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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This appeal arises from an assessment order dated 7 August 1931 by the Income-tax Officer (A Ward, Bombay) against Messrs. Currimbhoy Ebrahim and Sons, Limited (the respondent company), who were treated as agents of His Exalted Highness the Nizam of Hyderabad for assessment of income-tax for the year 1931–1932 (accounting period 1930–31). The assessment included two items: (a) Rs. 27,960 claimed as tax due from the Nizam under the head "property" in respect of house property in Bombay (property with which the respondent company had no connection), and (b) Rs. 3,15,214 claimed under the heading "Other Sources" as interest received by the Nizam from a loan of Rs. 50,00,000 made to the respondent company under an agreement dated 16 August 1929.

Earlier, under Section 43 of the Indian Income-tax Act (Act XI of 1922), a notice dated 7 May 1931 was issued indicating the Income-tax Officer's intention to treat the respondent company as agents of the Nizam; the respondent objected, and on 5 June 1931 the Officer held there was a "business connection" and that the respondent company might be deemed the Nizam's agent. The respondent appealed to the Assistant Commissioner of Income-tax, Bombay; that appeal was dismissed, upholding the Officer's findings both regarding the interest and the inclusion of the house property on the ground that the Officer could select any agent as the principal agent and bring all items of income into one assessment.

The respondent applied under Section 66 for a reference to the High Court of Bombay on questions of law. The Commissioner framed five questions for the reference. The Commissioner of Income-tax's opinion (under s.66(2)) supported the view that the interest income arose from a business connection in British India (Section 42(1)) and that the respondent company should be deemed the Nizam's agents. The High Court of Bombay answered all five referred questions in the negative and held there was no business connection and the respondent company were not covered by Section 43. The Commissioner subsequently appealed to His Majesty in Council.

Legal Issues Presented

  1. Whether the facts of the case constitute a business connection between the applicants (the respondent company) and His Exalted Highness the Nizam within the meaning of Section 42 of the Income-tax Act.
  2. Whether the interest earned by His Exalted Highness the Nizam on the loan made to the applicants constitutes profit or gain accruing or arising to the Nizam directly or indirectly through or from any business connection or property in British India chargeable to income-tax in the name of the applicants.
  3. Whether the assessee can in law be deemed to be agent of His Exalted Highness the Nizam under Section 43 of the Income-tax Act.
  4. Whether the applicants are liable to be assessed as agent for His Exalted Highness the Nizam in respect of (A) interest on the loan referred to, and (B) the property income referred to.
  5. Whether the assessment levied on the applicant is valid in law.

Arguments of the Parties

Appellant (Commissioner for Income-tax)

  • The Commissioner contended that, although the interest income did not in fact accrue or was not in fact received in British India within the literal meaning of Sub-section (1) of Section 4, the income was to be deemed by virtue of Section 42(1) to be income accruing or arising in British India, and thus chargeable to British Indian income-tax.
  • The Commissioner relied on the Income-tax Officer's earlier decision (and his own opinion under s.66(2)) that a business connection existed between the respondent company and the Nizam and that the respondent could be deemed the Nizam's agent under Section 43 for purposes of assessment.
  • The assessment included an item in respect of house property in Bombay on the rationale that income from all sources of an assessee must be included in one assessment and that a principal agent may be selected to aggregate income.

Respondent (Messrs. Currimbhoy Ebrahim & Sons, Limited)

