G.K. MITTER, J. - (1.) THIS is a reference under s. 66(1) of the Indian IT Act, the question referred being "Whether, on the facts and in the circumstances of the case, the amount of the interest of Rs. 51,092 payable by the assessee to Gwalior Investment Co. Ltd. was deductible as an allowance under s. 10(2)(iii) read with the proviso to the said section ?"
(2.) THE assessee carried on business at Calcutta with a branch at Gwalior. THE assessment year for our consideration is 1949-50 and the previous year for the purpose of assessment being Rathajatra 2006 ending 7th July, 1948. At the time Gwalior was not within British India. THE assessee claims to have obtained a loan from another company by the name Gwalior Investment Co. Ltd., a company non-resident in British India and carrying on business in an Indian State. THE assessee which kept its accounts on the mercantile system claimed deduction of interest of Rs. 51,092 accrued upon the loan to the Gwalior Co. In the account books of the assessee this amount was credited to the account of the said creditor. THE assessee seems to have been at first allowed the deduction in respect of the payment of interest shown in its books, but the matter came up again before the ITO in respect of a subsequent year and then the ITO made an enquiry as to whether any tax had been deducted or otherwise paid on the interest for the years 1950-51 or 1949-50. Receiving an answer in the negative he proceeded to use power under s. 34 and issued a notice thereunder. On hearing the assessee the ITO took the view that no allowance was permissible in respect of the said sum of Rs. 51,092 shown in the assessee's books of account as having been made of to the Gwalior creditor. THE appeals by the assessee to the AAC and the Tribunal were unsuccessful. THE assessee has now come up to this Court for determination of the question of law set forth above. Under s. 10 an assessee has to pay tax under the head "profits and gains of business" after making allowances set out in various sub-clauses of sub-s. (2). The relevant portion of s. 10(2)(iii) provides for allowances: "In respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid: Provided that no allowance shall be paid under this clause in any case for any interest chargeable under this Act which is payable without the taxable territories...except interest on which tax has been paid or from which tax has been deducted under s. 18 or in respect of which there is an agent in the taxable territories who may be assessed under s. 43 or, in the case of the firm, for any interest paid to a partner of the firm." On a plain reading of the above provision it is clear that although under the main section an assessee is to be allowed to deduct the amount of interest paid on capital borrowed by the first limb of the proviso no allowance is to be made in respect of "any interest chargeable under the Act" which is payable outside the taxable territories. Even in such a case, however, the assessee is permitted to claim deduction when he has paid the tax or when he has deducted the amount of tax from the interest which he is going to pay under the provisions of s. 18 of the Act. It was argued that as the assessee keeps his account on the mercantile system he can claim the benefit of s. 10 (2)(iii) even without actual payment when he incurs a liability to pay as he has done in this case. It was further argued that the proviso should not be construed in the way mentioned by me but that the expression "any interest chargeable under this" must mean "any interest chargeable under the Act in the hands of the creditor".
(3.) MR. Meyer arguing for the Revenue pointed out to me two authorities which put the second contention beyond controversy. A similar argument seems to have been made before Chakravartti C.J. and Lahiri J. in the case of P.C. Ray and Co. (India) Private Ltd. vs. A.C. Mukherjee, ITO (1959) 36 ITR 365 (Cal) : TC5R.355. Referring to s. 18(3B), which for our purposes is s. 18(3A) in the Act as it stands at present, the learned Chief Justice said: "Earlier, however, I had also thrown out the suggestion that probably s. 18(3B) could be satisfactorily construed and difficulties avoided, if the word 'chargeable' was taken to mean not 'assessable to tax', but as liable in its nature to be brought into computation in an assessment, that is to say, as belonging to one or other of the heads of income, as set out in s. 6 of the Act. In that view, if the amount payable to a non- resident appeared to be, say, income from property or profits and gains of business, profession or vocation or income from the other sources, it would come within the purview of the section; but if it was an amount of a kind exempt from tax, such as agricultural income, it would be outside its purview. On a fuller consideration of the terms of the section and the relevant authorities, I have reached the conclusion that the view which I suggested earlier is the correct view. I am led to that conclusion, particularly, by the provisions of s. 18(3C) of the Act which suggests unmistakably that payments which on receipt by the recipient would be a gross receipt in his hands, only a part or no part of which might be taxable, are not outside the contemplation of section." His Lordship felt himself fortified by the authority of the Supreme Court in the case of Aggarwal Chamber of Commerce Ltd. vs. Ganpat Rai Hira Lal (1958) 33 ITR 245 (SC) : TC5R.446. There the Supreme Court had considered whether a particular party could be treated as an agent of a non- resident for the purposes of ss. 40(2) and 42(1) on the basis of his having been in receipt of income, profits or gains chargeable under the Act, on behalf of the non-resident. Chakravartti C.J. pointed out that although the case was directly concerned only with ss. 40, 41 and 42, the Supreme Court had occasion to refer also to s. 18 which indeed was expressly mentioned in the first proviso to s. 42(1). I cannot, therefore, accept the contention which was put forward on behalf of the assessee that the proviso would only come into operation at the time when an actual payment was being made and it was then to be ascertained whether the person to whom the payment was made was liable to assessment under the Indian IT Act in respect thereof. The words of the proviso are clear on this point. "Interest chargeable under this Act" means "interest which is not exempt from taxation under the Act" and payable "without the taxable territories" refers to interest which is due to be paid outside the taxable territories. One can easily appreciate why the proviso was inserted in the section. Unless provision was made for deduction of tax on the interest at source, it might not be possible to recover it from a non-resident. Further, it would be open to an assessee who keeps his account on the mercantile system to go on claiming deduction for interest to creditors without the taxable territories when it would be impossible even to check the correctness of the accounts.;