Bombay High Court
Salzgitter Industrie Bau Gmbh vs Commissioner Of Income-Tax on 27 November, 1989
Equivalent citations: [1990]184ITR7(BOM)
Author: S.P. Bharucha
Bench: S.P. Bharucha
JUDGMENT T.D. Sugla, J.
1. The assessee is a non-resident company incorporated in West Germany. The assessee-company, Shah Construction agreement on and Jolly Brothers (Pvt.) Ltd., entered into a collaboration agreement on April 12, 1956, and formed a company by the name Shah Salzgitter and Jolly (P.) Ltd., in India in the year 1956, with the object of executing a contract work for Koyna Dam in Maharashtra. The assessee held 49% of the equity shares, while the two Indian companies held 51% between themselves. The assessee was to render technical assistance including supply of know-how to the newly formed Indian company (for short, the "Indian company"). The terms as regards the ownership of plant, machinery and other equipment, inter alia, were that the three companies would continue as the owners thereof in their shareholding ratio. For the purpose of enabling the contract work to be carried on smoothly and efficiently, the assesses opened a branch and a bank account in India in or about December, 1965.
2. Plant, machinery and other equipment needed for the purpose were of highly specialised nature. They had to be imported from the U.K., U.S.A. and West Germany. The understanding originally was that the assessee would arrange for the purchase of necessary equipment for and on behalf of the Indian company and the Indian company would open a letter of credit therefor. Subsequently, it was found that it was difficult for the Indian company to immediately arrange for the necessary exchange. At the same time, it was realised that the delay in the purchase of plant, machinery and other equipment necessary for executing the contract work would adversely affect the interest of the Indian company. In the circumstances. An arrangement was reached whereby the assessee-company agreed to advance and/or make payment for the purchase of the plant, machinery and other equipment to be purchased by or on behalf of the Indian company to the foreign suppliers as and when necessary and charge interest on such payments at the rate of 9% per annum from the date of payments up to the date of realisation.
3. The assessee followed the cash system of accountancy with regard to its income by way of interest from the Indian company. During the previous year relevant to the assessment year 1966-67, it received a sum equivalent to Rs. 25,56,289. While the assessee claimed that the amount was not taxable on the ground that income had not accrued in India, the Income-tax Officer held that the amount received by the assessee by way of interest was taxable in its hands under section 9(1)(i) of the Income-tax Act, 1962. The assessee's appeal was allowed by the Appellate Assistant Commissioner but the Tribunal set aside the order of the Appellate Assistant Commissioner and confirmed that of the Income-tax Officer. In so doing, the Tribunal agreed with the assessee that its alternative contention was not considered by the Appellate Assistant Commissioner as being unnecessary in view of his decision on the main issue in favour of the assessee-company. Accordingly, it was considered appropriate to direct the Appellate Assistant Commissioner to consider the assessee's alternative claim for deduction of interest in regard to payments by way of interest correspondingly made by it in Germany. The Department's appeal was, thus, allowed subject to the aforesaid direction to the Appellate Assistant Commissioner.
4. At the instance of the assessee-company, the Tribunal referred only one question as a question of law to this court for opinion. The Tribunal noted that the assessee had suggested as many as nine questions of law though, it its view, only one question needed to be referred as a question of law. The Tribunal also noted that the question of law framed by it covered questions Nos. 5 and 8 as suggested by the assessee. The question of law referred by the Tribunal and questions Nos. 5 and 8 suggested by the assessee in its reference application read as under : The question referred by the Tribunal.
"Whether, on the facts and in the circumstances of the case, the interest of Rs. 25,56,287 received by the assessee-company was income from 'moneys lent at interest and brought into India in cash or in kind', taxable under section 9(1)(i) of the Income-tax Act, 1962 ?"
5. Question Nos. 5 and 8 as suggested by the assessee :
"5. Whether, even if the Tribunal's conclusion that the sums on which interest payments were made by SSJ were advances made by the assessee on behalf of SSJ is correct, did the Tribunal err in law in not even considering whether such advances could be treated as 'loans' so as to be comprised in the term 'money lent at interest' in section 9(1)(i) of the Income-tax Act ?
8, whether the Tribunal's conclusion in its order dated November 22, 1975, in respect of the appeal heard in February 1974, that the interest paid by SSJ is assessable as income from money lent at interest and brought into India under section 9(1)(i) is based on surmises and conjectures and without consideration of the crucial issues which required determination ?"
6. Initially, Shri Dastur, learned counsel for the assessee-company, sought to challenge the Tribunal's finding on the lines indicated in question No. 8 suggested by the assessee. However, after arguing at some length, he conceded that this court could proceed on the basis of the findings given by the Tribunal and he no longer proposed to challenge the findings.
7. The findings given by the Tribunal as found in the statement of the case are as under :
Pages 42 and 43 of the statement of case : (extracted from the Tribunal's appellate order, pages 120 and 121 of the paper book).
"... The real nature of the transactions would appear to be that the assessee. With its well-established position and reputation and technical expertise arranged, as a shareholder of the Indian company, for the purchase of machinery from abroad and made advance payments to the suppliers on which S.S. J. Ltd., was made liable to pay interest at 9% on advances and loans. In formulating these transactions, even if the assessee was shown as the immediate supplier of the machinery to S. S. J. Ltd., this could not, in the opinion of the Tribunal, make any difference to the real issue under consideration." Page 44 of the statement of case :
(extracted from the Tribunal's appellate order, page 123 of the paper book :
"In these circumstances, the Tribunal was of the view that the sums on which interest payments were made were really advances by the assessee on behalf of S. S. J. Ltd., to make the payments to the suppliers, the transactions of supply of machinery being effected through the assessee as an intermediary which initially arranged the purchases from the suppliers."
