Judgment

RAMASWAMI, J. : These appeals are brought, by special leave, from the judgment of the High Court of Madras dated January 8, 1963 in Tax Case No. 108 of 1960.

2. All the three respondents (hereinafter called the assessee-companies ) are public limited companies engaged in the manufacture and sale of yarn at Madurai. Each of the assessee-companies had a branch at Pudukottai engaged in the production and sale of cotton yarn. The sale-proceeds of the branches were periodically deposited is the branch of Madurai Bank Ltd. (hereinafter referred to as the Bank ) at Pudukottai, a former native State either in the current accounts or fixed deposits which earned interest for the various assessment years as follows:

Assessment Years Meenakshi Mills Rs. Rajendra Mills Rs. Saroja Mills Rs.

1946-47 1,08,902 . . . . . . 25,511

1947-48 1,18,791 24,953 30,620

1948-49 1,50,017 33,632 36,890

1949-50 . . . . . . . 42,369 41,393

1950-51 1,27,314 41,957 42,092

The Bank aforesaid was incorporated on February 8, 1943 with Thyagaraja Chettiar as founder Director, the Head Office being at Madurai. Out of 15 000 shares of this bank issued 14, 766 were held by Thyagaraja Chettiar, his two sons and the three assessee companies as shown below:

Share holding

1. Thyagaraja Chettiar 1,008

2. Manickavasagam 250

3. Sundaram 250

4. Meenakshi Mills 5,972

5. Rajendra Mills 3,009

6. Saroja Mills 4,177

3. All the three assessee-companies borrowed moneys from the Madurai branch of the Bank and on the security of the fixed deposits made by their branches with the Pudukottai branch of the Bank. It is the admitted case that the loans granted to the assessee-companies were far in excess of the available profits at Pudukottai. In the assessment proceedings of the assessee-companies for the various years under dispute, the Income-tax Officer was of the view that the borrowings in British India on the security of the fixed deposits made at Pudukottai amounted to constructive remittances of the profits by the branches of the assessee-companies to their Head Offices in India within the meaning of S. 4 of the Indian Income-tax Act, 1922 (hereinafter called the Act ). Accordingly he included the entire profits of the assessee-companies including the interest receipts from the Pudukottai branches In the assessment of the assessee-companies since the overdrafts availed of by the assessee-companies in British India far exceeded the available profits. The assessee-companies appealed to the appellate Assistant Commissioner of Income-tax. After examining the constitution of the assessee-companies and the Bank and the figures of deposits and overdrafts, the appellate Assistant Commissioner found that the deposits made by the assessee-companies and other companies closely allied to them formed a substantial part of the total deposits received by the Bank. He was also of the view that the Pudukottai branch of the Bank had transmitted the funds so deposited for enabling the Madurai branch to advance loans at interest to the assessee-companies and that the transmissions of the funds were made with the knowledge of the assessee-companies who were major share-holders of the Bank. The appellant Assistant Commissioner also considered that the Pudukottai branch of the Bank had no other appreciable transactions except the collection of funds and on the facts found S. 42(1) of the Act applied to the case. The assessee-companies took the matter in appeal to the appellate Tribunal which took note of the position that the head office and the branch - whether of the assessee-companies or of the Bank - constituted only one unit and that Thyagaraja Chettiar occupied a special position in both the concerns and the establishment of the branch of the Bank at Pudukottai was intended to help the financial operations of Thyagaraja Chettiar in the concerns in which he was interested. After detailed consideration of the deposits and overdrafts and the inter-branch transactions of the Bank the appellat