1933 (2) TMI 12 - HC - Income Tax

Assessment under Rule 35 upheld for company's taxable interest income abroad

COMMISSIONER OF INCOME TAX, BOMBAY Versus NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA

The court upheld the Income-tax authorities' application of Rule 35 for assessing the company, finding the assessment for the financial year 1931-32 to be ... - Issues Involved:1. Applicability of Rule 35 of the Income Tax Rules for assessing the company.2. Legality of the assessment for the financial year 1931-32.3. Interpretation of Section 42 of the Income Tax Act regarding income received from business connections in British India.Issue-wise Detailed Analysis:1. Applicability of Rule 35 of the Income Tax Rules for assessing the company:The main question was whether the Income-tax authorities were justified in assessing the company under Rule 35, which provides a method for calculating the income of non-resident insurance companies in the absence of more reliable data. The company argued that they had supplied all necessary data, including renewal premiums from non-participating policies, interest, and fees, totaling lb3,241-14-8, and were prepared to be assessed on this sum without deductions for expenses. The Commissioner contended that the company did not provide a return in the prescribed form under Section 22 of the Income Tax Act and thus he was entitled to make the best assessment under Section 23(4) and Rule 35.The court noted that the prescribed form under Section 22 might not be appropriate for a mutual life assurance company and doubted whether it would supply the necessary data. However, the court held that if the Commissioner had reliable data supplied by the company, he would not be justified in making the assessment under Rule 35. Despite this, the Advocate-General argued that profits received in India from participating policies, although not taxable under a previous decision, were still profits received in India and remitted outside, making them liable to tax under Section 42. The court concluded that the Commissioner was justified in applying Rule 35 as the company did not provide all necessary data, specifically the interest earned on premiums from participating policies.2. Legality of the assessment for the financial year 1931-32:The court addressed whether the assessment was legal and binding, considering the previous decision in Civil Reference No. 5 of 1928. The court held that the assessment was legal and binding, as the company had not disclosed all necessary income, particularly interest earned outside India on premiums from participating policies. The court emphasized that under Sections 3 and 4 of the Income Tax Act, income tax is chargeable on profits or gains accruing, arising, or received in British India. Section 42(1) extends this to profits or gains accruing to a non-resident through any business connection in British India.The court noted that previous decisions had established that non-residents could be taxed on income derived from business connections in British India, even if the income was received or accrued outside India. Therefore, the interest earned on premiums from participating policies, which were remitted outside India and invested to produce income, was taxable under Section 42. The court concluded that the Income-tax authorities were correct in holding that the data provided by the company was not reliable and in proceeding under Rule 35.3. Interpretation of Section 42 of the Income Tax Act regarding income received from business connections in British India:The court examined whether Section 42 applied to the interest earned on premiums from participating policies, which were remitted outside India. The court referred to previous decisions that established that income derived from business connections in British India, even if received or accrued outside India, was taxable under Section 42. The court held that the interest earned on premiums from participating policies was income accruing or arising to the company through a business connection in British India and was therefore taxable.The court rejected the argument that the business of a mutual insurance company was not a business within the meaning of Section 42. It cited the House of Lords' decision in Cornish Mutual Assurance Co. v. Inland Revenue Commissioners, which held that a mutual insurance company was carrying on business. The court also rejected the view that 'business connection' should be restricted by the definition of 'business' in Section 2(4) of the Income Tax Act, noting that the definition was not exhaustive.The court acknowledged the difficulties in providing the necessary data but concluded that the Income-tax Commissioner was entitled to the particulars he claimed. If the assessee could not provide the necessary material, the Commissioner could proceed under Rule 35. The court answered both questions in the affirmative, upholding the assessment and the application of Rule 35.Conclusion:The court concluded that the Income-tax authorities were justified in applying Rule 35 for assessing the company and that the assessment for the financial year 1931-32 was legal and binding. The interest earned on premiums from participating policies, remitted outside India, was taxable under Section 42 of the Income Tax Act, as it was income accruing or arising through a business connection in British India. The court emphasized the need for uniformity in decisions under the Income Tax Act and followed previous decisions that supported this interpretation.