  • The respondents contended that the words "business connection" and "property" in Section 42(1) should be read as repetitions of the expressions "business" and "property" used elsewhere in Section 6 (heads of income), and that the particular interest income at issue — taxable under the sixth heading "Other Sources" — therefore cannot be said to accrue or arise through or from any business connection or property in British India within the meaning of Section 42(1).
  • In support of this contention the respondents referred to observations in Re Rogers Pyatt Shellac & Co. v. Secretary of State for India (1924) I.L.R. 52 Cal. 1 and Commissioner of Income-tax, Burma v. Messrs. Steel Brothers & Co., Ltd. (1925) I.L.R. 3 Ran. 614.
  • Factual arguments implicit in the record (as accepted by the High Court and by their Lordships) included that the loan was an isolated transaction, there was no evidence of a prior course of dealing or that the Nizam carried on business of money lending, and that the respondent company had no interest in or business connection with the Nizam.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Re Rogers Pyatt Shellac & Co. v. Secretary of State for India (1924) I.L.R. 52 Cal. 1 Observations relied upon by the respondents to support the view that "business connection" and "property" in Section 42(1) are to be read as repetitions of the heads of income in Section 6. The court noted the reference but rejected the contention derived from it, holding that "business connection" is different from the defined term "business" and that the subsection's wording must be given its ordinary meaning; consequently the observations did not determine the present case.
Commissioner of Income-tax, Burma v. Messrs. Steel Brothers & Co., Ltd. (1925) I.L.R. 3 Ran. 614 Referred to in support of the respondents' argument about the meaning of "business connection" and "property" in Section 42(1). The court considered the reference but did not accept the respondents' reliance upon it; the court treated "business connection" and "property" in Section 42(1) according to their ordinary and contextual meanings rather than as mere repetitions of Section 6.
Income-tax Commissioner, Bombay Presidency v. Bombay Trust Corporation (1929) L.R. 57 I.A. 49; S.C. 32 Bom L.R. 361 Case used for factual comparison in prior decisions where circumstances indicated a business connection; cited by parties for analogy. The court observed that the facts of the present case did not justify a comparison with Bombay Trust Corporation; there was no proof of an ongoing business relationship or other elements present in that case to establish a "business connection."

Court's Reasoning and Analysis

The Board's reasoning proceeds from statutory construction and the facts found in the letter of reference:

  1. Statutory context and issue: The central legal question was whether the interest income, although not in fact accruing in or received in British India for the purposes of Section 4(1), was nevertheless to be deemed by Section 42(1) to have accrued in British India because it arose "directly or indirectly through or from any business connection in British India" or "through or from any property in British India."
  2. Construction of "business connection" and "property" in Section 42(1):
    • The Board held that "business connection" is a different phrase from the defined statutory term "business" and must be construed in its ordinary sense and in the context of Section 42(1), not collapsed into the heads of income in Section 6.
    • The term "property" in Section 42(1) should be read in its ordinary meaning as something tangible and, importantly, the phrase "property in British India" plainly implies that the property is to be situated in British India. The Board rejected the narrower view that "property" in s.42(1) is confined to immovable property (land and buildings), although it did accept that the word should be taken in an ordinary, tangible sense rather than as a mere technical or notional situs device for choses in action.
  3. Application to the facts — business connection: On the facts recorded, the loan was an isolated transaction. There was no evidence that the Nizam had an interest (direct or indirect) in the respondent company, no prior course of dealing that could be described as a business connection, nor any element comparable to cases where a business connection had been established. The Board also noted that there was no proof that the Nizam carried on a business of money-lending in Hyderabad or British India; the transaction looked like an investment of surplus capital secured by mortgage.
  4. Application to the facts — property: The Board found that the statutory phrase "property in British India" should be read literally; a notional or technical situs of a chose in action (for purposes such as administration) is not the test for deeming income to have accrued in British India under Section 42(1). The securities and the fact of repayment outside British India did not make the interest income arise "through or from" property situated in British India as intended by the subsection.
  5. Consequence for the deemed agent/assessment question: Because neither branch of Section 42(1) (business connection nor property in British India) was satisfied on the established facts, the interest income was not to be deemed to have accrued in British India and therefore was not chargeable to Indian income-tax. The Income-tax Officer's earlier order (5 June 1931) deeming the respondent company to be the Nizam's agent for assessment purposes was found to be without foundation and invalid.
  6. Ancillary points: The Board declined to consider questions under Section 44 of the Act because it was unnecessary once the primary s.42(1) issues were resolved against the appellant. The Board also found it anomalous that debtors in India could be made liable for income-tax on a non-resident's house property in Bombay with which the debtors had no concern, particularly where tax had already been assessed and paid by the person managing the property.
  7. Agreement with the High Court: Their Lordships expressly agreed with the High Court of Bombay's negative answers to questions (1), (2), and (5) in the reference.

Holding and Implications

APPEAL DISMISSED. Their Lordships advised His Majesty that the appeal should be dismissed with costs.

