1940 (12) TMI 23 - HC - Income Tax

Court rules remittance from Saigon properties as taxable foreign income under Indian Income-tax Act.

Commissioner of Income Tax, Madras Versus Nadimuthu Pillai

Commissioner of Income Tax, Madras Versus Nadimuthu Pillai - [1940] 8 ITR 249 Issues Involved:1. Whether the remittance of $5,719 on 7th December 1935 was a remittance of profits derived from the assessee's Saigon properties.2. Whether the remittance was properly assessed under Section 4(2) of the Indian Income-tax Act, 1922, as receipt of foreign income in British India.Issue-Wise Detailed Analysis:1. Whether the remittance of $5,719 on 7th December 1935 was a remittance of profits derived from the assessee's Saigon properties:The assessee, deriving income from immoveable property, trade in cloth, money-lending, and other sources within the jurisdiction of the Income-tax Officer, Tanjore circle, also owned considerable house property in Saigon, Indo-China. The assessee maintained an account with the Saigon branch of the Banque Franco-Chinoise, with an overdraft limit of $50,000. By 1st April 1935, the overdraft stood at $20,149, used partly for repairs and taxes on Saigon properties. The net income from Saigon properties for the period 1st April 1935 to 31st March 1936 was $18,414. Payments into the account reduced the overdraft to $12,165 by 30th November 1935. On 7th December 1935, the assessee withdrew $5,719 (equivalent to Rs. 10,000), which was remitted to British India.The assessee contended that since the overdraft was not fully discharged, the remittance should be treated as borrowed money. However, the Income-tax authorities argued that the account should be examined as a whole, showing a reduction in overdraft and remittance of profits. The court held that the remittance was not merely of borrowed money but derived from the profits of Saigon properties, referencing decisions in V.V.R. Firm v. Commissioner of Income-tax, Madras, Commissioner of Income-tax, Madras v. S.KM.SP. Meyyappa Chettiar, and Fellowes Gordon v. Commissioner of Inland Revenue.2. Whether the remittance was properly assessed under Section 4(2) of the Indian Income-tax Act, 1922, as receipt of foreign income in British India:The court found that the remittance was properly assessed under Section 4(2) of the Indian Income-tax Act, 1922. The Commissioner concluded that the remittance was made out of profits available to the assessee in Saigon, despite the absence of direct proof linking the remittance to those profits. The court emphasized that the substance of the transaction must be considered, and if the remittance is traceable to profits, it is taxable as such. The court rejected the notion that the existence of an overdraft precludes tax liability, stating that income might be remitted through an account in which the assessee is a debtor.The court cited the case of Fellowes-Gordon v. Commissioners of Inland Revenue, where the Lord President (Lord Normand) stated that the mere existence of an overdraft does not preclude tax liability if the remittance is ultimately traceable to income. The court also referenced the decisions in V.V.R. Firm v. Commissioner of Income-tax, Madras, and Commissioner of Income-tax, Madras v. Meyyappa Chettiar, where remittances initially appearing as capital were deemed profits due to the repayment of loans from profits.The court concluded that the remittance of $5,719 was a remittance of profits and not borrowed money. The proper conclusion was that the remittance was derived from the income arising from possessions in Saigon. The court also noted that the assessee's contention would allow manipulation of overdraft accounts to escape taxation, which is not permissible. The court thus answered the question in favor of the Income-tax authorities, affirming the assessment under Section 4(2) of the Indian Income-tax Act, 1922, and awarded costs of Rs. 250 to the Income-tax authorities.Separate Judgment by Krishnaswamy Ayyangar, J.:Krishnaswamy Ayyangar, J., agreed with the conclusion but provided additional reasoning. He emphasized that the remittance must be traceable to profits to be taxable. He noted that the assessee's transactions with the Banque Franco Chinoise showed a consistent pattern of using profits to reduce the overdraft. The court must consider the substance of the transactions, and the existence of profits far exceeding the remittance indicated that it was derived from profits.He also referenced the rule of appropriation in Clayton's case, which applies credits to discharge earlier debits. The court found that the remittance was traceable to profits, and the existence of an untaxed balance from a previous year further supported this conclusion. Thus, the remittance was properly assessed as foreign income received in British India under Section 4(2) of the Indian Income-tax Act, 1922.Final Conclusion:The court answered the reference in favor of the Income-tax authorities, affirming the assessment of the remittance as foreign income received in British India under Section 4(2) of the Indian Income-tax Act, 1922. The Income-tax authorities were awarded costs of Rs. 250.