1940 (2) TMI 15 - HC - Income Tax

Court rules purchase of foreign bonds with overseas profits as capital, not income.

Commissioner of Income Tax, Madras Versus J.M. Muhammad Ismail Rowther

The Court determined that the purchase of Mysore Government Bonds by the assessee, using profits made abroad, constituted a conversion of profit into ... - Issues: Assessment of income tax on remittance of profits made abroad represented by Mysore Government Bonds; Determination of whether the bonds purchased by the assessee in Mysore represented capital or income.Analysis:The judgment pertains to an assessment of income tax on a resident deriving income from properties in British India and Saigon, including profits made in Saigon. The assessee remitted profits to British India and purchased Mysore Government Bonds with the remittance. The Income Tax Officer assessed the entire face value of the bonds as representing a remittance of profits. The assessee objected, claiming the bonds represented capital, not income. The Commissioner referred two questions to the Court for decision, primarily focusing on whether the bonds were capital or income. The Court considered precedents and legal principles to determine the nature of the bonds and their treatment under the Income Tax Act.The Court referenced a case involving a limited company investing foreign income in machinery and stores for business in British India, where it was held that such investment did not constitute a remittance of profits. The Court emphasized that to attract income tax in India, what is brought into the country must be income, profits, or gains. The Court distinguished between income and capital, stating that converting foreign income into capital and bringing it to India does not amount to bringing in income. The Court also highlighted that when profits are invested in bonds without any remittance, the bonds constitute capital assets.Additionally, the Court cited the Scottish Widows Fund Life Assurance case, where it was held that the receipt of foreign bonds did not constitute income within the United Kingdom. The Court emphasized the distinction between remitting money through bearer bonds and traditional remittance methods like bank drafts. The Court clarified that the purchase of bonds out of profits made abroad does not necessarily represent a remittance of profits, especially when the bonds are held as permanent investments.Based on the surrounding circumstances and legal principles, the Court concluded that the assessee's purchase of Mysore Government Bonds constituted a conversion of profit into capital. Therefore, the Court answered the first question in the negative, indicating that the bonds represented capital, not income. Consequently, the second question did not require an answer. The assessee was granted costs and the return of the deposit.In agreement with the primary judgment, the additional judges concurred with the decision and the reasoning provided, confirming that the Mysore Government Bonds purchased by the assessee represented capital rather than income.