Direct consequences for the parties:

  • The interest income received by the Nizam in respect of the loan to the respondent company is not to be deemed to have accrued or arisen within British India and is therefore not liable to British Indian income-tax on that basis.
  • The Income-tax Officer's order of 5 June 1931, whereby the respondent company was deemed to be an agent of the Nizam and made the assessee for those monies, was held to be without foundation and invalid.
  • Because the decision turns on the application of Section 42(1) to the facts of this case, the Board did not formulate any wider novel principle beyond the literal and contextual readings of "business connection" and "property in British India"; the decision therefore leaves intact the requirement that one establish on the facts either a business connection in British India or property situated in British India before deeming income to have accrued there under Section 42(1).

No broader new precedent beyond the application of Section 42(1) to the facts was announced; the Board limited its decision to the questions referred and to the particular facts before it.

Show full summary ...

    The Commissioner Of Income Tax v. Currimbhoy Ebrahim And Sons Limited

    1. This appeal arises out of an assessment order made by the Income-tax Officer of A. Ward, Bombay, on August 7, 1931, against the respondent company Messrs. Currimbhoy Ebrahim and Sons, Limited, as agents of His Exalted Highness the Nizam of Hyderabad. The order was made in respect of income-tax for the year of assessment 1931-1932, but was based upon the accounting period being the year 1930-31. Two items only were included in the order, first, the sum of Rs. 27,960 being income-tax claimed to be due from the Nizam under the head " property " in respect of house property in Bombay of which he is the owner; secondly, a sum of Rs. 3,15,214 being the amount received in the year of account by the Nizam from the respondent company as interest due upon a loan of Rs. 50,00,000 made by the Nizam to the respondent company upon the terms of a written instrument dated August 16, 1929. The latter claim was laid under the heading " Other Sources " as defined by Section 12 of the Act.

    2. This assessment of the respondent company in respect of income-tax claimed to be due from the Nizam was based upon proceedings taken under Section 43 of the Indian Income-tax Act (Act XI of 1922), a notice having been issued upon the respondent company to the effect that the Income-tax Officer intended to treat them as agents of the Nizam. Notice having been issued on May 7, 1931, and the respondent company having appeared and objected, the Income-tax Officer on June 5, 1931, made an order in writing holding that a business connection existed between the respondent company and the Nizam, and that the word " property " appearing in Section 42, Sub-section 1 of the Act includes movable property and investments. The final conclusion of this order was that there was income chargeable to income-tax under Section 42 (l) of the Act and that Messrs. Currimbhoy Ebrahim and Sons Limited, might be deemed to be the agent of His Exalted Highness the Nizam.

    3. As already mentioned, they assessment order of August 7, 1931, included income-tax in respect of house property in Bombay. This was property with which the respondent company had nothing whatever to do, It appears from the* assessment order itself that it was included, not because income-tax under the head " property " had not been paid by the person managing the property, but because the Income-tax Officer considered that income of an assessee from all sources must be included in one assessment, and that there cannot be two or more assessments against one assessee for the different sources of income.

    4. The respondent company appealed from the assessment order to the Assistant Commissioner of Income-tax, Bombay, taking objection not only to the claims themselves, but also to the right of the Income-tax Officer to treat them as agents of the Nizam. The appeal was dismissed by the Assistant Commissioner who upheld the findings of the Income-tax Officer under the first subsection of Section 42 in respect of the interest upon the loan. He also upheld the assessment in respect of the house property, on the ground that it was within the right of the Income-tax Officer to select any agent as the principal agent and to bring all items of income into one assessment.

    5. The respondent company thereupon applied under Section 66 of the Act to the Commissioner of Income-tax to make a reference to the High Court of Bombay regarding certain questions of law arising out of the assessment order, and by letter of reference dated November 30, 1932, the Commissioner submitted five questions formulated by the respondent company. The questions were as follows:-

    (1) Whether the facts of the case constitute a business connection between the. applicants and His Exalted Highness the Nizam within the meaning of Section 42 of the Income-tax Act.

    (2) Whether the interest earned by His Exalted Highness the Nizam on the loan made to the applicants constitutes profit or gain accruing or arising to His Exalted Highness the Nizam directly or indirectly through or from any business connection or property in British India chargeable to income-tax in the name of the applicants.

    (3) Whether the assessee can in law be deemed to be agent of His Exalted Highness, the Nizam under Section 43 of the Income-tax Act.

