K.L.Roy, J. - (1.) The petitioner in this application is the Assam Consolidated Tea Estates Ltd. (hereinafter referred to as the "English Company"), a company incorporated in England, which used to carry on business in the manufacture and sale of tea in India and Pakistan and owned several tea estates in these two countries and was assessed in respect of the income therefrom up to the 31st March, 1957. For carrying on the business more conveniently, the petitioner transferred its Indian assets including the tea estates situated in India to Assam Consolidated Tea Estates (India) Ltd. (hereinafter referred to as the " Indian company "), incorporated in the U.K. for that purpose with effect from the 1st April, 1957. The Indian company was a 100% subsidiary of the English company. The consideration for the transfer of the assets to the Indian company was 6,77,001) and the consideration was satisfied by the allotment to the English company of 4,77,000 ordinary shares of 1 each in the Indian company and the balance of 2,00,000 by the issue of unsecured loan stock of that amount bearing interest at 6% per annum. For the assessment year 1957-58, the petitioner filed its return showing its income up to the 1st March, 1957, and as the total income shown was nil no assessment order was passed on this return. It is claimed in the petition that thereafter up to the assessment year 1964-65 the interest paid in respect of the unsecured loan stock by the Indian company to the petitioner each year was allowed as a deduction in the assessment of the Indian company in computing its total income and not disallowed on the ground that the tax due thereon accruing to the non-resident petitioner had not been deducted. In the course of the assessment of the Indian company for the year 1965-66 the Income-tax Officer for the first time raised the issue, by his order dated the 23rd February, 1965, of the allowability of the interest paid by the Indian company to the petitioner. The respondent-Income-tax Officer was of the opinion that the said interest was income arising through or from any money lent and brought into India in cash or in kind and was assessable under Section 9(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act").
(2.) On the 24th February, 1966, the respondent-Income-tax Officer issued notices under Section 148 of the Act in respect of the assessment years 1961-62 to 1964-65 and a notice under Section 139(2) of that Act in respect of the assessment year 1965-66 calling upon the petitioner to submit its return of income for the said years within the period mentioned in the said notices. Along with the said notices the Income-tax Officer forwarded a letter dated the 24th February, 1966, contending that the sum of 2,00,000 lent by the petitioner to the Indian company has been utilised by the said company in its Indian business and as such the interest paid on the said loan was income which was deemed to accrue or arise in India under Section 9(1) of the Act and was taxable in India. A further notice under Section 139(2) in respect of the assessment year 1966-67 was issued on the 27th June, 1966.
(3.) The petitioner contended before the respondent-Income-tax Officer that the instrument of the loan stock was entered into in U.K. and any money in respect of the loan stock including interest was payable there. The loan stock itself formed the source of the income and was undoubtedly situated outside India. Even assuming that the transaction was a loan, the money lent at interest was never brought into India either by cash or in kind. Further, the assets had all along remained and continued to remain in India. There was thus no scope for the application of Section 9('l) to this case. As the respondent-Income-tax Officer was simultaneously proceeding to make assessments on the Indian company for these years by disallowing the interest paid to the petitioner and also initiating proceedings for imposing penalty for non-deduction of tax at source, a representation was made jointly by the petitioner and the Indian company to the Central Board of Direct Taxes stating, inter alia, their contention that the Income-tax Officer was in error in applying the provisions of Section 9(1) to the interest due on the said loan stock.;