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Commissioner Of Income-Tax v. Quantas Airways Ltd. .

Delhi High Court

Apr 29, 2002

Judgment

CaseIQ

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Factual and Procedural Background

These references were made by the Revenue under sub-section (1) of Section 256 of the Income Tax Act, 1961, by the Income Tax Appellate Tribunal, Delhi Bench ‘B’, New Delhi. The Tribunal referred common questions of law and fact to this Court and the matters were heard together and disposed of by a common judgment. In ITR No. 228 of 1983 only the second question was referred; in ITR No. 229 of 1983 only the first question was referred.

The factual matrix is undisputed: the assessee is a non-resident company incorporated in Australia, owned by the Government of Australia, carrying on a worldwide air-transport business with centralized accounts in Australia. The assessee sold aircrafts (capital assets) and those sales occurred outside India. The Inspecting Assistant Commissioner held that profits arising from the sale of these capital assets were taxable as income; the Commissioner of Income Tax (Appeals) and the Tribunal held otherwise, prompting the reference by the Revenue.

Legal Issues Presented

Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the order of the Commissioner of Income Tax (Appeals) in excluding the profits arising from the sale of capital assets located outside India from the word “income”?
Whether on the facts and in the circumstances of the case, the Tribunal was 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?

Arguments of the Parties

Revenue's Arguments

The Revenue contended that, having regard to Sub-section (2) of Section 5 of the Income Tax Act, 1961, income from the sale of capital assets situated outside India should be deemed to be income arising in India.
The Revenue relied on the legal fiction in the Act: that income which accrues or arises outside India can be brought into the tax net by deeming provisions and that those provisions must be given full effect.
The Revenue argued that the expression “attributable to” has wide amplitude and relied on authorities such as Cambay Electric Supply Industrial Co. Ltd. v. CIT and Commissioner of Income Tax, Karnataka v. Sterling Foods, Mangalore to support a wide construction.
It was also contended that, under Section 9 and Rule 10(1) of the Income Tax Rules, capital gains are within the concept of “income” and so liable to assessment even if the sale occurred outside India; several authorities were relied upon in support (including Union of India v. A. Sanyasi Rao; G.R. Karthikeyan; Father Epharam; Emil Webber).
The Revenue sought a construction that would permit proportionate assessment of such income under the Act, pointing to international or comparative scenarios to emphasize the assessability of such gains.