8. The finding in substance is that the assessee made payments to the foreign suppliers at the request and on behalf of the Indian company. The amounts paid were debited to the account of the Indian company and carried interest at 9% per annum. The amounts were payable by the Indian company in convenient instalments.
9. The applicability of the provisions of section 9(1)(i) has been considered in paragraphs 30 and 31 of the Tribunal's appellate order. The Tribunal has not as such considered whether payments made by the assessee on behalf of the Indian company to the foreign suppliers of plant, machinery and other equipment amounted to "moneys lent" within the meaning of that clause. But it proceeded on that assumption. It is for this reason that the Tribunal mainly applied its mind to the second limb of the provision, viz., whether the moneys lent were brought into India in cash or in kind and considered at length the Calcutta High Court decision in the case of CIT v. National and Grindlays Bank Ltd. and distinguished it.
10. Shri Dastur, in the circumstances mentioned in paragraph 5, not having challenged the Tribunal's findings, strictly speaking, it is not necessary to refer to his claim that the assessee had merely sold the machinery and plant to the Indian company and that interest was charged on the outstanding sale price of the machinery and plant so sold, the claim being based on the statement of invoices of the sale of plant and machinery at pages 213 to 221 of the paper book. However, it is considered desirable to refer to the assessee's letters dated February 27, 1957, and June 3, 1957, to the Indian company (pages 294 and 297 of the paper book), copy of the debit note 2-a of the assessee (pages 299 to 302 of the paper book) and the assessee's letter dated October 23, 1968, to the Income-tax Officer forwarding an extract from the Indian company's board resolution dated February 4, 1957 (pages 303 to 306 of the paper book), which was stated to be an agreement regarding interest payment. In our judgment, the aforesaid material fully justifies the Tribunal's conclusion that the assessee had not sold any machinery or plant to the Indian company as such. Further, it leads to the inevitable conclusion that the assessee had not merely arranged and/or facilitated the purchase of machinery and plant by the Indian company but had in fact made all payments to the foreign suppliers for the purchase of the machinery and plant and the payments or advances so made were treated as loans to the Indian company on which interest was agreed to be charged at the rate of 9% per annum.
11. One of the two letters is the assessee's short letter dated February 27, 1957, to the Indian company. So is the relevant portion of the assessee's letter dated October 23, 1967, to the Income-tax Officer. The letter dated February 27, 1957, and the extract from the letter dated dated October 23, 1968, read as under :
12. Letter dated February 27, 1957 "Messrs. Shah Salzgitter and Jolly Private Limited, 198, Churchgate Reclamation, Jamshedji Tata Road, Bombay-1.
2545 RW/Dr. Ot/Hlg GM/PV February 27, 1956. Re : Payment of interest on our advances for purchase of machinery. Dear Sirs,
Please refer to our letter Sch/Mb of the last inst., and find below a calculation of the interest due on December 31, 1956. To begin with, we have charged interest only on the advance payments made by us for purchase of machinery. We reserve to ourselves the right to charge interest also on our other advances after clarification on all questions.
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Date of Supplier Amount Days Days 9% Payment DM interest
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21-7-56 Qutehoffnungshutte-
Double Cable Civil 316.000, - 163 12,700,60
28-7-56 Jacks and Co.
Winget plant 91,816,20 156 3,531,78
30-7-56 Person Ltd. - Crush-
ing and grinding plant 287,581,40 154 10,920,21
12-12-56 Held KG. -
Conveyors 30,800, - 19 144,30
21 -12-56 Held KG. -
Conveyors 75,600, - 10 186,41
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801,797,60 27,483,30
= Rs.31,160-2-8
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Yours faithfully, Salzgitter Industries Bau Gesellschaft mbH."
13. Extract from the assessee's letter dated October 23, 1967, to the Income-tax Officer :
"(i) An agreement of S.I.G. with S.S.J. regarding interest payments enclosed as an extract of the board meeting resolution dated February 4, 1957."
Extract from the resolution dated February 4, 1957.
"The managing director informed the board that we have to decide the rate of interest on the amounts contributed by the participants in this company by way of loans and/or deposits.
Resolved that interest at the rate of 9% per annum on loans or advances taken and/or advanced by the company from/to shah Construction Co. Pvt. Ltd. To be paid with retrospective effect from the date as the loans or advances are received/or paid by the company."
14. The letter clearly shows that interest is charged on the advance payments made by the assessee for the purchase of machinery and not for the delay in payment of sale price of the machinery. The letter discloses the names of the suppliers and the dates of its payment to them, again, the resolution of the board of the Indian company dated February 4, 1956, also authorises payment of interest on the amounts contributed to the Indian company by way of loans and/or deposits. Assuming. For the sake of argument, that the interest was received on outstanding sale price of plant and machinery, such outstanding amounts could not certainly be deposits. The inevitable conclusion can only be that the advance or sale price paid by the assessee to the foreign suppliers for facilitating purchase of machinery by the Indian company were treated, mutual arrangement, as loan and that is how interest was charged and paid.
