Arijit Pasayat, C.J— At the instance of Revenue the following question has been referred for opinion of this Court under Section 256(1) of the Income-tax Act (in short, the Act) by the Income-tax Appellate Tribunal, Delhi Bench ‘B’ (in short, the Tribunal):

“Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in deleting the addition made by the Income-tax Officer on account of interest earned by the assessee on Commonwealth Treasury Bonds during this year in computing the world income of the assessee in this year?”

2. Dispute relates to assessment year 1971-1972.

3. Factual scenario, as indicated in the statement of the case, is as follows:

Assessee, a company fully owned by the Government of Australia, operates well known airline “Qantas”. Assessee filed a return of income declaring total income of Rs. 3.85.528/-. The same was worked out as follows:

“Adjustment profit

Rate of Profit : Adjusted profit Total World Revenue i.e 6,495.160 = 829

TAXABLE INDIAN INCOME $AU 1,682,629 × 8.4 = 13,294,084 Rs. 13,294,084 × 829 = 385,528”

4. Income-tax Officer made certain adjustments for the purpose of working out the adjusted profit and also the world revenue as per profit and loss account. He made two adjustments. We are essentially concerned with one of the adjustments. ITO was of the view that interest amount of $AU 8,32,832 earned from investments in Common Wealth Treasury Bonds held to protect the insurance funds was in the nature of income and a proportionate part of was liable to tax. This amount was included in the world revenue. By making this adjustment, the ITO worked out net amount liable to tax at Rs. 4,59,360/-. Assessee filed an appeal before the Appellate Assistant Commissioner (in short AAC) and submitted that interest earned from the investment in Common Wealth Treasury Bonds held in Australia to protect the insurance funds, should not have been treated as the assessee's income liable to tax in India. AAC was of the view that when certain income like $AU 91,169 being income from investment and $AU 11,87,661 being income received from interest bearing deposits and other short term funds had been declared as a part of the income under the head Other Revenue, there would be no justification for excluding the sum of $AU 8,32,832/- from the assessment. He upheld the ITO's view. The matter was carried in appeal before the Tribunal. It was contended that no part of the amount in question could be said to have accrued or arisen in India and therefore the same was not liable to be included in the income. It was submitted that the amount of insurance reserves increased yearly by interest received from investments of the reserves which under the directions of the Government of Australia have to be invariably made in Australian Commonwealth Treasury Bonds and sometimes also by capital gains realised on the sale of such investments. These amounts were duly credited to the insurance reserve account at the direction of the Australian Minister for Civil Aviation. Neither under the Australian law of taxation nor the India law of taxation could such interest earnings be regarded as income flowing from any business carried on by the assessee in India. Since the income from interest was not from any transaction in India, it was not liable to tax. Tribunal accepted the submission. On being moved, question, as set out, has been referred for opinion of this Court.

5. We have heard learned Counsel for the parties. Stand of the learned Counsel for Revenue is that the Tribunal has wrongly applied Section 9 of the Act and Rule 10 of the Income-tax Rules, 1962. Tribunal ought to have held that the interest in question was deemed income under Section 9 of the Act and should have been held to have accrued or arisen in India or is reasonably attributable to the operations carried out in India. Learned Counsel for the assessee, on the other hand, submitted that since the interest income has not been earned from any business done in India and is not relatable to any income earned in India, Tribunal's view is in order.

6. In order to appreciate rival submissions, it would be appropriate to first take note of certain statutory provisions which throw light on the controversy. They are Sections 5(2), 9 and Rule 10(2). They read as follows:

section 5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

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9. Income deemed to accrue or arise in India—(1) The. following income 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.

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Rule 10. In any case in which the Income-tax Officer is of pinion that actual asset or the income carrying or arising to any non-resident person 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 sources of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to Income-tax may be calculated—

(i) at such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable; or

(ii) or 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 receipt so accruing or arising bear to the total receipts of the business; or

(iii) in such other manner as the Income-tax Officer may deem suitable.”

