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1929 Supreme(SC) 98
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD BUCKMASTER, VISCOUNT DUNEDIN, LORD TOMLIN, SIR GEORGE LOWNDES, AND SIR BINOD MITTER.
COMMISSIONER OF INCOME TAX, BOMBAY PRESIDENCY - Appellant
Versus
BOMBAY TRUST CORPORATION, LIMITED - Respondents
On appeal from the High Court at Bombay.
Decided On : Nov. 26. 1929.
Solicitor for appellant:Solicitor, India Office, Solicitors for respondents: Linklaters & Paines.
A person deemed to be an agent under Section 43 of the Indian Income-tax Act, 1922, is liable as an assessee under Section 42, regardless of whether they are in actual receipt of the income on behalf of the non-resident.
Headnote:(A) Indian Income-tax Act, 1922 - Sections 40, 42, and 43 - Non-resident company - Business connection - Deemed agent - Liability for tax on interest paid - Profits or gains accruing to a non-resident through a business connection are chargeable to tax in the name of the agent, who is deemed to be the assessee for all purposes of the Act. (Para 217)
(B) Interpretation of "Deemed Agent" - Section 43 provides that any person having a business connection with a non-resident, or through whom such non-resident is in receipt of income, shall, upon notice, be deemed to be an agent for all purposes of the Act. The term "deemed to be" requires a person to be treated as if they were an agent, even if they are not one in reality. (Para 218)
(C) Relationship between Sections 40, 42, and 43 - The requirement under Section 40 that an agent must be in receipt of income on behalf of a beneficiary does not override the explicit deeming provision of Section 43. A person deemed an agent under Section 43 is an agent for the purposes of Section 42 and is therefore liable as the assessee, regardless of whether they received the profits or paid them. (Para 218)
Facts of the case:
A non-resident company lent large sums of money to a resident company. The resident company paid interest on these deposits. The tax officer served a notice under the Act treating the resident company as the agent of the non-resident company and assessed them for tax on the interest payments. The resident company challenged the assessment, arguing that they could not be agents because they did not receive the interest on behalf of the non-resident company, but rather paid it.
Findings of Court:
The interest paid was a profit or gain accruing to the non-resident company from a business connection in the jurisdiction. The resident company had a business connection with the non-resident company and was the means through which the non-resident company received profits. Consequently, upon service of the statutory notice, the resident company was deemed to be the agent and the assessee.
Issues: Whether a company that pays interest to a non-resident lender can be treated as a deemed agent under Section 43 and held liable as an assessee under Section 42, despite not being in receipt of the income on behalf of the non-resident as contemplated in Section 40.
Ratio Decidendi: The court held that Section 43 creates a legal fiction. When a person is "deemed to be" an agent for all purposes of the Act, they must be treated as such for the purpose of Section 42. The High Court erred in limiting the meaning of "agent" to those in actual receipt of funds under Section 40, as the explicit words of Section 43 artificially place the person in the position of the agent and assessee.
Result: Appeal allowed.
Legal Category Hierarchy
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tax law
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income tax
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non-resident taxation
- agency and assessment
- business connection
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non-resident taxation
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income tax
Judgement
Appeal (No. 37 of 1929) from a judgment and order of the High Court (March 13, 1928) upon a reference under s.66, sub-s.2, of the Indian Income-tax Act, 1922.
The following facts appeared from the reference and the documents annexed thereto. The Hong Kong Trust Corporation (hereinafter referred to as "the Hong Kong Company ") was incorporated in Hong Kong with the object of carrying on the business of bankers and financiers, and was resident in Hong Kong. The respondent company was incorporated as a private company at Bombay with similar
Law. Rep. 57 Ind. App. 49 ( 1929- 1930) Commissioner of Income Tax, Bombay v. Bombay Trust
215
objects. During the years of assessment—namely, those ending on March 31, 1925 and 1926—the Hong Kong company had lent to the respondent company large sums on deposit at 5J per cent, interest. The advances constituted substantially the whole of the available capital of the Hong Kong Company, including both its paid up capital and money deposited with it. The respondent company remitted the interest due to the Hong Kong Company.
Under a notice pursuant to s. 43 of the Act served on the respondent company, it was held that that company was to be deemed to be the agent of the Hong Kong company, and it was assessed to tax under the Act in respect of the payments of interest.
The respondent company in pursuance of s.66, sub-s.2, of the Act required the Commissioner to refer to the High Court questions of law arising out of the decision.
The questions referred, and the provisions of ss. 40, 42, sub-s. 1, and 43 of the Act of 1922, appears from the judgment of the Judicial Committee.
The High Court (Marten C.J. and Kemp J.), in answer to the questions submitted, held, shortly stated (1.) that the interest paid was a profit or gain accruing or arising to the Hong Kong company from a business connection in British India, also directly under s. 4, sub-s. 1, and s. 6 (iv.) and (vi.), and accordingly was liable to income-tax ; (2.) that though the respondent company by s. 43 was to be deemed to be an agent for the Hong Kong company for the purposes of s. 42, the tax could not be levied upon them, as they had not received the interest as required by s. 40.
The proceedings are reported at I. L. R. 52 B. 702.
1929. Nov. 5. Dunne K.C. and R. Hills for the appellant. The fact that the respondent company did not receive the interest on behalf of the Hong Kong Company does not relieve them of liability. Sects.42 and 43 deal expressly with the profits or gains of a person resident out of British India through a business connection therein ; there is no ground for reading s.40 with ss.42 and 43. Under
s.43 the respondent company was to be deemed for all the purposes of the Act to be the agents of the Hong Kong company. Accordingly, under s.42, sub-s.1, those profits and gains were chargeable to tax in their name, and they were to be deemed the assessee which by s. 2, sub-s. 2, means the person by whom the tax is payable. The terms of s.42, sub-s.1, are clear, and should not be varied by speculations as to the intention of the legislature. The provisions of s. 57 assist the appellants contention. The majority decision of the Calcutta High Court in 1922 in Imperial Tobacco Company of India v. Secretary of State for India (1) under the Act of 1918 does not affect this appeal.
Latter K.C. and E. B. Raikes K.C. for the respondent. Sect. 40 in terms refers to an agent of a person residing out of British India, and must be read with ss. 42 and 43. Unless the words as to receipt of the profits apply an agent may be liable under s. 42, although he has not the means of recouping himself from the beneficiary. Under s.18 the respondent company had no power to deduct the tax from the interest which it paid. Even if under s. 42 the respondent company is to be deemed the agent under s. 42, sub-s. 1, its liability as an agent depends upon s. 40. The words in s.42, sub-s.1, that the tax is chargeable in the name of the agent