15. Shri Dastur's legal submission is that clause (i) of sub-section (1) of section 9 is a part of the taxing statute. It creates a legal fiction whereby income actually earned outside India is deemed to accrue or arise in India in then circumstances mentioned in that clause and, therefore, the clause requires to be constructed strictly so as to give the benefit of doubt to the assessee. His further submission is that even through the Tribunal did not as such consider the question whether the assessee-company had or could be said to have lent money to the Indian company within the meaning of the clause, he was entitled to argue it before this court. The submissions are well-founded and have not been seriously disputed by Shri Jetley for the Department.
16. Since. However, this aspect of the question is a mixed question of fact and law, the contention will naturally have to be considered on the basis of facts found by the Tribunal and the documents annexed to the statement of case in the light of the legal submissions that will be made by the parties. Reference to the relevant material has already been made in the earlier paragraphs.
17. In this context, it may not be out of place to mention that the exact terms of the arrangement (whether formal or informal) between the assessee and the Indian company are not available. Neither the books of account of the assessee nor of the Indian company are available to this court. The invoices by the Indian company are also not on record. Such material could have thrown some light as to the nature of the transactions
18. Clause (i) of sub-section (1) of section 9 of the Income-tax Act, 1962, reads as under :
"9. Income deemed to accrue or arise in India, - (1) The following incomes shall be deemed to accrue or arise in India - (i) all income accruing or arising, whether directly or indirectly, through or from any money lent at interest and brought into the taxable territories in cash or in kind". Admitedly, the situation contemplated herein is that the income arises outside India but by the statute, it is deemed to accrue or arise within the taxable territory. However, the deeming provision is not absolute. It is applicable only if the conditions laid down therein are satisfied.
On the face of it, this part of the clause can conveniently divided into three parts, namely :
(i) income accrues or arises, whether directly or indirectly;
XF (ii) through or from any money lent at interest; and XGX (iii) brought into India in cash or in kind.
The dispute herein is as regards the interpretation of the second and third parts only. However, in view of the Federal Court decision in the case of A. H. Wadia v. CIT [1948] 17 ITR 63 and the Supreme Court decision in CIT v. Sri Meenakshi Mills Ltd. , it is not possible to accept Shri Dastur's submission that the two parts are independent of each other. Assuming for the present that Shri Dastur is right, the controversy then is about the expression "through or from any money lent at interest". Which, it is agreed, can be further narrowed down to the two words used therein, namely, "money lent". The expression "money lent" is admittedly not defined in the Income-tax Act, 1961. Therefore, we have to first as certain the plain dictionary meaning of the words "money" and "lent". According to Shorter Oxford English Dictionary, "money" means current coin and promissory documents as are currently accepted as medium of exchange. This meaning does not present any difficulty. The word "lent", according to the same dictionary, means the act of lending, the word "lend", in turn, meaning to grant temporary possession of a thing on condition of return of the same or equivalent, to let our money at interest, etc. Section 42 (1) of the 1922 Act was almost in identical terms. While considering the provisions of section 42 (1), the Federal Court in the context of its validity, etc., through Chief Justice Kania in A. H. Wadia v. CIT [1949] 17 ITR 63,73, observed :
"The exact words used in the section are 'arising from any money lent at interest and brought into British India in cash or in kind". In my opinion, it is proper to read this as one head and as indicating one composite transaction. The interest must be the result of the loan of money and the money must be brought into British India in cash or in kind. Reading it in that way, the incident of bringing the money into British India in cash or in kind to the knowledge of the lender or borrower is an integral part of the transaction. After the money is bought into India, how it is used by the borrower, to my mind, is an irrelevant question."
19. Thus, according to the Federal Court, this part of the clause should be read as one head indicating one complete transaction and knowledge of the borrower and of the lender about the incident of bringing the money into India is an integral part of the transaction. The Supreme Court in CIT v. Sri Meenakshi Mills Ltd. , also understood the Federal Court to say :
"But all the learned judges agreed that the knowledge of the lender and the borrower that the money is to be taken into British India must be an integral part of the transaction. That is the ratio of the decision of the Federal Court with regard to the construction of section 42(1) of the Act."
20. We will. Therefore, proceed on the basis that the second and third parts of the clause are not really independent of each other.
21. The first important judgment relied upon by Shri Dastur was that of the House of Lords in Potts' Executors v. IRC [1951] 1 All ER 76. The question involved in that case was whether the trustees of the settlement had paid any capital sum to the settlor within the meaning of section 40 of the Finance Act, 1938, the capital sum under that section meaning any sum paid by way of loan or repayment of loan. On the answer to the question depended the assessability of the capital sum paid as income in the hands of the settlor. The facts were that the settlor was a governing director of the company both before and after he had made a settlement in favour of his grandchildren. The trustees of the settlement had invested the money in the purchase from him of all but one share of that company. The settlor had, for many years prior to the settlement and continued to have after the date of the settlement with the company have after the date of the settlement, an arrangement with the company whereby the company paid various amounts on his behalf, such as charitable subscriptions and taxes, debiting his account in the company's books with the sums so paid. And crediting his account with receipts such as director's fees and expenses due to him and payments which he made to the company in discharge of his indebtedness. In the relevant years, the company made payments at the request of the settlor exceeding the available income of the settlement. It was held that the company did not make the payments in question to the settlor by way of loan. The Special Commissioners had held (at p. 79) :
"The payments by the company direct to (for example) the Inland Revenue Commissioners for surtax are in substance merely a convenient method which avoided the necessity of the company paying to Mr. potts and Mr. Potts then paying the Inland Revenue Commissioners."
