1937 (9) TMI 11 - HC - Income Tax

Foreign Income Through Investment Not Taxable: Bombay High Court Ruling

Commissioner Of Income-Tax Versus Ahmedabad Advance Mills, Ltd.

The High Court of Bombay interpreted Sec. 4(2) of the Indian Income-tax Act regarding taxation on foreign income brought into India through investment in ... - Issues:Interpretation of Sec. 4(2) of the Indian Income-tax Act regarding taxation on income received abroad and brought into India through investment in capital assets.Detailed Analysis:The High Court of Bombay considered a reference by the Income-tax Commissioner under Sec. 66(2) of the Act, focusing on whether a limited company is liable to pay income-tax on income received in London and invested in stores and machinery in England, subsequently brought into British India. The central issue revolved around the interpretation of Sec. 4(2) of the Indian Income-tax Act, which deems income received abroad and brought into India as taxable. The Court emphasized that for foreign income to attract income-tax in India, it must be brought into the country as income, profits, or gains, rather than as capital. The distinction between income and capital is crucial in determining tax liability. Foreign income converted into capital assets and then brought into India does not constitute bringing income into the country for tax purposes. The Court highlighted that the conversion of foreign income into capital should be assessed as a question of fact in each case. In the present scenario, the income was capitalized through the purchase of machinery and stores, indicating a conversion into capital rather than income brought into India. The Court illustrated a hypothetical scenario where foreign income converted into capital for subsequent sale and application as income might be treated differently. However, the fundamental consideration remains whether what is brought into India constitutes income, profits, or gains, or capital assets acquired from foreign income.The specific query raised by the Commissioner of Income-tax was whether interest on sterling securities accrued in England but received or brought into British India falls under the purview of Sec. 4(2) for taxation. The Court answered the question in the negative, concluding that the Income-tax Officer incorrectly included the interest amount in the taxable income. The judgment emphasized the importance of distinguishing between income and capital when determining tax liability on foreign income brought into India. The Court ruled in favor of the Assessees, directing the Commissioner to pay the Assessees' costs on the original Side scale to be taxed by the Taxing Master.In a concurring opinion, Justice BACKWELL agreed with the judgment and had no additional comments, leading to the resolution of the reference accordingly.