rejected. That permission for making remissions in pounds sterling for payment of interest in the above manner was for the first time granted in 1951, is the finding of fact by the Tribunal. The question is whether under the above circumstances the case made on behalf of the Revenue that the interest income amounting to pounds 12,152-10-10 (Rs. 1,62,033) had arisen in 1950 has been rightly rejected by the Appellate Tribunal. Mr. Joshi in that connection repeatedly relied upon the following facts : The debentures provided for payment of interest every six months on June 30 and December 31. The above interest for the year 1950, that was recovered by the assessee-company had, therefore, in his submission, become due in part in June, 30, and in the remaining part in December 31. The assessee-company maintained accounts in accordance with the mercantile system. The assessee-company had no right, having regard to the provisions of s. 13 of the Act, to alter that system for its own convenience. The provision for payment of interest in pounds sterling did not prevent the Brazilian company from making payment, because the debentures did not provide for payment in London. The interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esents the mode and manner in which the obligation for paying interest was to be discharged. Up to 1951, the legislative restrictions imposed by the Brazilian Government had prevented the debtor company from making payment in pounds sterling. The payment had been rendered impossible. In this connection, the facts of the present case were entirely similar to the facts in the case of De Beeche v. South American Stores Ltd. and Chilian Stores Ltd. [1935] AC 148 (HL), we have referred to above. The debt of interest had, in our view, become due on June 30 and December 31. It had not remained payable on those dates due to the supervening legislation and the altered mode and manner of payment agreed to in April, 1950, as mentioned above. The supervening legislation so altered the situation that any claim made by the assessee-company for payment of interest accrued on June 30 and December 31, 1950, was not enforceable in law and could not have been sustained. As the interest which had become due had not remained payable, for the reasons mentioned above, we Revenue on this question. Now, in this Connection, it requires to be clarified that the alleged failure of the assessee-company in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussed in connection with the question No. 1, Mr. Dastur submitted that interest for the year 1953 had not become payable in that year. Mr. Joshi for the Revenue repeated the submissions made in connection with question No. 1 and argued that interest for 1953 had become due and payable to the assessee-company in that very year. For that reason, in his submission, question No. 2 should be answered in the negative. Now, we find it difficult to accept the submissions made by Mr. Joshi. The facts involved in this question are similar to the facts in respect of interest that became due for 1950 as discussed above. For the same reasons as in respect of interest that became due in 1950, we reject the submissions made by Mr. Joshi and accept the case made on behalf of the assessee-company. The second question will, therefore, be answered in the affirmative. The third question relates to the claim made by the assessee-company for deduction of interest in the sum of Rs. 1,04,912 paid by the assessee-company to the parent company in respect of the debt due under a promissory note. The relevant facts in this connection are as follows : On September 30, 1933, the parent company sold and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itories.(1) All income, profits or gains accruing or arising, whether directly or indirectly ... through or from any money lent at interest and brought into the taxable territories in cash or in kind ... 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 latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax : Provided that where the person entitled to the income, profits or gains is not resident in the taxable territories the income-tax so chargeable may be recovered by deduction under any of the provisions of section 18..." Now, the submission of Mr. Joshi for the Revenue was that the above income of interest was earned by the parent company in the taxable territories. This was the result of the fact that the above promissory note relating to the purchase of the shares of Tata Hydro Electric Agencies Ltd. was money lent at interest and brought into the taxable territories in kind Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction of sale which does not involve, directly or indirectly, any transaction of loan at interest. To these facts the above provisions of s. 42 were accordingly not applicable. The interest earned by the parent company was income earned by the parent company without the taxable territories. In respect of this income the parent company was not liable to pay income-tax under any of the sections of the Act, and it was, therefore, not obligatory on the assessee-company under s. 18(3B) to collect any amount by way of tax. In the result, the expenditure of the sum of Rs. 1,04,912, which was interest in respect of the above promissory note, was allowable for the year of account 1953 as claimed on behalf of the assessee-company. The answer to the part of question No. 3 relating to the interest on 3% sterling promissory note will be on the footing that tax was not liable to be deducted under s. 18(3B) in respect of the interest paid to the parent company and the assessee-company was entitled to have the expense of interest deducted from the Indian income for 1953. The assessee will be entitled to deduction from its total income because in the year of account 1953, admittedly, it is taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income of the assessee-company will be taxable as resident in that year, the expenditure of interest amounting to Rs. 24,000 in respect of this rupee promissory note will have to be deducted from the total income of the assessee. In the result, our answers to the questions are as follows Question No. 1 : In the affirmative. Question No. 2 : In the affirmative. Question No. 3 : Tax was not payable on Rs. 1.04,912 paid as interest on 3% sterling promissory note in the year of account 1953. Similarly, tax was not payable in respect of the interest paid for the 3% sterling promissory note in the year of account .1951. Expenditure of interest relating to 3% sterling promissory note was deductible from the dividend income earned in India. The interest paid on 3% Indian rupee promissory note was not deductible from the dividend income earned in India in the year of account 1951 when the assessee-company has been assessed as non-resident. Interest paid in respect of this promissory note in the year of account 1953, was deductible expense from the total world income of the assessee-company, as it was assessed for that year as resident. The Commissioner will pay cost ..... 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