Assessee's Arguments

The assessee's counsel pointed out that the capital assets were purchased outside India and the sales took place outside India.
It was argued that the sale of such capital assets was not connected with the assessee's business activity carried on in India (the transport of passengers), and the transactions occurred outside India, so no part of the income could be said to have accrued in India.
Counsel submitted Section 9 of the Act had no application in this case and relied on authorities such as Commissioner of Income Tax v. Quantas Airways Ltd.; R.D. Aggarwal & Co.; Carborundum Co. v. CIT; and Commissioner of Income Tax, A.P. v. Toshoku Ltd. to support the contention that income arising from sales of capital assets outside India, and not connected to operations in India, is not deemable as income arising in India.
On the second question (currency-exchange gain), counsel relied on authorities including CIT, Bombay City v. Tata Locomotive & Engineering Co.; Sutlej Cotton Mills Ltd.; South India Shipping Corporation Ltd.; and Arvind Mills Ltd. to support the characterization issue.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Cambay Electric Supply Industrial Co. Ltd. v. Commissioner of Income Tax, (1978) 113 ITR 84	Cited by Revenue to support a wide meaning of the expression “attributable to”.	Relied upon by Revenue; the Court did not base its decision on this precedent and did not apply it in its reasoning in the opinion.
Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore, (1999) 237 ITR 579	Cited by Revenue to support a wide construction of “attributable to”.	The Court held that Sterling Foods has no application to the instant case and expressly stated it was not concerned with the question decided there.
Union of India v. A. Sanyasi Rao, (1996) 219 ITR 330	Interpreting the word “income” in the context of Entry 82, List I, Seventh Schedule of the Constitution.	The Court observed that the interpretation in that constitutional context should not be imported into the specific statutory scheme of the Income Tax Act and so it did not apply to the present construction.
Commissioner Of Income Tax, Madras v. G.R. Karthikeyan, Coimbatore, (1993) 201 ITR 866	Cited in discussion concerning the meaning of “income” under the Act.	The Court noted this decision concerned different factual and statutory considerations and does not have direct nexus with the present case.
Father Epharam v. Commissioner of Income Tax, (1989) 176 ITR 78	Consideration of whether receipts were referable to the assessee's occupation/vocation (meaning of “income”).	The Court observed the decision was fact-specific and did not lay down dicta directly applicable to the present matter.
Emil Webber v. Commissioner of Income Tax, (1993) 200 ITR 483	Cited in support of the Revenue's proposition that capital gains fall within “income” for Section 9 purposes.	Cited by Revenue; the Court did not rely on this case as a basis for its decision in the opinion.
K.V.A.L.M Ramanathan Chettiar v. Commissioner of Income Tax, Madras, (1973) 88 ITR 169	Relied upon by Revenue for a converse reasoning about assessment and set-off principles (example of cross-border taxation issues).	The Court noted the factual differences and that the principle in that case (money-lending context) did not have direct application to the issues here.
Commissioner of Income Tax v. Quantas (Quantas/Quantas Airways) Airways Ltd., (2001) 251 ITR 264	Interpreting Rule 10 modalities for determination of income of non-residents and use of proportion method.	The Court relied on the Division Bench's observation to show that deemed income under Section 9 must be income accruing or arising from the business carried out in India; used to support the Court's reasoning that business-derived income deemed to accrue in India must be connected to operations in India.
Commissioner of Income Tax, Punjab v. R.D. Aggarwal & Co., (1965) 56 ITR 20	Defines “business connection” as requiring a real and intimate relation between outside trading activity and trading activity within taxable territory.	The Court applied this principle to hold that the necessary relation was absent in the present case and so the sale of aircrafts abroad could not be deemed to accrue in India.
Carborundum Co. v. Commissioner of Income Tax, Madras, (1977) 108 ITR 335	Authority that activities carried out wholly abroad do not amount to business activity carried on in India for deeming purposes; limits Section 42 of the 1922 Act (corresponding to present Section 9(1)(i)).	The Court quoted and relied on the holding to support the conclusion that services or activities performed wholly outside India cannot be treated as operations carried on in India; used to limit the scope of “business connection”.
Commissioner of Income Tax, A.P. v. Toshoku Ltd., (1980) 125 ITR 525	Explains Explanation (a) to Section 9(1)(i): only that part of business income reasonably attributable to operations carried out in India becomes taxable in India.	The Court relied on the analysis to show that if no operations are carried out in India, then income arising abroad cannot be deemed to accrue in India; applied to support non-application of Section 9 to the present sales.
