Deemed accrual of interest failed where no definite arrangement showed fixed deposit funds were brought into the taxable territory.

Section 42 required a composite lending arrangement in which money brought into the taxable territory formed part of a definite understanding between lender and borrower. Mere internal banking transfers between a branch and head office, or a speculative possibility that deposit funds might later be used elsewhere, was not enough. On the facts, there was no reliable evidence that the fixed deposits were specifically intended to be transferred for the assessee-mills' use, and the alternative business connection argument was also unsupported. The interest on the fixed deposits therefore could not be treated as income deemed to accrue or arise in the taxable territory, and the assessment on that basis was unsustainable.

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Issues: Whether the interest earned on fixed deposits kept with the Pudukottai branch of the bank was liable to tax on the footing that the deposits were brought into the taxable territory within the meaning of section 42 of the Indian Income-tax Act.

Analysis: Section 42 required a composite transaction in which money lent at interest was brought into the taxable territory as part of a definite arrangement between lender and borrower. Mere banking transfers between the branch and head office, or a mere possibility that deposited funds might in ordinary course be used elsewhere, was insufficient. On the facts, there was no reliable evidence of any specific understanding that the fixed deposits were to be transferred to Madurai for the assessee-mills' use, and the departmental inference rested on speculation rather than proved arrangement. The alternative contention based on business connection was also unsupported by the record.

Conclusion: The interest could not be treated as income deemed to accrue or arise in the taxable territory under section 42, and the assessment of the entire interest on that basis was not sustainable.

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