22. This judgment is not unanimous. One of the five judges constituting the Bench dissented from the majority view. Some observations made by one or two of the judges go even to the extent of suggesting that if A pays money to C at the request and on behalf of B, A has not lent money to B or that if A deposits money direct to B's bank account where from C had borrowed money at the request and on behalf of B, then also A cannot be said to have lent money to B. However, on going through the majority judgment carefully. It cannot be held that is the majority view. The majority view is correctly stated in the headnote at page 77 :
"On the true construction of section 40 (5)(a)(i), the company did not make the payments in question 'by way of loan' to P, and they did not, therefore, constitute a 'capital sum' within section 40 (3), and, although the words 'directly or indirectly' were to be read into section 40 (3), and, although the words 'directly or indirect' were to be read into section 40 (3), the words 'paid to the settlor' were not thereby so enlarged as to include payment to some person other than the settlor for that person's own use and benefit."
23. The payments in question, it may be again stated, were made under an arrangement which existed prior to the date of the settlement and continued after the settlement between the company and the settlor. The nature of the arrangement had already been referred to in the earlier paragraph.
24. The facts in the chancery Division judgment in the case of Champagne Perrier -Jouet SA v. H. H. Finch Ltd. [1983] 3 All ER 713 were that a life director of the company, J, held about 10% of the equity shares of the company. He became greatly indebted to the company as a result of the payment by the company of his numerous bills on his behalf and also on account of supply of wine to a company controlled by him. It was held (headnote) :
"The defendant company had at no stage made a 'loan' to J within the meaning of regulation 10 of Part 1 of Table A in the 1948 Act since he had not been lent a sum of money but was simply indebted to the company in respect of the bills paid on his behalf and this stocks of wine passed over to a third party, I Ltd. Therefore, by virtue of regulation 11, the company had at all material times a lien over his shares and that lien took priority over the plaintiffs' equirble charge. Furthermore, the lien conferred on the defendant company the right to sell a sufficient number of J's shares, through the machinery of article 7 of its articles of association, to discharge J's liability to the company and all incidental costs and expenses of the sale. The sale could only be effected through the machinery prescribed by article 7 because, on the true construction of the company's articles, the provisions of regulations 12 to 14 of Table A did not override the scheme laid decided onwn in article 7 for the sale of shares. Declarations to that effect would be made accordingly."
25. What had happened in the Chancery Division judgment in. In re H.P.C. Productions Ltd. [1962] 1 All ER 37 was that at the request of K who was resident in the United Kingdom, T.V. a Swiss finance corporation, bought in 1954 for dollars some bills, which were delivered delivered in New York to K's direction, and made payments in 1955 in Paris in French francs for or towards the purchase of a villa. At this death in 1956, K was owned a substantial sum of money by H.P.C. Productions Ltd., an English company, for money lent by him. In 1956, Appeal from the Judgment and Order dated er K's death. The indebtedness of K to T.V. in respect of the transactions previously mentioned, was assigned to H.P.C. Productions Ltd. In the voluntary liquidation of this company in 1960, K's executors proved for K's debt. The liquidator rejected the proof, claiming to set off in respect of it the indebtedness assigned to the company, the amount of which exceeded the amount of the proof. By section 1(1) of the exchange Control Act, 1947, a person resident in the United Kingdom, other than an authorised dealer, was forbidden, outside the United Kingdom, to borrow foreign currency from or lend foreign currency to any person other than an authorised dealer. Neither K nor T.V. were authorised dealers, and the dollars and francs were foreign currency for the purposes of section 1 (1). On the question whether the transactions giving rise to K's indebtedness to T.V. were illegal, and, therefore, could not be made the subject of set-off, it was held (headnote) :
"The payments made by T.V. were not payments made by way of a loan nor were they made to K or to persons accountable to him, but were such as would give rise to a claim for money paid at K's request, which was a claim generally different from that of money lent, and, therefore, there had not been a borrowing by K; not had there been a sale of foreign currency to K, and, therefore, the assigned indebtedness of K to T.V. was not affected by illegality under section 1 (1) of the Exchange Control Act, 1947, nor prevented thereby from being the subject of set-off."
26. The next judgment was of the Court of Appeal in Inland Revenue Commissioners v. Rowntree and Co. Ltd. [1948] 1 All ER 482. The facts in that case were that in pursuance of arrangements covering a period of years, a company raised money for the purposes of its business by drawing sight bills, payable at four and six months, on an acceptance house, which accepted the bills in consideration of a commission paid to them by the company, and remitted the proceeds to the company, discounted them in the market and remitted the proceeds to the company. Under the arrangement, the company was bound to put the acceptance house in funds shortly before the maturity dates of the respective bills. Money was raised in this way during the company's standard period. The Special Commissioners were of the opinion that the words "borrowed money" in para 2(1) should not be given a strained meaning and that in ordinary commercial usage. The relationship between the company, the acceptance house, and the holders of the bills was not that of borrower and lender nor were the transaction ones of loan. They, therefore, held that the money so raised was not "borrowed money" within the meaning of para 2(1). On these facts, it was held (headnote) :
"The words 'borrowed money' in para. 2(1) in law required the relationship of a borrower and a lender, a relationship which did not exist in this case, but, even if the words were to be given some wider interpretation, the finding of the Commissioners that, in ordinary commercial usage, the relationship between the parties was not that of borrower and lender ought not to be disturbed."