CIT, Bombay City v. Tata Locomotive & Engineering Co., Ltd., (1966) 60 ITR 405	Cited by assessee concerning characterization (second question) of exchange-rate related profit.	Cited among authorities relevant to the second question; the Court noted these authorities but held the second question did not subsist once the first was answered.
Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal, (1979) 116 ITR 1	Principles for determining whether a liability/amount is trading (revenue) or capital in character.	The Court referenced Sutlej Cotton Mills in relation to characterization questions in other cases and to show how the nature of liability can determine tax treatment (applied in discussing similar issues in cited cases).
South India Shipping Corporation Ltd. v. Additional Commissioner of Income Tax, Madras, (1979) 116 ITR 819	Cited by assessee on characterization/currency-liability issues (second question).	Cited among authorities relevant to the second question; no distinct application in the Court's primary reasoning because the second question was rendered non-subsisting.
Commissioner of Income Tax v. Arvind Mills Ltd., (1992) 193 ITR 255	Cited by assessee on characterization of exchange-rate gains (second question).	Cited among authorities relevant to the second question; the Court observed these cases but did not further apply them substantively because the second question did not subsist following the Court's primary conclusion.
D.K. Jain v. State of Haryana, 1995 Lab. I.C. 722 (citing Bengal Immunity)	Discusses that legal fictions are created for a definite purpose and must be limited to that purpose.	Used by the Court to support the proposition that legal fictions in taxation law must be constrained to their object and cannot be extended beyond their purpose.
Bengal Immunity Co. Ltd. v. State of Bihar, AIR 1955 SC 661	Principle that interpretation of explanations/fictional constructs must be limited to intended purpose.	Referred to as foundational authority for limiting legal fictions to their legitimate scope; applied by the Court in its interpretive approach.
Commissioner Of Sales Tax, U.P. v. Modi Sugar Mills Ltd., AIR 1961 SC 1047	Authority that legal fictions must be limited to the purposes for which they were created.	Applied to reinforce the proposition that Section 9's deeming fiction should not be extended beyond its intended field.
Braithwaite & Co. (India) Ltd. v. Employees' State Insurance Corporation, AIR 1968 SC 413	Reiterates that legal fictions are for limited, definite purposes only.	Used by the Court to support the restrictive approach to the application of legal fictions in taxation.
Birla Cement Works v. Central Board of Direct Taxes, (2001) 9 SCC 35 : AIR 2001 SC 1080 : (2001) 248 ITR 216	Where two interpretations are reasonably possible, construction favouring the assessee (especially one acted upon and accepted by Revenue) should be given effect to.	Applied by the Court as part of its interpretive framework to justify adopting the construction favourable to the assessee where reasonable doubt exists.
Excise Superintendent, Warangal v. Deluxe Bar, Kazipet, Warangal, (2001) 9 SCC 497	Fiscal statutes require strict compliance with their requirements.	Referred to by the Court to support the proposition that fiscal provisions must be strictly construed and complied with.
Reva Investment Pvt. Ltd. v. Commissioner of Gift Tax, Gujarat II, (2001) 9 SCC 111	Interpretation of deeming provisions and the requirement to show inadequate consideration to invoke a deeming provision.	Referred to by the Court as an example of the correct approach to applying deeming provisions; used to show limits on broad deeming constructions.
Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd., (2001) 6 SCC 463	Illustrates interpreting a specific statutory provision in light of its object; relevance of special provisions for particular commercial instruments.	Cited to emphasize that special statutory provisions are to be interpreted in light of their object and not extended beyond their purpose; used to underline the Court’s interpretive approach.
Commissioner of Income Tax v. Bharat Heavy Electricals Ltd., (1999) 239 ITR 756	Addressed whether additional liability due to change in currency parity was trading or capital in nature; used in discussion of the second question.	The Court treated this decision as covering the second question and quoted its reasoning demonstrating that characterization depends on whether the liability pertains to trading or capital asset; used to show how similar issues have been resolved.
G.V.K. Industries Ltd. v. Income Tax Officer, (1997) 228 ITR 564	Interpretation under clause (vii)(b) of Section 9(1): whether a resident person can create a business connection for a non-resident as agent.	Referred to as an example of interpretation of Section 9(1) and business connection issues; not applied as determinative in the present facts.