    (4) Whether the applicants are liable to be assessed as agent for His Exalted Highness the Nizam in respect of :-

    (A) Interest on the loan above referred to, (B) Property income above referred to.

    (5) Whether the assessment levied on the applicant is valid in law.

    6. The opinion of the Commissioner submitted as required by Sub-section (2) of Section 66 of the Act was to the effect that the interest income arose from a business connection in British India within the meaning of Section 42, Sub-section (l). He also found that the respondent company were liable to be deemed the Nizam's agents for all the purposes of the Act by reason of the fact that they had a business connection with the Nizam.

    7. The High Court of Bombay answered all the questions propounded in the negative, holding that there was no business connection between the Nizam and the respondent company, that the interest income did not arise to the Nizam through or from any property in British India, and that the respondent company is not hit by Section 43 of the Act either as having any business connection with the Nizam or as being persons through whom the Nizam is in receipt of any income, profits or gains. It is from this decision that the present appeal has been brought to H. M. in Council by the Commissioner for Income-tax.

    8. The loan in question was a loan of Rs. 50,00,00()v and the instrument of agreement in respect thereof was executed in Bombay- Apart from the respondent company who were the borrowers, and the Finance Member of the Government of the Nizam (the lender), there were four other parties to the agreement who joined for the purpose of recording the deposit of title deeds made by them as security for the repayment of the loan by the borrowers. The security consisted both of shares in joint stock companies, and of immovable properties, and the mortgage was a mortgage by deposit effected in the usual manner by blank transfers in the case of shares and by deposit of title deeds in the case of land. Interest was to be paid at the rate of 7i per cent, per annum and it was to be paid to the Nizam of Hyderabad through the Imperial Bank of India, Hyderabad Branch. The loan itself was to be repaid by five annual instalments of Rs. 1,00,000 each, exclusive of interest, such instalments to be paid in like manner in Hyderabad. There was a covenant by the borrowers to keep-the mortgaged properties in repair and a provision that in default the lender should be entitled to repair and to add the cost to the principal debt. By another provision the Nizam was to be entitled to appoint one or more representatives to look after and protect his interests in connection with the securities, and the respondent company was to pay a remuneration to such representative or representatives not exceeding in the aggregate Rs. 6,000 per annum. The respondent company was also to furnish the Nizam in each year with a certified copy of the balance sheet and profit and loss account of their own business. Although nothing turns upon the clause, it may be mentioned that the respondent company agreed to pay income-tax if leviable in British India upon the interest. The actual advance of the Rs. 50,00,00G was made by this sum being paid by the Nizam into the Hyderabad branch of the Imperial Bank of India on behalf of the respondent company.

    9. It is not the contention of the appellant that the interest income now in question did in fact accrue or arise in British India or was in fact received in British India within the meaning of these words as they appear in Sub-section (1) of Section 4, but it is said that by virtue of the first sub-section of section 42 this income is deemed to be income accruing or arising in-British India within the meaning of the concluding words of Section 4. Whether or not the income is to be deemed to accrue or arise in British India and so to be chargeable to income tax in British India, depends upon the two questions, (a) Did it accrue or arise to the Nizam through or from any business connection in British India ? (6) Did it accrue or arise to the Nizam through or from any property in British India. In their Lordships' opinion both of these questions have been correctly answered in the negative by the learned Judges of the High Court of Bombay.

    10. It was contended on behalf of the respondents that the words "business connection " and " property " ins. 42 (1) are intended as repetitions of the expressions " business " and "property " appearing in Section 6 to describe " heads of income " and that the interest income now in question, being admittedly taxable under the sixth heading " other sources ", cannot be said to accrue or arise through or from any Easiness connection or property in British India within the meaning of the subsection. In support of this argument their Lordships were referred to certain observations in the case of Re Rogers Pyatt Shellac & Co. v. Secretary of State for India (1924) I.L.R. 52 Cal. 1 and The Commissioner of Income-tax, Burma v. Messrs. Steel Brothers & Co., Ltd. (1925) I.L.R. 3 Ran. 614. This contention, however, does not appear to their Lordships to be valid. The phrase " business connection " is different from, though doubtless not unrelated to, the word " business" of which there is a definition in the Act. The word " property " when used in Section 6 to describe a head of income is not defined by the statute, but by Section 9 it is provided that under this head tax shall be payable in respect of the bona fide annual value of property consisting of any buildings or lands appertaining thereto. In their Lordships' opinion the word " property ", as it occurs in the sub-section (i) of section 42, cannot hi given so special a colour, but is used as an ordinary English word to be taken in its usual signification subject to the context provided by the rest of the sub-section. There in nothing in the sub-section to exclude from its scope any of the six classes of income mentioned in Section 6 of the Act.