27. Commissioners of Inland Revenue v. G. B. Bates [1966] 44 TC 225 is a The judgment of the Court was delivered bygment of the House of Lords delivered in the year 1966. One of the questions involved was the same as in Potts' case [1952] 1 All ER 76 (HL), viz. Whether $9100 paid by the company to the settler's bank account in which he had an overdraft was a loan by the company to the settlor. Observing that, despite the court's observations in Potts' case [1952] 1 All ER 76 (HL), nothing was done to amend the section, it was held that such a payment did not amount to a loan.
28. Superficially looked at, all these decisions, particularly the decision of the House of Lords in G. B. Bates' case [1966] 44 TC 225 and of the Chancery Division in H.P.C. Productions Ltd.'s case [1962] 1 All ER 37, give the impression that unless money is actually given by A to B, there can be no loan from A to B. On a careful examination, however, it would appear that the decisions were rendered in the context of their own facts and different statutory provisions. Besides, according to the theory of precedents, so long as the Supreme Court does not take a view different from the view taken by the Privy Council. The decision of the Privy Council is still binding upon the High Courts. The position regarding a Federal Court judgment cannot be different. Therefore, while the decisions referred to here in above deserve full respect and have great persuasive value, the Privy Council decision in the case of Beninson v. Shiber AIR 1946 PC 145, relied upon by Dr. Balasubramanian will be blinding on his court unless the Supreme Court is shown to have taken a contrive view. In the Privy Council decision, a building owner had entered into a building contract with a building contractor. In terms of the agreement. The building contractor was to find money for the building and charge the building owner for the same interest at the rate of 9% per annum on the total amount discounted in advance. A question arose as to whether the money paid by the building contractor for the construction of the building was a loan by him to the building owner. Rejecting the argument that, unless the money was given by the building contractor to the building owner as such it could not be loan, it was held that physical transfer of money was not necessary to continue a loan. The relevant observations as found in the headnote are :
"Ordinarily. In a building contract, the relationship of lender and borrower does not exist between the builder and the building owner. The parties to the contract may, however, so frame it as to create that relationship, e.g., where the builder agrees to find the money for the building and the building owner agrees to pay him interest on the money for the building and the building owner agrees to pay him interest on the money so found. If a man finds money for another and expands it on that other's behalf and in accordance with his request, he is lending it although he never physically transfers it to the borrower, this may be true even where some of the money is due to the lender himself for his services. It is not necessary in such a case, in order to constitute a loan, that money should be handed over by the lender to the borrower and by him returned to the lender as the reward for his services. The same result is arrived at if the parties, by the terms of their contract and by their course of dealing, have shown an intention that the money payable by the debtor should be provided or found by the creditor and treated as having been advanced by him."
29. It is true that the Privy Council in this case was considering the provisions of the Userious Loans Act and not of a taxing statute and that interest was to be charged in advance. Howeves, the decision does not appear to have rested on these facts, the Privy Council, it applicantears, held that ordinarily when a contractor puts his own money in a building contract to be executed by him, there will be no relationship of a borrower and lender between the building owner and the building contractor, but a contract of the type involved in that case would create and had created such a relationship. In other words, according to the Privy Council, it is necessary to constitute a loan that money must be paid by A to B physically. To that extent, therefore, the Privy Council has taken a view different from the judgments relied upon by Shri Dastur. Accordingly, following the Privy Council decision in Beninson's case, AIR 1945 PC 145, as no decision of the Supreme Court taking a contrary view was brought ton our notice, we will proceed on the basis that it is not always necessary to constitute a loan transaction between A and B that A should pay money direct to B. Depending upon the facts and circumstances of a case, there can be an arrangement whereby A discharges the obligations of B and A is treated as having lent money to B. 30 As regards the Supreme Court decisions cited, viz., :
(i) Shree Ram Mills Ltd. v. CEPT ;
(ii) Bombay Steam Navigation Co. (1954) Pvt. Ltd. v. CIT ; and
(iii) CIT v. Sri Meenakshi Mills Ltd. , We find that the second decision does not have any direct bearing on the question before us. In this case, as a result of a scheme of amalgamation. The value of the assets of the amalgamated company was partly paid by the issue of shares and partly by treating it as a loan. A question arose as to whether interest paid thereon was allowable as deduction under section 10(2)(iii) or under section 10(2)(xv) of the old act. Holding that it was not a case of capital borrowed, interest was held allowable under section 10(2)(xv). The court observed that an agreement cannot convert a transaction into a loan, if factually it is not so. The decision in Shree Ram Mills Ltd's case [1954] 23 ITR 120 (SC), on the other hand, suggested that, by a proper agreement, unrealised managing commission can be converted into a loan. In that case, the managing agents had left their commission lying with the assessee. The question was whether the amount of commission so left was a loan, it was held that mere inaction on the part of the managing agents could not convert money due to them into a loan. In the case of Sri Meenakshi Mills Ltd. The Supreme Court made certain observations which speak for themselves. The observations are (at pages 615 and 616 of 63 ITR :
"It is well-established that in a matter of this description the income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases, the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation."
32. Further, the court analysed section 42(1) of the 1993 Act corresponding to section 9(1)(i) of this Act and drew the ratio of the Federal Court judgment in A. H. Wadia's case [1949] 17 ITR 63 (page 614 of 63 ITR) which has already been quoted in paragraph 10 (p. 17 supra) of this judgment. The nexus was stated to be the knowledge to be attributed to lender that the borrower had borrowed money for the purpose of taking to British India and earning income on that money.
33. This court's judgment in Pennwalt India Ltd. v. Registrar of Companies, [1987] 62 Comp Cas 112. Notices a distinction between a deposit and a loan. It was observed that though the dividing line between a loan and a deposit was thin, the two were not synonymous.
