TMI Blog1968 (2) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... Assistant Commissioner and confirmed by the Tribunal was in accordance with law ?" The facts giving rise to these questions are briefly as follows : The assessment years are 1953-54 and 1954-55 for which the previous years are the calendar years 1952 and 1953 respectively. The assessee is a sterling banking company and has been assessed as a non-resident in both the years in question. During the relevant years interest amounting to pound 35,576.94 and pound 42,638.23 were received by the assessee in the United Kingdom from Messrs. Calcutta Electric Supply Corporation, which is a company incorporated in England with its head office in London and was during the relevant periods carrying on business of supplying electricity in the city of Calcutta and certain other places in India. The corporation maintained a current bank account with the assessee's head office in London at 26, Bishops Gate, London, E.C. 2. On the 24th May, 1950, the corporation applied to the assessee bank for grant of temporary financial accommodation to the extent of pound 1 million. The reason for seeking the financial accommodation as given in the application was that, according to the balance-sheet on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This is why he held that, even though the overdraft was granted to meet the contractual liability in respect of the capital expenditure already incurred, it was obvious that all these transactions, namely, the purchase of the capital machinery, the contractual liability to pay those bills and the overdrafts, were integral parts of one complete transaction. The assessee appealed to the Appellate Assistant Commissioner from the judgment of the Income-tax Officer. The Appellate Assistant Commissioner confirmed the Income-tax officer's order but modified the quantum. He called upon the assessee to furnish figures of interest accruing on the daily balance of the overdraft specifically utilised for the purpose of purchasing plants and machinery which came to India. The assessee furnished those figures and data. The quantum of the taxable interest received from the corporation was reduced to pound 16,297 and pound 6,225 for these two years respectively. In respect of the interest chargeable to tax received from the tea companies it was reduced to pound 2,612 for the assessment year 1953-54. Both the assessee and the revenue authorities preferred appeals to the Tribunal against such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g money into India in the shape of electrical generators and plants. The Tribunal also observed that a transaction,inorder to be an integrated composite whole, the transference of money to India, even if the machinery could be described to be money in kind, it must be as a result of conscious definite arrangement between the assessee and the corporation and not simply an act of the corporation without any reference to the assessee. The Tribunal found that the transference of the machinery to India was the sole concern and responsibility of the corporation alone with which the assessee was completely unconcerned. The Tribunal accordingly allowed the assessee's appeals and dismissed the appeals of the revenue department. The department has now come with the above questions in this reference. The crucial question in this reference is the interpretation of section 42(1) of the Income-tax Act and particularly the expression " in case or in kind " occurring in sub-section (1) thereof. Broadly analysed, section 42(1) covers five different classes of income which are said to be income deemed to accrue or arise within the taxable territories. Paraphrasing section 42(1) and leaving aside m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of. Therefore, it is contended that this interest is " money in cash or in kind " within the meaning of section 42(1) of the Income-tax Act and must be deemed to accrue or arise within the taxable territory. In our opinion, the contention of the revenue on this point suffers from a number of fallacies. Section 42(1) of the Income-tax Act, as its language reads, is income which is deemed to accrue or arise within the taxable territories although it is not so in fact. It is an income which is arising outside but which by the statute is deemed to accrue or arise within the taxable territory. But then this deeming provision is careful to describe the connection or the nexus between such income and the taxable territory. That will be plain from the five different classes of income stated on the analysis of the section itself. The nexus in the first class is the business connection in the taxable territory. The nexus in the second class is the property in the taxable territory. The nexus in the third class is the asset in the taxable territory. The nexus in the fourth class is the money lent at interest but brought into the taxable territory in cash or in kind meaning thereby that that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uble and anxiety not only morally and materially but also fiscally and legally under the Income-tax Act and other taxing statutes. Judicial interpretation of " money ", by judges and courts, have added fuel to the fire. For instance, interpretation of " money " in a will or a testament construed by judges has almost caused intellectual uproars throughout the world. Money, when used in a will, has been construed by courts in its strictest sense unless there was a context which permitted a wider interpretation. In that strict and rigorous sense money has been held to mean not only cash and in kind but also all forms of money due, such as cash at the bank, dividends due, bills, draft and similar choses-in-action. Meredith J. in In re Jennings : Coldbeck v. Stafford made the following celebrated observation : " The judiciary has waged a long fight to teach testators that ' money ' means cash, but as the ordinary testator who makes his own will does not study the law reports, he proceeds in constantly using the word in a wider sense and it is time that in such cases the popular meaning prevailed over the legal one. It has taken only about 13 or 14 years for the judicial mind to chan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance Mills Ltd. There the assessees were owners of sterling bonds of the Government of India the interest on which payable in England was received in England and they invested that income in the purchase of certain mill stores and machinery in England and brought the articles purchased to India and employed them for the purposes of their mills. It was decided by the Privy Council there confirming the decision of the Bombay High Court that the income was not received in or brought into India within the meaning of section 4(2) of the Income-tax Act and the assessees were not accordingly liable to pay income-tax on this amount. No doubt, this decision must be read subject to the Explanation to section 45 of the Act after the Amendment Act of 1939. But certain principles there discussed are of crucial importance for the purposes of this case. Lord Romer, in delivering the judgment of the Privy Council, approved the observation of Lord Lindley in Gresham Life Assurance Society Ltd. v. Bishop, where Lord Lindley had said : "...a sum of money may be received in more ways than one, e.g., by the transfer of a coin or a negotiable instrument or other document which represents