1937 (4) TMI 19 - HC - Income Tax

Court rules loans outside British India not taxable under Income Tax Act. Fair hearing in tax references.

Commissioner of Income Tax, Burma Versus P.V.R.M. Visalakshi Achi

The court ruled against taxing the profits from loans made by the assessee outside British India under Section 42(1) of the Income Tax Act, 1922. It found ... - Issues Involved:1. Applicability of Section 42(1) of the Income Tax Act, 1922.2. Definition and scope of 'business connexion' under Section 42(1).3. Right to be heard first in tax references.4. Costs and refund of deposit.Detailed Analysis:1. Applicability of Section 42(1) of the Income Tax Act, 1922:The primary issue was whether the profits from loans made by the assessee, who resides outside British India, could be deemed to accrue or arise within British India under Section 42(1) of the Act. The court examined whether the loans listed in Schedule B, made to residents in British India and one non-resident with a business in British India, fell within the ambit of this section. The court noted that the respondent was a partner in a money-lending firm in Burma, but there was no evidence that the loans in question were connected to this partnership. The court concluded that the loans were isolated transactions and did not arise from any business connexion in British India.2. Definition and Scope of 'Business Connexion' under Section 42(1):The court delved into the interpretation of 'business connexion' as used in Section 42(1). It was argued that each loan transaction could constitute a business connexion. However, the court distinguished between a mere business transaction and a business connexion. Citing previous cases, the court emphasized that a business connexion requires more than isolated transactions; it necessitates a course of dealing that establishes a subsisting business relationship. The court found no evidence of such a relationship in the present case, as the loans were isolated and not connected to any ongoing business in British India.3. Right to be Heard First in Tax References:The court addressed the procedural issue of who should be heard first in tax references. It upheld the practice that the assessee should normally be heard first, aligning with the practices of the Madras, Calcutta, and Allahabad High Courts. The court noted that this practice ensures fairness, especially when the assessee is aggrieved and the Commissioner is bound to refer the question to the High Court.4. Costs and Refund of Deposit:The court ordered that the Commissioner of Income Tax must pay the costs of the reference, amounting to 20 Gold Mohurs, and refund the Rs. 100 deposited by the assessee under Section 66(2) of the Act. This decision underscores the principle that costs should follow the event, particularly when the reference is decided in favor of the assessee.Conclusion:The court answered the reference in the negative, concluding that there was no material before the Income Tax Officer to find that the profits in question accrued or arose from any business connexion in British India. The loans were deemed isolated transactions, and thus, not taxable under Section 42(1) of the Income Tax Act, 1922. The court also reinforced procedural fairness by upholding the practice of hearing the assessee first and awarded costs to the assessee.