George Rankin, J. - (1.) IN this case two appeals from the High Court at Bombay have been consolidated. Both appeals are brought by income-tax authorities and both arise out of proceedings to assess a company registered outside British INdia called the Hong Kong Trust Corporation Limited, (herein referred to as the Hong Kong company) to income-tax in respect of the year of assessment 1928-9. The income-tax authorities have claimed to be entitled to assess the Hong Kong company in the name of the Bombay Trust Corporation Limited, (herein called the Bombay company) as its agent under the provisions of Section 42(I) and Section 43 of the INdian INcome-tax Act, 1922, that is, upon the footing that in the year 1927 profits and gains accrued or arose to the Hong Kong company through its business connection with the Bombay company. The INcome-tax Officer having on March 29, 1930, made an assessment upon this footing the matter came on appeal from him before the Assistant Commissioner. The Assistant Commissioner on July 12, 1930, confirmed the assessment. The Bombay company having requested the Commissioner to make a reference to the High Court under Section 66 of the Act, the Commissioner, on March 2, 1931, exercised his powers of review under Section 33, and remanded the appeal for a fresh decision by the Assistant Commissioner after taking certain further evidence. IN the end the Assistant Commissioner on October 9, 1931, assessed the Bombay company as agent of the Hong Kong company upon a sum of Rs. 20,50,000 which involved a liability to tax, including super-tax, of Rs. 3,17,187-8-0. On December 8, 1931, the Bombay company again applied to the Commissioner for a reference of certain questions of law to the High Court. This the Commissioner refused to do, but upon application made to the High Court for an order under Section 66, Sub-section (5), the High Court by order dated October 6, 1932, required the Commissioner to refer the following question of law : Whether there was any evidence to justify the finding of the Assistant Commissioner that for the year of assessment, profits and gains accrued or arose to the Hong Kong Trust Corporation through its business connection with the Bombay Trust Corporation.
(2.) THE Bombay company had in the meantime, on April 6, 1932, paid under protest Rs. 3,17,187-8-0, the amount of the tax assessed. THE Commissioner having stated a case for the opinion of the High Court upon the question propounded, and having further stated his opinion that the question should be answered in the affirmative, the High Court on August 29, 1933, gave judgment answering the question in the negative, and directing the costs of the reference to be paid to the Bombay company. It is from this decision that appeal No. 1 of 1936 has been brought, and their Lordships will first deal with this appeal. The main evidence upon the question whether in the year 1927 sums of money were paid by the Bombay company to the Hong Kong company by way of interest upon money lent consists of entries in the books of the Bombay company. Exhibited to the case stated by the Commissioner are extracts from the ledger of the Bombay company taken from the accounts of the Hong Kong Trust Corporation Limited, "Fixed Deposit account" and "Call Loan Account" and of E.D. Sassoon and Company Limited, "Shanghai Loan Account" and "Shanghai Current Account." These books show clearly enough that until November of the year 1926 the Bombay company was borrowing money in large sums from the Hong Kong company at five and a quarter per cent, interest upon fixed deposit, that is, in every case or almost every case, upon deposit for one year certain. In 1924, 1925 and for almost the whole of 1926 different sums are shown as being lent for one year upon different dates, and interest thereon is shown as remitted to the Hong Kong company by debits to the account of the Bombay company in the books of E.D. Sassoon and Company Limited, at Shanghai, who were bankers to both parties. It is not open to dispute that in October, 1926, the income-tax authorities served a notice upon the Bombay company to show cause why it should not foe treated as an agent of the Hong Kong company under Section 43. From documents which are in evidence it is further dear that on October 27, 1926, the Bombay company telegraphed to the Hong Kong company to enquire whether they were agreeable to all their deposits with the Bombay company being on call as from the dates of the deposits. On October 28 a reply was received from the Hong Kong company agreeing to this proposal. On November 13 the Hong Kong company telegraphed requiring repayment of their deposits amounting to Rs. 11,04,85,918 through Messrs. E.D. Sassoon and Company Limited, of Shanghai. On November 16 and 17 the Income-tax Officer came to a finding that the Bombay company should be held to be agent of the Hong Kong company and called for a return upon that footing. On November 19 the Bombay company wrote to Messrs. E.D. Sassoon and Company Limited, of Bombay asking them to remit to Messrs. E.D. Sassoon and Company Limited, Shanghai (whom their Lordships will refer to as the Shanghai branch), the sum of Rs. 11,42,29,93140-9. They also wrote to the Shanghai branch advising that they had remitted this amount through Messrs. E.D. Sassoon and Company Limited, Bombay, the amount being made up as follows : Rs. a. p. Amount of Call Loans repaid by you on our behalf 11,04,85,918 0 10. Interest on above ending 16th November, 19269 11 37,44,013 ________________________ 10 9 11,42,29,931 ________________________
(3.) ON the same day also the Bombay company wrote to the Hong Kong, company saying that they had advised Messrs, E.D. Sassoon and Company,. Limited, Shanghai, to credit their account with these sums. In complete accordance with this correspondence entries are made by the Bombay company in their ledger. Thus an account called the "Hong Kong Trust Corporation Limited, Call Loan Account" is opened with a credit entry of November 13,1926, showing sums amounting for interest and principal to the figure already mentioned on the footing that the principal loans were taken originally as fixed deposits for one year and are now converted into call loans. On the debit side of this account there is an entry dated November 17 "to E.D. Sassoon and Company Limited, for amount being repayment of loans with interest ending November 16, 1926. " The "E.D. Sassoon and Company Limited, Shanghai, Loan Account" shows at the same time a credit to the Shanghai branch" for amounts borrowed by E.D.S. & Co., Shanghai, on our account being equivalent of Taels 6,50,00,000 at Exchange 170 bearing interest at five and a quarter per cent. per annum" together with a credit of interest to the end of the year upon this loan. Within a short time, namely, on December 6, 1926, an entry states that three out of the six and a half crores of taels borrowed were repaid to the Shanghai branch. Throughout 1927 entries are made upon the footing that there are no longer any sums received on loan from the Hong; Kong company in respect of fixed deposits, call loans or otherwise, but that the Bombay company has received from the Shanghai branch a loan in taels on which interest at five and a quarter per cent, is being paid. When the present matter was first before the Assistant Commissioner, he requested the Bombay company to obtain a declaration from the Hong Kong company and from Messrs. E.D. Sassoon and Company Limited, Shanghai, on certain specific questions which he formulated. These declarations were duly made, the Chief Accountant of the Shanghai branch declaring that his company made a payment on November 17, 1926, to the Hong Kong company of the eleven crores of rupees and that the Shanghai branch made a tael loan of six and a half crores to the Bombay company but did not borrow any portion of that loan from the Hong Kong company, and that the Shanghai branch had not since November 17, 1926, borrowed any taels from the Hong Kong company or paid to that company any interest which they them selves had received from India. There was a further declaration from a Mr. Priestley, Director of the Hong Kong company stating that the Bombay company on November 17, 1926, paid off the loans and that the Hong Kong company had made no new loan of six and a half crores of taels to the Bombay company or to Messrs. E.D. Sassoon and Company Limited, and that there were no transactions between the Bombay company and the Hong Kong company in 1927. This declaration was accompanied by the certificate of a firm of chartered accountants, auditors to the Hong Kong company. At a later stage, namely, in June, 1931, a letter from Sir Victor Sassoon was put in to the effect that in 1926 when he was in China he set to work to make arrangements on behalf of the Bombay company so that after his return to India that company was in a position to send the telegram of October 27, 1926.;