and produces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act." That last observation of Lord Romer in that above passage still remains true. Applying that principle contained in those observations the plant or the machinery in this case is not income and it is only income that can be taxed under section 42(1) of the Income-tax Act and nothing else. The next landmark in judicial decisions is to be found in A. H. Wadia v. Commissioner of Income-tax, a decision of the then Federal Court of India. Three of the learned judges, Kania C.J., Mahajan J. and Mukherjea J., came to the conclusion in that case that the provision in section 42(1) of the Indian Income-tax Act was not ultra vires on the ground that it was extra territorial in operation, for, the nexus, according to the three learned judges, was the bringing of the money into India with the knowledge of the lender and borrower giving the real territorial connection. Patanjali Sastri J. disagreed with that view that bringing of money by the borrower could not constitute a sufficient territorial connection. Kania C.J., of the report, analysed section 42(1) of the Income-tax Act and showed the nexus or the connection in each case on the lines which we have already indicated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the respective cheques to the Bank of England and credited to the taxpayer's account in England an amount in sterling equivalent at the then rate of exchange to the amount of dollars specified in the cheques. Then the English bankers, by registered mail, presented the taxpayer's cheques to the Bank of New York, which honoured those cheques and, on the instruction of the English bankers, transferred the amount of dollars in question in each case to the account of the Bank of England with the Federal Reserve Bank of the United States. The taxpayer was assessed to income-tax. The House of Lords held that the sterling credits were sums received by the taxpayer in the United Kingdom out of his American income which had pro tanto been used to acquire them and that in this sense he had brought forward his American income to the United Kingdom. It is pointed out in this decision by the House of Lords that, for the purposes of rule 2 of Cases IV and V of Schedule D of the British Income Tax Act, the bringing in of a person's income meant nothing more than the effecting of its transmission from one country to the other by whatever means, the agencies of commerce or finance might make avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dollars from the United States. It was held there that the act of retaining the moneys in the United States for capital purposes after obtaining the sanction of the Reserve Bank was not a trading transaction in the business of manufacture of locomotive boilers and locomotives and it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. Therefore, the surplus attributable was capital accretion and not profit taxable in the hands of the assessee : see the observations of the Supreme Court particularly at page 410 of that report. This question of capital assets has come up in the matter of interpretation in other decisions. We shall notice one decision of the Madras High Court in A. Lakshmanan v. Commissioner of Income-tax. It was held there, on the facts of that case, that the assessee had capitalized whatever surplus income was in his hands in the foreign country and there was no material upon which the Tribunal could reach the conclusion that the capitalization was not effected. The court came to the conclusion that the amounts received were capital in nature and hence not assessable. But these decisions rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced in London. The interest was payable in London. There was nothing else left of this money or interest which can connect it with the taxable territory in India. We are unable to hold that in this case the electrical generator plant is " money in kind " within the meaning of section 42(1) of the income-tax Act the " money in kind " in section 42(1) of the Income-tax Act means that which retains its character or quality or its kind as money, namely, in commercial forms recognised in the commercial world such as bills of exchange, I.O.Us. or even gold and silver bars or ingots. It will be illegal and unjustified in our view to extend the meaning of the expression " money in kind " in section 42(1) of the Income-tax Act beyond these accredited uses of money accepted, used and recognised as such in the commercial world and in the usual transactions. We, therefore, hold on the interpretation of section 42(1) of the Income-tax Act that the plant, goods, machinery or the generator brought in this case was neither money in cash nor money in kind nor income within the meaning of section 42(1) of the Income-tax Act and it does not mean any and every article into which the money had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been able to show us in what way this computation was against the provisions of any law. The Tribunal found as a fact that the Appellate Assistant Commissioner rightly computed the net interest in the amount of interest taxable. This being so, the answer to the second question is in the negative and we hold that the computation of the amounts of taxable interest in the case of the tea company as made by the Appellate Assistant Commissioner was in accordance with the law. The Commissioner will pay the costs of this reference. Certificate for two counsel. K. L. Roy J.--While respectfully agreeing with the judgment delivered and the answers given by my Lord to the questions referred, I wish to add a few words of my own. In support of his contention that the expression " money in kind " in section 42(1) of the Act would include anything into which the money has been converted, Mr. Pal referred us to the meaning of the expression " in kind " in Murray's Oxford Dictionary, 1901 Edn., Vol. V, as follows : " Item 15 : In kind : in the very kind of article or commodity in question ; usually of payment ; in goods or natural produce as opposed to money. " In my opinion, the meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the overdraft accommodation granted by the assessee to the corporation had been utilised solely for the purpose of bringing in plant and machinery into the taxable territories. Mr. Pal was somewhat taken aback when we drew his attention to the fact that he had not advanced any arguments on the second question referred and, though he made a valiant attempt to convince us that both the Appellate Assistant Commissioner and the Tribunal acted arbitrarily in deducting the proportionate costs of the head office from the amount of the income from interest on the overdrafts granted to the tea companies, he was not successful. Mr. Pal, somewhat hesitatingly, pointed out that this was not the question asked to be referred by the Commissioner in his application under section 66(1). The question that the Commissioner had asked for reference was that, if the first question was answered in favour of the department, then whether the computation of the income from interest on the overdrafts granted to the corporation by the assessee was in accordance with law, and that, through inadvertence, the Tribunal has referred the question of the propriety of the computation of such income in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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