Court's Reasoning and Analysis

The Court proceeded by first identifying the statutory vocabulary and structure relevant to the questions: the definitions in Section 2 (including “income” and “capital asset”), the scope of total income under Section 5, the deeming provision in Section 9(1)(i) and its Explanation (a), Section 45 dealing with capital gains, and Rule 10 of the Income Tax Rules concerning determination of income for non-residents.

Key steps in the Court's analysis (as stated in the opinion):

The Court recognized that “income” under Section 2(24) includes profits and gains and capital gains under Section 45.
The scope of total income (Section 5) is subject to other provisions of the Act, including the deeming provision of Section 9. For a non-resident, Section 5(2) shows that total income includes income received or deemed to be received in India or accruing or arising or deemed to accrue or arise in India.
The specific deeming provision in Section 9(1)(i) makes certain incomes deemed to accrue or arise in India if they arise “through or from any business connection in India,” “from any property in India,” “from any asset or source of income in India,” or “through the transfer of a capital asset situate in India.” The Court noted the income in the present case did not arise from property in India, nor from an asset or source in India, nor from the transfer of a capital asset situate in India.
Therefore, the only remaining limb of Section 9(1)(i) to consider was whether the income arose “through or from any business connection in India.” The expression “business connection” is not defined in the Act, and the Court held that the ordinary meaning should be used.
The Court reviewed the meaning of “business” and observed that the assessee’s business, for the purposes of the Act, must be held to be confined to transport of passengers (i.e., its air-transport operations). The sale of capital assets (aircraft) was not part of those business operations in India.
Explanation (a) to Section 9(1)(i) was considered: it limits attribution to operations carried out in India where operations are not wholly in India. The Court concluded that Explanation (a) is of limited significance here because it applies when some operations are carried out in India; it does not extend the deeming fiction to sales of capital assets effected wholly outside India.
The Court emphasized that legal fictions (such as deeming provisions) should not be extended beyond the object and purpose for which they were created. The Court relied on established authorities to support the proposition that deeming provisions must be confined to their legitimate field and not used to tax transactions outside the intended reach.
Considering precedent authorities (including R.D. Aggarwal; Carborundum; Toshoku; Quantas), the Court concluded that the words “business connection” must be confined to profits arising out of business operations. Where income is not a receipt out of the business (but arises from sale of capital assets effected outside India), it cannot be treated as income deemed to accrue or arise in India under Section 9(1)(i).
Applying these principles to the facts (assessees’ aircraft purchased and sold outside India; sales effected outside India; capital assets not connected to operations carried out in India), the Court concluded the sale proceeds were not income accruing or arising in India and Section 9 did not apply to make them taxable in India.
Because the first question (whether profits from sale of capital assets located outside India fall within “income” for purposes of assessment in India) was answered in favour of the assessee, the Court held that the second question (characterization of exchange-rate gain as capital gain) did not subsist in the context of the present references. The Court nevertheless noted that the second question is covered by judicial authorities including the Bharat Heavy Electricals Ltd. decision and others, which address characterization issues.

Holding and Implications

Holding: The Court answered the first referred question in the affirmative in favour of the assessee and against the Revenue: the profits arising from the sale of capital assets located outside India are not to be treated as income arising in India under Section 9(1)(i) and therefore are not assessable in India under the deeming provision relied upon by the Revenue. (Paragraph 51 of the opinion.)

The Court further held that the second referred question (whether profit due to change in exchange rate of the Australian Dollars is a capital gain) does not subsist once the first question is resolved. The Court observed that the second question is also covered by prior decisions (including Bharat Heavy Electricals Ltd., Sutlej Cotton Mills, Tata Locomotive, Sutlej, Arvind Mills), but in the context of these references it was rendered moot. (Paragraphs 52–54.)

Direct consequences and implications (as stated in the opinion):

The Tribunal and the Commissioner of Income Tax (Appeals) were correct in excluding the profits arising from the sale of capital assets located outside India from the word “income” for purposes of deeming under Section 9(1)(i) in the facts of this case.
The second issue concerning exchange-rate gains did not require a separate answer in these references because it did not subsist once the primary question was decided; the Court noted existing authorities that deal with similar characterization issues.
The references were disposed of without any order as to costs and the reference(s) were answered. (Final lines of the opinion: “These references are accordingly disposed of without any order as to costs.” and “Reference answered.”)
No new, broader precedent was announced to extend the scope of Section 9's deeming fiction beyond the purposes for which it was enacted; the Court emphasized limiting legal fictions to their object and purpose and construing fiscal statutes strictly.

Reference answered.

Show all summary ...

S.B Sinha, C.J— All these references made at the instance of the Revenue in terms of Sub-section (1) of Section 256 of the Income Tax Act, 1961 (hereinafter referred to as, ‘the Act’) by the Income Tax Appellate Tribunal, Delhi Bench ‘B’, New Delhi (hereinafter referred to as ‘the Tribunal’) involving common questions of law and fact were taken up for hearing together and are being disposed of by this common judgment.

2. The questions, which have been referred for opinion of this Court, are as follows:

“(1) Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in upholding the order of the C.I.T (Appeals) in excluding the profits arising from the sale of capital assets located outside India from the word income?

(2) Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in upholding the order of CIT (Appeals) that the profit due to change in exchange rate of the Australian Dollars is a capital gain?”

3. However, in ITR No. 228 of 1983, only the second question and in ITR No. 229 of 1983, only the first question has been referred to this Court for its opinion.

4. The factual matrix of the matter is not in dispute. The assessee is a nonresident 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 the aircrafts, which were its capital assets. Such sales are affected outside India.

5. 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?

6. Although the Inspecting Assistant Commissioner (in short, TAC) held that the profits arising out of sale of capital assets would come within the purview of income at the hands of the assessee, the Commissioner of Income Tax (Appeals) (in short, ‘CIT(A)’) and the Tribunal held otherwise.

