Non-resident loan interest and business connection: isolated advance was not taxable in British India

Interest on a single loan advanced by a non-resident was not treated as income accruing or arising in British India, because the transaction was an isolated advance and not part of any money-lending business or established course of dealing. The lender had no direct or indirect interest in the borrower's business, so no business connection existed within the statutory meaning. The phrase "property in British India" was held not to extend to a debt or chose in action merely because repayment passed through banking channels or the borrower applied the funds in business. The interest was therefore not deemed taxable in British India, and the company's assessment as agent could not stand.

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Issues: Whether interest on a loan advanced by a non-resident in an isolated transaction could be treated as income accruing or arising through a business connection or property in British India, so as to be deemed taxable and to sustain the assessee company's liability as agent.

Analysis: The governing provisions treated certain income as accruing or arising in British India where it arose through or from a business connection in British India or through or from property in British India. The loan transaction was found to be a single monetary advance, not part of any established course of dealing or money-lending business, and there was no evidence that the lender had any direct or indirect interest in the borrower's business. That did not amount to a business connection within the statutory meaning. The Court also held that the expression "property in British India" could not be expanded to cover a debt or chose in action merely because payment was arranged through banking channels or because the borrower used the funds in business. The statutory phrase was to be understood in its ordinary sense and required property situated in British India. On that footing, the interest was not deemed to accrue or arise in British India and the agency assessment could not stand.

Conclusion: The questions were answered against the Revenue, and the assessment treating the respondent company as agent for the non-resident lender was invalid insofar as it related to the interest income.

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