Carew & Co. Ltd. v. Commissioner Of Income-Tax, West Bengal Iii.

Dipak Kumar Sen, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, the only question referred to us is as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of Rs. 3,32,158, Rs. 3,79,290 and Rs. 3,64,760 representing interest on bank overdraft and debenture loan as allocated to the Pakistan branch by the assessee-company in the assessments for the assessment years 1960–61, 1961–62 and 1962–63, respectively?”

2. The assessment years involved as will appear from the question itself are 1960–61, 1961–62 and 1962–63, the relevant previous years each ending on the 30th June. The assessee, Carew & Co. Ltd., is an Indian company and has its registered office in Calcutta. The assessee carries on the business of manufacturing and selling spirits, liquors, sugar, etc. The assessee has distillery and factories at Rosa and Asansol in the Union of India and also at Darsana, formerly in East Pakistan, now Bangladesh. The control and management over all the branches are exercised from the head office of the assessee in Calcutta. All the directors of the assessee reside in Calcutta and the factories are run by managers who periodically send their reports to the directors in Calcutta and take instructions from them. The entire financial arrangements of the assessee are made at the head office at Calcutta where the accounts of the company as a whole are consolidated, though statements of accounts relating to different branches are prepared separately. Before the partition of India the assessee had raised two mortgage debentures, the first being in the year 1938 and the second in 1941. The funds raised by the said debenture in 1938 were utilised for building the factory at Darsana. After the partition of India the said factory at Darsana fell within the territory of East Pakistan.

3. The assessee had overdraft accounts with the State Bank of India both in India and Pakistan. The overdraft arrangements in Calcutta were utilised by the head office of the assessee for financing the transactions of the assessee. Such transactions included remittances of funds as and, when necessity arose from Calcutta to Darsana up to the year 1949. There was no free remittance of funds between India and Pakistan since 1949. In the Pakistan branch of the State Bank of India an overdraft had been sanctioned in favour of the assessee's Dacca branch to the limit of Rs. 5,00,000.

4. The interest payable on the aforesaid overdrafts and debenture loans every year were allocated by the assessee between its businesses or branches in India and businesses or branches in Pakistan. In the accounts the amount which was allocated to Pakistan was being debited to the Pakistan branch. In the assessment years in question the assessee claimed deduction of three amounts, namely, Rs. 3,32,158, Rs. 3,79,290 and Rs. 3,64,760, being interest debited to its Pakistan branch in the computation of its total income including income in India.

5. The Income-tax Officer found that the amount of interest allocated to the Pakistan branch had been claimed as a deduction in the assessment of the Darsana branch of the assessee in Pakistan. The Pakistan revenue authorities did not allow such deduction on the ground that such interest was payable outside the taxable territory of Pakistan and no income-tax was deducted at source. From such disallowance, an appeal was pending before the Supreme Court of Pakistan. As the amount of interest was debited to the account of the Pakistan branch and had been claimed in the assessment in Pakistan, the Income-tax Officer in India rejected the claim of the assessee for deduction of the said amounts in the assessments in India.

6. Being aggrieved, the assessee went up on appeal before the Appellate Assistant Commissioner. In the appeals relating to the assessment years 1960–61 and 1961–62, the Appellate Assistant Commissioner found that the entire interest on the debentures as well as for the overdraft with the State Bank of India, Calcutta, were payable and paid by the Calcutta head office of the company. The borrowing on these two accounts were found to have been made by the assessee's head office for the purpose of the assessee's business as a whole. It was also found that the branches had no liability either to the debenture-holders or to the State Bank of India at Calcutta. So far as the remittances to the branches are concerned, it was found that such remittances were out of the general funds of the company at the head office. The Appellate Assistant Commissioner held that the entire overdraft and debenture interest should be allowed as deductions.

7. In the appeal from the assessment of the assessment year 1962–63, the then Appellate Assistant Commissioner, however, found that the assessee was claiming deduction in respect of the same amount both in India as also in Pakistan and to allow the assessee such deduction would amount to permitting the assessee to take two different stands in respect of the same claim. On that ground the appeal in respect of this assessment year was rejected.

8. The department being aggrieved went up on appeal from the order of the Appellate Assistant Commissioner for the assessment years 1960–61 and 1961–62 and the assessee similarly preferred an appeal from the order of the Appellate Assistant Commissioner for the assessment year 1962–63.

