1949 (9) TMI 19

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....hi JUDGMENT Chagla, CJ. The assessee in this reference is the Porbandar State Bank and it is assessed to income-tax under the provisions of the Government Trading Taxation Act, 1926. In the year of account, which is the 1st of November, 1940, to the 31st of October, 1941, the gross income of the Bank was Rs. 92,064 and it received in British India interest on securities amounting to Rs. 4....

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....essee deducted tax at source under Section 18(3A). Therefore, the question that we have to consider is whether the interest that was paid by the assessee to its depositors in Porbandar was an interest which was liable to tax under the Income-tax Act. What was relied upon by the Tribunal which came to the conclusion that the Bank was not entitled to this deduction was Section 42 of the Act. Sect....

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....he lender is not liable to pay any tax on the interest which he receives on the borrowed money. This is put on the principle that there must be some nexus between the taxing State and the assessee who is a foreigner, and the nexus which the Federal Court has suggested is that a knowledge must be attributed to the lender that the borrower has borrowed money for the purpose of taking it to British I....

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.... Therefore, in order to deprive the assessee of the deduction under Section 10(2)(iii) it must be found that the persons who deposited moneys with the assessee and earned interest on the deposits knew as a part of the integral transaction of the deposit that the Porbandar Bank would take this money to British India and utilise that money for the purpose of earning income on it. Now, on the fact....