7. Mr. Sanjiv Khanna, the learned Counsel appearing on behalf of the Revenue, would submit that having regard to the provisions contained in Sub-section (2) of Section 5 of the Act, such income would be deemed to be an income arising in India.

8. The learned Counsel would urge that as in terms of the aforementioned provisions, the income derived by sale of capital assets would come within the net of assessment as the same accrued or arose or deemed to accrue or deemed to arise outside the territorial jurisdiction of India, in view of the legal fiction created and the same must be given its full effect.

9. The learned Counsel would contend that the expression ‘attributable to’ is of wide amplitude and in support of the said contention reliance has been placed on Cambay Electric Supply Industrial Co. Ltd. v. Commissioner of Income Tax, (1978) 113 ITR 84 and Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore, (1999) 237 ITR 579.

10. The learned Counsel would contend that there does not exist any dispute that having regard to its worldwide network, the assessee had been having computation of worldwide profit and, thus, is liable to pay ‘tax’ in terms of the Act.

11. The learned Counsel would submit that having regard to the provisions contained in Section 9 and Rule 10(1) of the Income Tax Rules, 1962 (in short, ‘the Rules’), the sale of the capital assets would also come within the concept ‘income’ inasmuch as capital gains also come within the purview thereof. Reliance in this connection has been placed on Union of India v. A. Sanyasi Rao, (1996) 219 ITR 330; Commissioner Of Income Tax, Madras v. G.R Karthikeyan, Coimbatore., (1993) 201 ITR 866; Father Epharam v. Commissioner of Income Tax, (1989) 176 ITR 78; and Emil Webber v. Commissioner of Income Tax, (1993) 200 ITR 483.

12. The learned Counsel would contend that there cannot be any doubt whatsoever that the capital gains would be income within the meaning of Section 9 of the Act, even if the sale of the capital assets of the assessee takes place outside India.

13. The learned Counsel would argue that for the purpose of answering the question, a converse case may be taken into consideration inasmuch had the sale of the aircrafts took place in India, the proportionate income could have been assessed in Australia upon setting off the amount of tax paid in India. Reliance in this connection has been placed on K.V.A.L.M Ramanathan Chettiar v. Commissioner of Income Tax, Madras, (1973) 88 ITR 169.

14. Mr. Anoop Sharma, the 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.

15. The sale of such capital assets, the 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 CIT (A) and the Tribunal to be not ‘income’ arising in course of business in India.

16. The 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 Commissioner of Income Tax v. Quantas Airways Ltd., (2001) 251 ITR 264; Commissioner of Income Tax, Punjab v. R.D Aggarwal and Co., (1965) 56 ITR 20; Carborundum Co. v. Commissioner of Income Tax, Madras, (1977) 108 ITR 335; and Commissioner of Income Tax, A.P v. Toshoku Ltd., (1980) 125 ITR 525.

17. On the second question, reliance has been placed by the learned Counsel on Cit, Bombay City v. Tata Locomotive & Engineering Co., Ltd., (1966) 60 ITR 405; Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal, (1979) 116 ITR 1; South India Shipping Corporation Ltd. v. Additional Commissioner of Income Tax, Madras, (1979) 116 ITR 819; and Commissioner of Income Tax v. Arvind Mills Ltd., (1992) 193 ITR 255.

18. Before adverting to the questions involved, we may notice the relevant provisions of the Act and the rules, which are as under:

“Section 2. In this Act, unless the context otherwise requires,—

…………………………………………………………………………………………………

(13) “business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture;

(14) “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include—

(i) any stock-in-trade, consumable stores or raw material held for the purposes of his business or profession;

(ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him.

…………………………………………………………………………………………….

(24) “income” includes—

(i) profits and gains;

………………………………………………………………………………………..

(vi) any capital gains chargeable under Section 45;

Section 5. Scope of total income—

(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a 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 arises to him in India during such year; or

Provided that in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(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 arises to him in India during such year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a 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.

Section 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 though or from any asset or source of income in India, or through the transfer of a capital asset situate in India:

Explanation—For the purpose 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 from operations which are confined to the purchase of goods in India for the purpose of export;

(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;

(d) in the case of a non-resident being—

(1) an individual who is not a citizen of India; or

(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or

(3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company though or from operations which are confined to the shooting of any cinematograph film in India.