7. Section 5 of the Act deals with the scope of total income. section 5(2) deals with total income of any previous year in respect of a person who is non-resident and income may be one which is received or deemed to be received in India during such year by him or on behalf of such person or to have accrued dr arisen or deemed to have arisen to him in India during such year. Section 9 deals with income deemed to have accrued or arisen in India. Rule 10 deals with topic of determination of income in the case of non-resident. On plain reading of Sections 5(2), 9 and Rule 10 the position is clear that where the total income in the case of non-resident has to be treated as income from whatever source derived which is received or is deemed to have been received in such a year by or on behalf of such a person, additional income that arises, or deemed to have arisen or accrued to a person has also to be taken note of. Cumulative conditions necessary for bringing in application under aforesaid provisions are that income which is deemed to have accrued or arisen in India, has to be income whether directly or indirectly or through any business connection in India; through or from any property in India; through or from any asset or source of income in India; through or from any money lent at interest and brought into India in cash or in kind; through the transfer of capital asset situate in India. In the case of business of which all operations are not carried out in India, only such part of the income as is reasonably attributable to the operations carried out in India can be deemed as income from business under Section 9 of the Act, accrued or arisen in India. For the purpose of determination of income in the case of non-residents, modalities to be followed is percentage of turnover so accrued or arisen as the ITO may consider to be reasonable or on any amount which bears the same proportion to the total profits and gains or the business of such person, as the receipt so accruing or arising bears to the total receipts of the business or such other manner as the ITO may deem suitable.

8. In the case at hand, there is no dispute that the assessee as well as the Assessing Authorities have gone by the proportion method. The income which has been treated as accruing or arising from the business carried out in India as an airliner. It has to be noted that no income can be said to have accrued or arisen, either directly or indirectly, either through or from any asset or source of income in India. It is not shown as to how the assessee had or was in receipt of any income through or from any money lent at interest and brought in India either in cash or in kind. Assessee has also not received any income from any transfer of capital assets situate in India. The income of business which can be treated as deemed income under Section 9 must be one which has accrued or arisen in India and the same forms part of the income derived from business carried out in India. Stand of the Revenue is that surplus which was a part of reserve and was invested in bonds has link with the income earned in India and a note to the statement of account on which reliance was placed reads as follows:

“Revenue

Traffic Revenue 177,511,508 158,164,034 Charter Revenue 27,046,923 22,965,266 Contract Work 16,194,979 14,241,939 Income from investments (note 14) 91,169 36,484 Other Revenue (note 15) 4,550,361 3,531,731”

“Insurance Reserve

The reserve of $ 19.36 million at 31st March, 1971 is held to cover risks which the company may decide from time-to-time as a matter of policy, to self-insure. Self-insurance premiums charged against profits during 1970-1971 and created to the insurance reserve amounted to $ 721,254. Interest of $ 832,832 was earned from investments in Commonwealth Treasury Bonds held to protect the Insurance Fund. After claims $ 83,320, and provision for overseas taxation $ 12071 the net amount of $ 737,441 was credited to the reserve.”

9. A reading of the note does not show that the investment in the bonds came out of any income which is even remotely linked with the operations in India. Stand of the Revenue that when there is surplus which is put to reserve and is invested, same includes profits from all operations and consequentially it also includes the income from operations in India. In our considered opinion, such a hypothetical assumption would not be proper. In the absence of any material, either direct or indirect, to show that the amount which was kept in reserve and invested was in fact linked with the operations in India or income accruing or deemed to have accrued in India, an inferential conclusion to that effect would be acting on surmises and conjectures. The Tribunal has recorded its findings that income has neither accrued nor arisen to the assessee from any business operation in India and it cannot be said to be income deemed to have accrued or arisen to the assessee from any business operation in India. As interest derived from investment made by the assessee to the Common Wealth Treasury Bonds accrued outside India, it cannot be treated as income falling under the head profits and gains of business. The concept of accrual or arising of income in India, although not dependent upon the receipt of the income in India, is quite distinct and apart from the notion of deemed accrual. The former follows the general principles of law while in the case of the latter the accrual has to be tested against the deeming provisions of Section 9. The distinction has to be kept in view and the one cannot be mixed with the other [See: Carborandum Co. v. CIT, (1977) 108 ITR 335]. In CIT v. Toshoka Ltd., (1980) 125 ITR 525, it was held that if no operations are carried out in India, no income can be deemed to accrue or arise in India even though there may be a business connection in India. As observed in Carborandum Co.'s case (supra) if all the operations are not carried out in India, the profits and gains of the business deemed to accrue or arise in India shall be only such profits or gains as are reasonably attributable to that part of operations which are carried out in India. That being the position, the Tribunal was justified in its view.

10. We answer the question in affirmative in favour of the assessee and against the Revenue.

Question answered in affirmative.