34. The Gujarat High Court, of course, held in CIT v. Saurashtra Cement and Chemical Industries Ltd. , that unpaid price in respect of sale of goods could never set to be a loan advanced by the non-resident to the assessee-company. Since the non-resident company could be said to have lent the amount of unpaid purchase price to the assessee-company either in cash or in kind, there was no question of interest payable by the assessee-company to the non-resident company being deemed to be "income" accruing or arising from any money lent at interest and brought into India in kind.
35. The Supreme Court, on the other hand, in the case of Radha Kissen Chamria v. Kesahardeo Chamria, , while holding that a part of unpaid purchase price agreed to be paid in instalments on interest in that case did not amount to a loan, observed (at page 745) : "But, looking at its terms, we are unable to hold, as the High Court was unable to do, that it shows that the price due was by agreement treated as a loan by the vendor to the purchasers. Mr. Chatterjee was unable to contend that in every case when unpaid vendor leaves the purchase money outstanding and agrees to accept it later with interest, the transaction amounts in substance to a loan. He said that the facts of each agreement had to be looked at to find out whether the agreement amounted in substance to a loan.
36. Here, we have no other facts than those appearing on the face of the compromise decree and these facts do not, in our view, amount to an agreement to convert the outstanding purchase money to a loan by the vendor to the purchasers. All that we have here is an agreement by the vendor to accept payment of a portion of the moneys payable under the agreement for sale immediately and the balance in certain instalments and to be paid interest on the purchase money at the same rate which was provided in the agreement for sale."
37. In view of the Privy Council decision in Beninson's case, AIR 1946 PC 145 and the Supreme Court decision in Radha Kissen Chamria's case, , it appears clear to us that it is not always necessary that, in order to constitute "money lent", money must actually pass from the lender to the borrower, depending upon the facts and circumstances in each case, money paid by the payer to a third party at the request of the payee under an agreement that the money so paid would constitute a loan at interest, can be treated as a case of money lent by the payer as a lender to the one who so requested it as a case of money lent by the payer as a lender to the one who so requested it as a case of money lent by the payer as a lender to the one who so requested it as a borrower within the meaning of the clause. This is what has happened in this case. The amounts were advanced and paid by the assessee-company for and on behalf of the Indian company for the purchase of plant. Machinery and other equipment from the foreign suppliers. To borrow money abroad and then to make payment to the foreign suppliers of plant, machinery and other equipment might have resulted in the violation of foreign exchange regulations. If, on the other hand, instead of borrowing money as such and making payments to the foreign suppliers, borrowed money was brought into India and then the payment were made to the foreign suppliers of plant and machinery, the process, to say the least, would have been cumbersome. All these aspects have to be appreciated in the background of the fact that the assessee-company not only holds 49% equity shares of Indian company and has supplied know-how, but it also the owner of the plant, machinery and other equipment in the ratio of its shareholding. In the circumstances, it is only reasonable, having regard to the resolution dated February 13, 1957, which was described by the assessee itself to the Income-tax Officer as an agreement under which the amounts were advanced by the assessee-company to the Indian company at interest, that the assessee-company had lent money to the Indian company within the meaning of section 9(1)(i) of the Income-tax Act. Shri Dastur's submission that Department's case. As noted by the Tribunal at page 115 of the paper book, merely was :
"... The purchases of the machinery were in effect made on S. S. J.'s behalf by the assessee as a part of an agreement between them to finance the purchases and S. S. J. Ltd., paid the assessee in deferred installments with interest and the basis of interest at 9% was the resolution dated February 4, 1957, there being no documentary evidence of any subsequent (sic) as claimed by the assessee; the Revenue's second contention is that such interest received by the assessee was chargeable under section 9(1)(i)."
38. Viewed in the context, it will also justify the conclusion arrived at by us above.
39. Before proceeding to consider the next contention, it may be desirable to briefly refer to the other decisions relied upon by Dr. Balasubramanian which are not germane to the issue in this case. The Madras High Court in CIT v. S. Ramsay Unger was dealing with the question whether the money remaining as the testator's estate in the hands of assessee as the executor, could be regarded as borrowed capital. It was held to be so without discussion. The Privy Councils decisions in CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 and Raja Raghunandan Prasad Singh v. CIT [1933] 1 ITR 113, the Rangoon High Court decision in the case of CIT v. P.L.S.M. Concern, Minhla [1934] 2 ITR 417, the Madras High Court decision in Chidambaram Chettiar v. CIT and the Allahabad High Court decision in Seth Kishori Lal Babulal v. CIT , involved a question as to the purpors and scope of the word "income" in the context of the well-known dictum that income can be received in cash or in kind. It was held in all these cases that the expression "in kind" included received in money's worth. The Madras High Court decision in K. S. P. K. T. Kalayappa Chettiar v. CIT , involved the case of a money-lender who had, in satisfaction of a decree, acquired a house. The question was whether the house was the assessee's stock-in-trade or a capital asset. Since the assessee was carrying on money-lending business and the house was acquired in the course of money-lending business, the house was held to be a part of its stock-in-trade, we do not think that any of the decisions here in above have any bearing on the question before us.