9. In the said appeals it was noted that there was an agreement for avoidance of double taxation between India and Pakistan. The particular fact, in this case, that there was an allocation of interest country wise in accordance with law was also noted. The Tribunal came to the conclusion that in order to circumvent the provisions of the agreement for avoidance of double taxation the assessee had proceeded on the theory of a single business. There had been assessment by Pakistan income-tax authorities disallowing the amounts of interest in dispute as no taxes were deducted at source out of such interest payable outside Pakistan. The assessee itself had claimed deduction for such interest and an appeal was pending against such disallowance before the Supreme Court of Pakistan. Considering all the facts and circumstances the Tribunal held that the decision of the Madras High Court in the case of Commissioner of Income-tax v. Somasundaram Cheltiar AIR 1928 Mad 487 [FB]. and the principles laid down therein applied in this case and the assessee was not entitled to any deduction for interest as claimed.

10. The facts as set out above appear from the statements of the case and the annexures thereto.

11. Mr. Somnath Chatterjee, learned counsel for the assessee, contended before us that it was found as a fact that the business which was being carried on by the assessee was one business all along. The branch at Darsana by reason of the partition of the country no doubt had gone out of the territory of India but that did not in any way affect the nature of the business as a whole carried on by the assessee. He relied on section 10(2)(iii) of the Indian Income-tax Act, 1922, and section 36(1)(iii) of the Income-tax Act, 1961. The said sections are as follows:

“10. Business.—(1) The tax shall be payable by an assessee under the head ‘Profits and gains of business, profession or vocation’ in respect of the profits and gains of any business, profession or vocation carried on by him.

(2) Such profits or gains shall be computed after making the following allowances, namely:— ……

(iii) in respect of capital borrowed for the purposes of the business, profession or vocation,………the amount of the interest paid……”

“36. Other deductions.—(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—……

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession.”

12. Mr. Chatterjee contended that the language of the sections is clear and if it was found that the business at Darsana was the business of the assessee then the assessee was entitled to claim deduction of the interest paid irrespective of the fact whether such interest was allocated in the accounts of the assessee or whether the capital borrowed by the assessee had been invested.

13. In support of his contentions, Mr. Chatterjee relied on a decision of the Supreme Court in the case of Commissioner of Income-tax v. C. Parakh & Co. (India) Ltd. This decision had been cited before the authorities below. In this case the assessee was a limited company resident and ordinarily resident in India and had its head office in Bombay. The company maintained a branch at Karachi for purchasing cotton for shipment to Bombay as also for export direct to other places. The managing agents of the company were entitled to a remuneration of 20% of the annual net profits of the company. The company had apportioned the managing agency commission and debited the proportionate amounts in the respective profit and loss accounts for the Bombay head office and the Karachi branch. In computing the Pakistan income of the assessee for the purpose of double taxation relief the Income-tax Officer deducted from the income of the Karachi branch the proportionate managing agency commission. The question arose whether in those circumstances the amount paid to the managing agents as commission at 20% of the net profits of the Karachi branch was allowable as a revenue deduction against the Indian profits of the assessee-company for the accounting year.

14. On these facts the Supreme Court held that where an assessee carried on the same business at a number of places, then for the purpose of section 10 of the Indian Income-tax Act, 1922, there was only one business and the net profits of the business had to be ascertained by pooling together the profits earned in all the branches and deducting therefrom all the expenses. The fact that some of the branches were outside India will make no difference to the position if the assessee was a resident and ordinarily resident within the taxable territories.

15. Mr. B.L Pal, learned counsel, on the other hand, contended on behalf of the revenue that the facts found in the instant case were that there were two separate businesses of the assessee—one being in India and the other being in Pakistan. Accounts of the said two businesses were kept separately and the interest payable on overdrafts and debentures had been allocated separately for the two separate businesses. Mr. Pal emphasised the fact that capital must have been utilised by the assessee for its business in Pakistan and such capital at present must be considered to have gone out of the Indian territory. On such facts Mr. Pal urged that the principles laid down in the Madras case, namely, Commissioner Of Income-Tax v. V.S.K.S. Somasundaram Chettiar, applied in the facts and circumstances of this case.

16. Mr. Pal further contended that this decision of the Madras High Court has been subsequently approved by the Supreme Court in the case of Commissioner Of Income Tax, Madras v. Indian Bank Limited, Madras [1965] 56 ITR 77 SC. The facts in that case before the Supreme Court, however, are entirely different from the facts of the case before us, but the Supreme Court in its judgment in that case, inter alia, observed at pages 81-82 of the report as follows:

“The Madras High Court's decision in Commissioner Of Income-Tax v. V.S.K.S. Somasundaram Chettiar does not assist Mr. Sastri. The assessee carried on business at Madras, where his head office was, and Ipoh, a place in the Federated Malay States. Money was borrowed at Madras and part of it sent to Ipoh where it was used as capital in the conduct of Ipoh business. The High Court held that interest on the part of the borrowed money used at Ipoh was rightly disallowed as a deduction because the business which was being taxed was the business at Madras and not the business at Ipoh. No exception can be taken to the decision but it does not advance the appellant's case because we are concerned with one indivisible business.”