Section 22. Income from house property—

The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head “Income from house property”.

Section 45. Capital gains—

(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54b, 54d, 54e, 54ea, 54eb, 54f, 54g and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.”

“Rule 10. Determination of income in the case of non-residents—

In any case in which the Assessing Officer is of opinion that the actual amount of the income accruing 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 though or from any asset or source 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 Assessing Officer may consider to be reasonable, or

(ii) on any amount which bears the same proportion to the total profit 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.”

19. The expression ‘income’ in terms of the interpretation clause as mentioned above in Sub-section (24) of Section 2 of the Act would include profits and gains and any capital gains chargeable under Section 45 of the Act.

20. 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 Subsection (2) thereof.

21. In 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 accrue or arise or is deemed to accrue or arise to him in India during such year.

22. 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 Act?

23. Such income, as noticed hereinbefore, must arise or accrue, (a) from any business connection in India, or (b) from any property in India, or (c) from any asset or source of income in India, or (d) through the transfer of a capital asset situate in India. The income in question had not arisen from business connection in India or from any asset or source of income in India or through transfer of a capital asset situate in India.

24. The only question, therefore, remains for consideration, is as to whether the purported ‘income’ arises through or from any business connection in India.

25. The expression ‘business connection’ has not been defined in the Act. In absence of any definition, the ordinary meaning of the said expression must be taken recourse to.

26. The meaning of expression “business”, according to Collins Cobuild English Language Dictionary 1991 Edn. is as under:

“…‘Business’ is work relating to the production, buying and selling of goods or services;

AND/OR

‘Business’ is the activity of buying, selling or exchanging goods in deal with people or companies.”

27. Rule 10(2) of the Rules more or less uses the same expression as has been used in Section 9 of the Act. The assessee carried on business of operating air-transport business. The business activity of the assessee for the purpose of the Act must be held to be confined to the transport of passengers.

28. Section 9(i) of the Act per se can be said to have any application in the instant case inasmuch as the answer to the question referred has to be made in terms of Section 9 of the Act alone. The explanation (a) appended to Clause (i) of Sub-section (1) of Section 9 of the Act will not be much significance inasmuch as the same is confined to a case where all operations of the business are carried out in India and only in that event, that part of income as is reasonably attributably to the operations carried out in India can be treated to be income arising in India. In that view of the matter, the meaning of expression “attributable to” is held to have a wide expression. Thus, the decision in Sterling Foods's case (supra) cannot be said to have any application in the instant case. Therein a question arose whether the assessee was entitled to use the import entitlements itself or sell the same to others and/or whether sale of such import entitlements would 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.

29. There cannot be any doubt that capital gain may be an income, but, in our opinion, the same would have been so, if the transaction would have 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.

30. 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.

31. In R.D Aggarwal and Co.'s case (supra), it has been held:

“… The expression “business connection” postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. In this case such a relation is absent.”

32. In Carborundum Co.'s case (supra), it has been held:

“… The High Court was wrong in its view that activities of the foreign personnel lent or deputed by the American company amounted to a business activity carried on by that company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as their employees, paid their salary and they worked under the direct control of the Indian company. The service rendered by the American company in that connection was wholly and solely rendered in the foreign territory. Even assuming however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company, yet no part of the activity or operation could be said to have been carried on by the American company in India. And in the absence of such a sustainable finding by the High Court the provisions of Section 42, either of Sub-section (1) or of Sub-section (3), were not attracted at all.”

33. Yet again in Toshoku Ltd.'s case (supra), the matter has been discussed in the following terms:

“… It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of Clause (a) of the Explanation to Clause (i) of Sub-section (1) of Section 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that 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. If all such operations are carried out in India, the entire 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 Carborundum Co. v. CIT, [1977] 108 ITR 335 (SC), which are decided on the basis of Section 42 of the Indian I.T Act, 1922, which corresponds to Section 9(1)(i) of the Act.]”

34. In Quantas Airways Ltd.'s case (supra), 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 proportion to the total profits and gains of the business of such person, as the receipt so accruing to arising bears to the total receipts of the business or in such other manner as the Income-tax Officer may deem suitable.

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. The 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.”