40. The second condition. According to Shri Dastur, is the money lent must have been brought in India in cash or in kind. In support of his contention that even if it is assumed for the present that the money was lent by the assessee-company to the Indian company, the money was not brought into India in cash or in kind; Shri Dastur strongly relied on the Calcutta High Court decision in the case of CIT v. National and Grindlays Bank Ltd. , where it was stated to have been held that money meant a medium of exchange and must retain the character of money or its equivalent in drafts, cheques, etc., which were really acceptable in the commercial world for money and electric generators and plant do not satisfy that criterion. In the present case, what was brought into India was plant, machinery and other equipment and, therefore, the Calcutta High Court decision was squarely applicable. Fairly admitting that the Calcutta High Court decision was not binding on this court, he invited our attention to this court's judgment in CIT v. Chimanlal J. Dalal and Co. , where it was held that even if this court doubted a judgment, for the sake of uniformity among the High Courts in the matter of the Income-tax Act, this court would follow another High Court's decision if there was no other High Court decision to the contrary.
41. Dr. Balasubramanian, on the other hand, relied on the order of the Tribunal, in particular, he referred to the judgment delivered by Justice K. L. Roy in the Calcutta decision to show that electrical generators and plant were brought into India long before the non-resident assessee had borrowed moneys. He contended that the Calcutta decision, thus, should not be applied in this case and the expression "in cash or in kind" should be understood as cash or anything worth cash or money or their worth including plant, machinery and other equipment. In reply, Shri Dastur stated that Justice Roy, as he then was, undoubtedly had referred to the factual aspects of the matter, but this he gave as an additional reason. The fact is that whatever observations he made, he made them while respectfully agreeing with the judgment delivered by Mukharji J. Thus, the observations made in the course of the judgment by Mukharji J., were the observations of the Bench and not of Mukharji J., alone.
42. On going through the judgment carefully, it appears clear to us that the judgment delivered by Mukharji J., is judgment of the Bench as Roy J., has prefixed his judgment with these words (page 135 of 72 ITR) :
"K. L. Roy J. - While respectfully agreeing with the judgment delivered and the answers given by my Lord to the questions referred, I wish to add a few words of my own."
43. This being the only judgment cited having direct bearing on this aspect of the matter, it is only reasonable that the judgment is properly apprecited. In the context of the meaning of the expression "money in cash or in kind", this is what the court observed (at pages 127 and 128) XIXA :
"What then is the meaning of the expression 'money in cash or in kind' ? In the broadest concept and in some schools of economist, money is a medium of exchange and money includes whatever is obtained by money. In other words, goods or plants or machinery brought with money are equivalent of money and should be regarded as money. Does that broad meaning apply in taxing and fiscal statute like the Income-tax Act in construing the expression 'any money lent at interest and brought into taxable territories in cash or in kind ?' A tax must be clearly brought home without equivocation to the assessee. A tax by implication is not encouraged by interpretation, unless such implication is necessary and compelling. That is well-settled principle of construction."
44. In the same context, the court further observed (at page 134 of 72 ITR) XIAD "The 'money in kind' in section 42(1) of the Income-tax Act means that which retains its character or quality or its kind as money, namely, in commercial forms recognised in the commercial worlds such as bills of exchange, I.O.Us., or even gold and silver bars or ingots. It will be illegal and unjustified in our view to extend the meaning of the expression 'money in kind' in section 42(1) of the Income-tax Act beyond these accredited uses of money accepted, used and recognised as such in the commercial world and in the usual transactions. We, therefore, hold on the interpretation of section 42(1) of the Income-tax Act that the plant, goods, machinery or the generator brought in this case was neither money in cash nor money in kind nor income within the meaning of section 42(1) of the Income-tax Act and it does not mean any and every article into which the money had been converted. It has still to be 'money in kind' and not money converted into goods, without anything more."
45. Rejecting the meaning that may be given to the expression elsewhere, the court observed at pages 128 and 129 of 72 ITR :
"But in a statute like the Income-tax Act, the scope for this kind of construction is limited. It is limited for variety of reasons. First, because it is a tax imposition and, therefore, must be in clear language and if not always explicit at least by necessary and compelling implication. Secondly, because a statute like a taxing statute is a legal document using legal words. Expressions and concepts and is not the naive and artless product of a legally inexperienced and ignorant testator. The expression 'money in cash or in kind' can lend itself to the popular meaning that money is not only technical money in the technical sense but also money in all kinds of converted forms including goods, plant or machinery purchased or sold so that all wordly goods can be seen as the alter go of money. For taxing purposes we have no hesitation to come to the conclusion that is not meaning which can be adopted for the expression 'in cash or in kind', in section 42(1) of the Income-tax Act."
46. However, the observations made in the Calcutta decision in National and Grindlays Bank Ltd.'s case , about the concept of "money brought into India in cash or in kind" are not independent of the facts of the case. In the first place, the Calcutta High Court noted that the Federal Court decision in Wadia (A.H.) v. CIT [1949] 17 ITR 63 held section 42(1) of the 1922 Act to be not ultra vires on the ground of being extra-territorial in operation for the reason that the nexus was the bringing of the money into India with the knowledge of the lender and borrower giving the real territorial connection. It further noted that, referring to the aforesaid Federal Court judgment, the Supreme Court, in the case of Sri Meenakshi Mills Ltd. had held that the expression "arising from money lent at interest and brought into British India in cash or in kind" meant one ahead indicating one composite transaction, the incident of bringing the money into British India in cash or in kind to the knowledge of the lender and the borrower as an integral part of the transaction. It is in this context that while rejecting Mr. Pal's argument that the assessee knew that the object of the loan was to buy capital goods and to bring them into India, the court observed (at pages 133 and 134 go 72 ITR) :
"We are not impressed by this line of argument for the purpose of this reference. The assessee in this case was lending money. How the borrower would use the money after obtaining it was not a matter of concern for the lender, the assessee. That a case was made to represent to the lender that the real reason for borrowing the money was to buy goods which were ultimately to be brought to India did not really make it a part of the loan or an obligation of the loan or a part of the legal arrangement in respect of this overdraft for a loan. For it must be emphasised that the statement of case and facts in this reference make it abundantly and expressly clear that the debts for which the overdraft loan was taken had already been incurred. Supposing the corporation after obtaining the money from the assessee-bank did not buy the goods and did not install them; even then the loan was good enough and the lender could insist that you repay the loan and also in the meantime pay the interest due on the loan."