17. We have carefully considered this judgment of the High Court of Madras as also the judgment of the Supreme Court which has approved of the same. The facts in the case before the Madras High Court were that the assessee carried on a business in various places including at Madras where the head office was stituated and at Ipoh being in the then Federated Malay States. Money had been borrowed by the assessee in Madras and part of the money was sent out to Ipoh and was used as capital in the conduct of the Ipoh business. Deductions for the purpose of income-tax payable by the assessee in India were claimed in respect of the interest paid by the assessee in respect of the moneys borrowed. The interest paid on the amounts which were remitted by way of capital to the Ipoh branch was disallowed by the income-tax authorities in India. The Madras High Court held, considering the sections of the Income-tax Act then in force, that what was really being taxed in India was the part of the business which was carried on in India and not the business which was being carried on at Ipoh. The section of the Income-tax Act then in force was quoted by the Madras High Court as follows:

“The words of the section are:

Such profits or gains (i.e, the taxable profits or gains of the business) shall be computed after making the following allowances,

and then comes (iii),

in respect of capital borrowed for the purposes of the business where the payment of interest thereon is not in any way dependent on the earning of profits, the amount of the interest paid.”

18. After considering the language of the section, the Madras High Court held that the expression “capital borrowed for the purpose of the business” should mean capital borrowed and used for the purposes of the business.

19. An argument was advanced before the Madras High Court that the business carried on in Madras included the business of financing the Ipoh branch. The court observed that if it was found as a fact that all the profits of the Ipoh branch were automatically remitted to Madras and that the Madras office was notiona???y running in its Madras office the business of Ipoh, then this argument possibly could have been entertained but there was no finding to that effect. In that view of the matter the Madras High Court accepted the contentions of the revenue and upheld the rejection of the claim of deduction.

20. Mr. Chatterjee referred to the sections of the Indian Income-tax Act, 1922, as they stood at the relevant time when the Madras High Court disposed of the said case. Section 4 of the Indian Income-tax Act, 1922, read as follows:

“4. (1) Save as hereinafter provided, this Act shall apply to all income, profits or gains, as described or comprised in section 6, from whatever source derived, accruing, or arising, or received in British India, or deemed under the provisions of this Act to accrue, or arise, or to be received in British India.

(2) Profits and gains of a business accruing or arising without British India to a person resident in British India shall be deemed to be profits and gains of the year in which they are received or brought into British India, notwithstanding the fact that they did not so accrue or arise in that year, provided that they are so received or brought in within three years of the end of the year in which they accrued or arose.

Explanation.—Profits or gains accruing or arising without British India shall not be deemed to be received or brought into British India within the meaning of this sub-section by reason only of the fact that they are taken into account in the balance sheet prepared in British India.”

21. Mr. Chatterjee argued that the decision of the Madras High Court has to be construed in the background of the old sections of the Act. In the context of the later Act in each case the world income of the assessee has to be computed.

22. It appears to us that there is substance in the contentions of Mr. Chatterjee. From the facts found it cannot be disputed that so far as the assessee is concerned, at all material times prior to the partition of India and thereafter it was running one business with different branches. The head office, the directors, the financial control and management of the entire business were at all material times at or being done from one place, namely, Calcutta. In that view of the matter it cannot be said that the business at Darsana was a separate business. In the Madras case the business at Ipoh was held to be a separate business for the limited purpose of computation of taxation, as the only income which was taxable was the income which was arising from the business carried on in India and not outside. From that point of view the business was held to be divisible. It also appears to us that the Supreme Court approved of the Madras decision on that basis. The law has been clearly laid down by the Supreme Court in Parakh's case referred to earlier. The facts in that case seem to match the facts of the case before us and there is no reason why the propositions of law laid down by the Supreme Court in that case will not apply here. Following such law we return our answer to the question referred in the negative and in favour of the assessee. It has been brought to our notice that in the instant case the revenue had allowed the deductions claimed only as against the income accruing from the branch of the assessee at Darsana on the basis of the allocation in the assessee's accounts. We make it clear that the deduction claimed will be available as against the entire income of the assessee including income arising within the Union of India. In the facts and circumstances there will be no order as to costs.

Deb, J.:— I agree.