35. Legal fiction, as is well known, should not be extended beyond its object and purport. It shall not be applied beyond the purpose for which it was created.

36. In D.K Jain v. State of Haryana, 1995 Lab. I.C 722, it was observed that in the case of Bengal Immunity Co. Ltd. v. State of Bihar, AIR 1955 SC 661, it was held:

“Whichever view is taken of the explanation it should be limited to the purpose the Constitution makers had in view when they incorporated it in Clause (1). It is quite obvious that it created a legal fiction. Legal fictions are created only for some definite purpose.”

37. In Commissioner Of Sales Tax, U.P v. Modi Sugar Mills Ltd. , AIR 1961 SC 1047, it was observed:

“A legal fiction must be limited to the purposes for which it has been created and cannot be extended beyond its legitimate field.”

38. In Braithwaite & Co. (India) Ltd. v. Employees' State Insurance Corporation, AIR 1968 SC 413, it was held:

“A legal fiction is adopted in law for a limited and definite purpose only and there is no justification for extending it beyond the purpose for which the Legislature adopted it.”

39. It is now well-settled principles of law that a statute should be construed firstly 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 the Parliament to specifically include income (a) through or from any property in India; (b) through or from any asset or source of income from India; and (c) through or from sale of capital asset situate in India.

40. The very fact that in terms of Section 9 of the Act, the transfer of capital asset situate in India has brought within the purview of the deemed income under Section 9 of the Act and Rule 10(2) of the Rules, the intention of the Parliament was not to bring within its purview any income derived out of sale or purchase of a capital asset effected outside India.

41. In Dalmia Cement (Bharat) Ltd. v. Galaxy Traders and Agencies Ltd., (2001) 6 SCC 463, while interpreting Section 38 of the Negotiable Instruments Act, it was held:

“3. The Act was enacted and Section 138 thereof incorporated with a specified object of making a special provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned. The law relating to negotiable instruments is the law of commercial world legislated to facilitate the activities in trade and commerce making provision of giving sanctity to the instruments of credit which could be deemed to be convertible into money and easily passable from one person to another. In the absence of such instruments, including a cheque, the trade and commerce activities, in the present day world, are likely to be adversely affected as it is impracticable for the trading community to carry on with it the bulk of the currency in force. The negotiable instruments are in fact the instruments of credit being convertible on account of legality of being negotiated and are easily passable from one hand to another. To achieve the objectives of the Act, the Legislature has, in its wisdom, thought it proper to make such provisions in the Act for conferring such privileges to the mercantile instruments contemplated under it and provide special penalties and procedure in case the obligations under the instruments are not discharged. The laws relating to the Act are, therefore, required to be interpreted in the light of the objects intended to be achieved by it despite there being deviations from the general law and the procedure provided for the redressal of the grievances to the litigants. Efforts to defeat the objectives of law by resorting to innovative measures and methods are to be discouraged, lest it may affect the commercial and mercantile activities in a smooth and healthy manner, ultimately affecting the economy of the country.”

42. Furthermore, it is well known that in case of any doubt or dispute and if two interpretations are reasonably possible, the constructions, which would favour the assessee and which has been acted and accepted by the Revenue should be given effect to. (See Birla Cement Works v. Central Board of Direct Taxes, (2001) 9 SCC 35 : AIR 2001 SC 1080 : 2001) 248 ITR 216.

43. It is also well known that requirements in fiscal statutes are required to be strictly complied with. (See Excise Superintendent, Warangal, Distt. Warangal v. Deluxe Bar, Kazipet, Warangal, (2001) 9 SCC 497).

44. Yet again in Reva Investment Pvt. Ltd. v. Commissioner of Gift Tax, Gujarat II, (2001) 9 SCC 111, it has been held:

“10. Ordinarily, a gift is a transfer of property without consideration; but for the purpose of the Act a transfer for inadequate consideration is to be deemed to be a gift under Section 4(1)(a). By the inclusive 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 between the parties to evade the tax.