    11. Upon the question whether the interest income arose to the Nizam through or from any business connection in British India, their Lordships observe that so far as appears from the facts found in the letter of reference, the loan made by the Nizam to the respondent company on August 16, 1929, was an isolated transaction between the parties. It is not shown that the Nizam has at any time had an interest direct or indirect in the respondent company. There is no evidence of a course of dealing between the parties such as might fairly be described as a business connection previously subsisting between them. There is no element in the present case which justifies a comparison on the facts with the position of the parties in the case of The Income-tax Commissioner, Bombay Presidency v. Bombay Trust Corporation (1929) L.R. 57 I.A. 49 : S.C. 32 Bom L.R. 361

    12. If the words

    " accruing or arising to such person whether direct or indirect, through or from any business connection in British India"
    are not to be deemed satisfied in every case in which a single monetary transaction by a non-resident with a resident produces gain to the former, it is difficult to see in the facts of this case any distinguishing element of business connection which the legislature has chosen as the test for rendering chargeable to British Indian income-tax income which has not accrued in British India. There is no proof that the Nizam is carrying on business of money lending either in Hyderabad or British India. So far as appears, he invested some surplus capital in making a loan to the respondent company taking security therefor. That the respondent company doubtless used the borrowed money in connection with their own business is not a fact which brings the Nizam any nearer to being a person who has a business connection in British India. The circumstance that the repayments of the loan are contemplated to-extend over a period of five years, and that the interest would be payable from rime to time during this period, is equally ineffective to bring the case within the words of sub-section (!) of section 42.

    13. Upon the question whether the interest income accrued or arose to the Nizam through or from property in British India, their Lordships agree with the view expressed by the learned Chief Justice of Bombay that the word "property" as used in Sub-section (l) of Section 42 means something tangible; though for reasons already given, they cannot accept his suggestion that it is confined to immovable property or to buildings or lands appertaining thereto. The phrase to be construed is " property in British India " and it seems to their Lordships that the plain implication is that the property is to be situated in British India. No doubt for purposes of administration or succession, or for purposes of jurisdiction to attach a debt, a chose in action is treated notionally as situated in a particular country or district. The statute, however, does not intend to import questions of this character as the test whether income which does not( accrue within British India shall be deemed so to accrue. In their Lordships' opinion the phrase is to be taken literally and simply. It is applicable for example, in a case where furniture situated in British India has been hired under an agreement whereby the hire is payable outside British India.

    14. In the result, therefore, their Lordships come to the conclusion that the interest income in respect of which the respondent company has been assessed to tax as agent for the Nizam, is not to be deemed to have accrued or arisen within British India at all, and is, therefore, not liable to tax. The Income-tax Officer's order of June 5, 1931, whereby the respondent company was deemed to be an agent of the Nizam and liable to be made assessee in respect of these monies is without foundation and altogether invalid. In these circumstances it does not appear to their Lordships to be necessary that they should discuss any of the questions raised under Section 44 of the Act. It would indeed be strange if the respondent company as mere debtors to a non-resident paying him outside British India monies which are not assessable to Indian income-tax at all, could be made liable for the income-tax due on the nonresident's house property in Bombay with which they had no concern, and this notwithstanding that tax had hitherto been duly assessed upon and paid by the person managing the property on behalf of the non-resident. No such opinion was given by the Commissioner in his letter of reference and no such contention has been raised by the learned counsel for the appellant before this Board. It appears to their Lordships to be sufficient to say that as regards questions (l), (2) and (5) answered by the High Court of Bombay in the negative their Lordships agree with the High Court, and that their Lordships will humbly advise His Majesty that this appeal should be dismissed with costs.

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    The Commissioner Of Income Tax v. Currimbhoy Ebrahim And Sons Limited
    (Oct 28, 1935)