TMI Blog2002 (4) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... India from the world income? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in upholding the order of the Commissioner of Income-tax (Appeals) that the profit due to change in exchange rate of the Australian dollars is a capital gain?" However, in ITR No. 228 of 1983, only the second question and in I.T.R. No. 229 of 1983, only the first question has been referred to this court for its opinion. The factual matrix of the matter is not in dispute. The assessee is a non-resident company incorporated in Australia. Its shares are owned by the Government of Australia and the assessee carries on worldwide air-transport business and maintains the centralized accounts in Australia. It had sold aircrafts, which were its capital assets. Such sales are effected outside India. The question, which arises for consideration, is as to whether the sale of such capital assets would be "income" proportionately assessable in terms of the provisions of the Act? Although the Inspecting Assistant Commissioner (in short, "the IAC") held that the profits arising out of sale of capital assets would come within the purview of income in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [1973] 88 ITR 169 (SC). Mr. Anoop Sharma, learned counsel appearing on behalf of the assessee, on the other hand, would point out that the capital assets of the respondent were purchased outside India. The sale of such capital assets, learned counsel would contend, being not connected with the business activity of the assessee and the transaction of sale and purchase of the capital assets having taken place outside India, no part of income can be said to have accrued within India and thus it has rightly been held by the Commissioner of Income-tax (Appeals) and the Tribunal to be not "income" arising in the course of business in India. Learned counsel would submit that in a case of this nature, section 9 of the Act will have no application. In support of the said contention, reliance has been placed on CIT v. Qantas Airways Ltd. [2001] 251 ITR 264 (Delhi); CIT v. R.D. Aggarwal and Co. [1965] 56 ITR 20 (SC); Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) and CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC). On the second question, reliance has been placed by learned counsel on CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 (SC); Sutlej Cotton Mills Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance-sheet prepared in India. Explanation 2.--For the removal of doubts, it is hereby declared that income which has been included in the total of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India." "9. Income deemed to accrue or arise in India.--(1) The following incomes shall be deemed to accrue or arise in India-- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India: Explanation.--For the purposes of this clause,-- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer may consider to be reasonable, or (ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or (iii) in such other manner as the Assessing Officer may deem suitable." The expression "income" in terms of the interpretation clause as mentioned above in clause (24) of section 2 of the Act would include profits and gains and any capital gains chargeable under section 45 of the Act. Section 5 of the Act provides for the scope of the total income, but the said provisions are subject to other provisions of the Act, which would include sub-section (2) thereof. In the case of a non-resident, it would include all income from whatever source derived, which is received or is deemed to be received in India in such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to him in India during such year. What would be the scope of the legal fiction created in terms of section 5 of the Act, as specified in section 9 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be profit and gain in the context of section 80HH of the Act and it was held that the expression "attributable to" would be of wider import. This court is not concerned with the question raised therein. There cannot be any doubt that capital gain may be income, but, in our opinion, the same would have been so, if the transaction had taken place either in India or through or from any property in India or from any asset or source of income in India or through the transfer of the capital asset situate in India. The assessee only had some part of its business operation in India. Its capital assets have nothing to do with its business connections in India. The words "business connection" for the purpose of sections 5 and 9 of the Act must be kept confined to profits arising out of business. When an income accruing or arising from a business by reason of a legal fiction becomes assessable, it must be held that the same must be kept confined to receipts out of the business and not out of the sale of capital assets. In R.D. Aggarwal and Co.'s case [1965] 56 ITR 20 (SC), it has been held: "The expression 'business connection' postulates a real and intimate relation between tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (see CIT v. R.D. Aggarwal and Co. [1965] 56 ITR 20 (SC) and Carborandum Co. v. CIT [1977] 108 ITR 335 (SC)) which are decided on the basis of section 42 of the Indian Income-tax Act, 1922, which corresponds to section 9(l)(i) of the Act." In Qantas Airways Ltd.'s case [2001] 251 ITR 264, a Division Bench of this court observed: "For the purpose of determination of income in the case of non-residents, the modalities to be followed is the percentage of turnover so accrued or arisen as the Income-tax Officer may consider to be reasonable or on any amount which bears the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly having regard to the literal meaning, which can be assigned thereto. Having regard to the purport and object thereof, if the words "business connection in India" were wide enough to cover all transactions including transactions in capital assets, in our opinion, there was no reason for Parliament to specifically include income (a) through or form any property in India, (b) through or from any asset or source of income from India, and (c) through or from sale of a capital asset situate in India. The very fact that in terms of section 9 of the Act, the transfer of a capital asset situate in India has been brought within the purview of the deemed income under section 9 of the Act and rule 10(ii) of the Rules, the intention of Parliament was not to bring within its purview any income derived out of sale or purchase of a capital asset effected outside India. In Dalmia Cement (Bharat) Ltd. v. Galaxy Traders and Agencies Ltd. [2001] 104 Comp Cas 472 (SC), while interpreting section 138 of the Negotiable Instruments Act, it was held: "The Act was enacted and section 138 thereof incorporated with a specified object of making a special provision by incorporating a strict liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e definition in section 2(xii) of the Act a 'deemed gift' is also a gift. The provision of deemed gift in section 4(1)(a) is intended to bring within the purview of the tax such transactions which are entered into between the parties to evade the tax. The question which arises for determination in this case is whether the transaction made by the assessee can be said to be a 'deemed gift' under section 4(1)(a) of the Act. For invoking the deeming provisions of section 4(1)(a) of the Act inquiries have to be made regarding--(i) the existence of a 'transfer of property'; (ii) the extent of consideration given, i.e., whether the consideration is adequate. It is necessary for the Assessing Officer to show that the property has been transferred otherwise than for adequate consideration. The finding as to inadequacy of the consideration is the essential sine qua non for application of the provisions of 'deemed gift'. The provision is to be construed in a broad commercial sense and not in a narrow sense. In order to hold that a particular transfer is not for adequate consideration the difference between the true value of the property transferred and the consideration that passed for the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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