11. 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 enquiries have to be made regarding—(i) the existence of a “transfer of property”, and (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 different between true value of the property transferred and the consideration that passed for the same must be appreciated in the context of the facts of the particular case. If the transaction involves transfer of certain property in lieu of certain other property received then the process of evaluation of the two items of property should be similar and on such evaluation if it is found that there is appreciable difference between the value of the two properties then the transaction will be taken as a “deemed gift” to the extent as provided in the section. It is to be found that the transaction was on inadequate consideration and the parties deliberately showed the valuation of the two properties as the same to evade tax. Such a conclusion cannot be drawn merely because according to the Assessing Officer there is some difference between the valuation of the property transferred and the consideration received.”

45. In the aforementioned backdrop, the decisions cited by Mr. Sanjiv Khanna may be considered.

46. In A. Sanyasi Rao's case (supra) and G.R Karthikeyan's case (supra), the Apex Court was considering the meaning of the word “income” in the context of Entry 82 List I of the 7th Schedule of the Constitution of India. Interpretation of an entry should be brought based is a well known concept, but the same would not having regard to the specific provisions contained in the Act be brought into services for the purpose of construction word “income” used in other context.

47. In Father Epharam's case (supra), a Division Bench of the Karnataka High Court was considering the meaning of the word “income” having regard to the scheme of Sections 2(24), 4 and 10 of the Act. The question, which arose for consideration, was “receipts at the hands of the assessee were referable to his occupation or vocation or not”. The said decision, therefore, was rendered in the affirmative in fact situation obtaining therein and no dicta has been laid down therein, which has a direct nexus with the subject matter of the present case.

48. In G.V.K Industries Ltd. v. Income Tax Officer, (1997) 228 ITR 564, a Division Bench of the Andhra Pradesh High Court was interpreting the provisions of Clause (vii)(b) of Sub-section (1) of Section 9 of the Act, which shows that income by way of fees for technical services payable by a person, who is a resident, would be an income. In that case, the question arose as to whether the person residing in India has any business connection with it as a non-resident as an agent.

49. In K.V.A.L.M Ramanathan Chettiar's case (supra), the assessee was doing money-lending business, although in Malaya as well as in India. Therein the Apex Court held that a sum of Rs. 1,92,816/- had suffered double taxation, in this case, the question of set off dos not arise.

50. In Commissioner of Income Tax v. Bharat Heavy Electricals Ltd., (1999) 239 ITR 756, a Division Bench of this Court was concerned with a question as to whether a particular expenditure is capital or revenue in nature. Thus, the same has no application in the case at hand.

51. For the reasons aforementioned, we are of the opinion that the first question must be answered in the affirmative, in favour of the assessee and against the Revenue.

52. So far as the second question is concerned, having regard to the answer to the question No. 1, the same does not subsist.

53. The said question, however, is also covered in Tata Locomotive and Engineering Co. Ltd's case (supra); Sutlej Cotton Mills Ltd.'s case (supra); Arvind Mills Ltd.'s case (supra); and a recent decision of this Court in Bharat Heavy Electricals Ltd.'s case (supra) therein the question, which arose for consideration, inter alia was:

“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in upholding the deletion of the disallowance of Rs. 7,65,21,000/- on account of additional liability on the change of rupee-rouble parity ratio?”

54. The aforesaid question was answered stating:

“… Thus, the answer to the first question whether the additional liability which the assessee had incurred on account of change in the rupee-rouble parity ratio would necessarily depend on the answer to the question whether the additional liability pertains to the trading asset or capital asset. In the statement of the case, the Tribunal has stated that the fact that the claim in question related to the increase in the existing liabilities outstanding against the assessee in respect of the supply of material made by the USSR on deferred credit facility basis was not disputed. As noticed above, even the stand of the Assessing Officer was that even if the money was originally related to raw material inputs from the USSR but it changed its character when it was blocked under the deferred payment account, giving also an enduring advantage to the assessee. We find that the said findings, which are pure findings of fact, are not sought to be challenged as perverse in the proposed question. Therefore, in the present case, admittedly the initial liability arose on account of purchase of new material, a trading debt, and after it had arisen, nothing happened to divest it of the character of a trading debt. In this view of the matter, applying the principles of law adumbrated in Sutlej Cotton Mill's case [1979] 116 ITR 1 (SC), we are of the opinion that the Tribunal came to the correct conclusion that the additional liability incurred by the assessee on the change of the rupee-rouble parity ratio was allowable as a trading liability.”

55. These references are accordingly disposed of without any order as to costs.