1933 (2) TMI 16 - HC - Income Tax

Court rules no tax on interest to Nizam; profits not taxable as company not agents.

The Commissioner Of Income-Tax Versus Currimbhoy Ebrahim And Sons Ltd.

The court held that the assessee company could not be charged income tax on the interest paid to the Nizam as there was no business connection, and the ... - Issues Involved:1. Assessability of the assessee company under Sections 42 and 43 of the Indian Income-tax Act for interest on a loan received from the Nizam of Hyderabad.2. Liability of the assessee company to be assessed for income or profits derived from a palace belonging to the Nizam in Bombay.Detailed Analysis:Issue 1: Assessability for Interest on LoanFacts and Agreement:- The assessee company, Messrs. Currimbhoy Ebrahim & Sons, Ltd., received a loan of Rs. 50 lakhs from the Nizam of Hyderabad on August 16, 1929, secured by an equitable mortgage.- The loan carried an interest of 7.5% per annum, payable in Hyderabad, with the principal repayable in five annual installments, also in Hyderabad.- The assessee company paid Rs. 3,15,214 as interest during the year ending March 31, 1931.Legal Provisions:- Section 42: Profits or gains accruing to a non-resident through business connection or property in British India are deemed to be income accruing in British India and chargeable to income-tax in the name of the agent.- Section 43: Defines who can be treated as an agent for a non-resident.Arguments and Judgment:- The Advocate General argued that the Nizam, being a non-resident, received gains (interest on the loan) through a business connection or property in British India.- The court found no business connection between the Nizam and the assessee company. The relationship was purely that of debtor and creditor, not constituting a business connection under Section 42.- The court also opined that 'property' in Section 42 likely refers to immovable property and not a mere debt or chose in action. The Nizam was entitled to a debt, not specific property in British India.Conclusion:- The assessee company cannot be charged with income-tax on the interest paid to the Nizam as there was no business connection, and the debt did not constitute property in British India under Section 42.Issue 2: Liability for Income from Nizam's PalaceFacts:- The Nizam owned a palace in Bombay, which produced some profit.- It was not suggested that the assessee company was the agent of the Nizam or had any involvement with the palace.Legal Provisions:- Section 43: Allows the Income-tax Officer to appoint any person as an agent if they are employed by or have a business connection with the non-resident, or through whom the non-resident receives income.Arguments and Judgment:- The Income-tax Commissioner treated the assessee company as the agent of the Nizam under Section 43, arguing that because they paid interest on the loan, they could be assessed for all of the Nizam's property in British India.- The court found this argument startling and unreasonable. The relationship between the Nizam and the assessee company was merely that of debtor and creditor.- The court referred to a Privy Council decision, emphasizing that the agent must be more than a mere debtor. In this case, the assessee company was not involved with the Nizam's palace and thus could not be appointed as an agent under Section 43.Conclusion:- The assessee company cannot be charged in respect of the Nizam's palace in Bombay as they do not qualify as agents under Section 43.Separate Judgments:Rangnekar, J.:- Agreed with the Chief Justice but provided additional reasoning.- Emphasized that the relationship between the Nizam and the assessee company was that of debtor and creditor, not a business connection.- Concluded that the words 'through whom' in Section 43 should not be construed as 'from whom,' aligning with the earlier decision in Commissioner of Income-tax, Bombay v. Bombay Trust Corporation.- Stated that the income sought to be taxed did not arise from a business connection or property in British India under Section 42.Final Conclusion:- The questions propounded were answered in the negative.- Costs of the assessees to be paid by the Commissioner, taxed by the Taxing Master, Original Side, as on the original side scale.