47. It is significant to mention that the court did not rule out a possibility in which Mr. Pal's submission could be accepted depending, of course, on the facts of each case. This is clear from the court's further observations at page 134 of 72 ITR :
"It is possible to imagine a case where the lender and the borrower come into a kind of agreement for the loan and its repayment which clearly stipulates a legal obligation on the borrower about a particular use of the money in buying goods and a particular obligation to pay back to the lender after installing a kind of floating or other charge upon the assets of the company and a further obligation to pay the interest out of the profits earned by the use of such goods. Then in such cases of facts a nexus may be built up which will change the picture and bring the assessee within the meaning of section 42(1) of the Income-tax Act."
48. Finding, however, that the facts in the case before it were different, the court further observed at page 134 itself (of 72 ITR) :
"But then these are not the facts in this case. It was a loan simpliciter, a bank giving a loan to an old customer, the whole transaction of the loan was in England. The head office and the registered office of the lender and the borrower were both in London. The money was advanced in London. The interest was payable in London. There was nothing else left of this money or interest which can connect it with the taxable territory in India. We are unable to hold that in this case the electrical generator plant is 'money in kind' within the meaning of section 41(1) of the Income-tax Act."
49. Shri Dastur is, thus, not quite correct in stating that the fact that plant and machinery in that case had been purchased and brought into India long before the money was borrowed was not a consideration that weighed with the court in coming to its conclusion (see underlined portion of quotation from the judgment at pages 133 and 134), nor is Shri Dastur very correct in drawing from the Calcutta decision an absolute proposition that the expression "money brought to India in cash or in kind" can never be money converted into goods. Further, the Federal Court and the Supreme Court having held in so many words that it is only proper to read the expression "money lent at interest and bought into British India in cash or in kind" as one her and as indicating a composite transaction and that the knowledge of the lender and the borrower that money is to be taken into British India must be an integral part of the transaction. It is only fair and reasonable to take an overall view of the transaction rather than considering it in parts as suggested by Shri Dastur. In other words, the approach that the Revenue must first prove that the assessee-company lent money to the Indian-company and in the event of its successfully doing so, it must further prove that money lent was brought into India in cash or in kind, is, to say the least, fallacious. To our mind, what requires to be appreciated is that the assessee-company holds 49% of the equity shares of the Indian Company. It has supplied the entire technical know-how to the Indian company for the contract work. The plant, machinery and other equipment of highly specialised nature was required to be purchased in the U.K., U.S.A. and Germany. The Indian company did not have the necessary foreign exchange readily available. Delay in purchasing the plant and machinery would have jeopardized the interest of the Indian company. The Indian company approached the assessee-company and the assessee-company agreed to make payments to the foreign suppliers of the plant, machinery and other equipment at the request of and on behalf of the Indian company on the condition that the amount its as and when paid will be debited to the account of the Indian company and carry interest. The assessee-company also agreed to receive payments with interest in deferred instalments. This is how it was possible for the Indian company to import plant, machinery and other equipment to India.
50. In our judgment, these facts surely fit into the possibility visualised by the Calcutta High Court in its decision. On so particularly so as, for reasons best known to the assessee-company, the actual arrangement between the assessee-company and the Indian company, whether formal or informal, was not placed before the Department, the Tribunal or before this court, neither the books of the assessee-company nor those of the Indian company nor even the copies of the originals of invoices which could have thrown some light as to the exact nature of the transactions were made available. The only relevant and important material available in the paper book is the assessee-company's letter dated October 23, 1968, to the Income-tax Officer in which an extract of the board's (Indian company) resolution No. 6 dated February 4, 1957, was referred to an an agreement between the parties. The said extract clearly and categorically refers to the Indian company's payment of interest on loan and advances by the assessee-company.
51. This is also the view of the Kerala High Court in the case of (CIT v. Lakshmi Lines Ltd. . In that case, an Indian company had purchased a ship from a non-resident company and agreed to pay the purchase price in instalments with interest on the unpaid purchase consideration. The Indian company had paid interest but had not deducted taxes under section 195 of the Income-tax Act, 1961. The claim for deduction in respect of interest was disallowed on the ground that the tax was not deducted from interest payments. The question that arose in that context was whether the payment of interest by the Indian company to the non-resident company was taxable under section 9(1)(i) in the hands of the non-resident company because it was only the that the Indian company's liability to deduct tax would arise, and the Kerala High Court held that the non-resident company was taxable in respect of interest income under section 9(1)(i). Therefore, the Indian company had an obligation to deduct tax under section 195 and it not having done so, the disallowance of its claim for deduction was justified.
52. Apart from the other reasons already given, there is one more reason why the decisions relied upon by Shri Dastur on the meaning of the expression "money lent" will not apply in this case. Ordinarily in the case of a borrower borrowing money from a lender, the lender will now know, except to the extent it is necessary for him to have a sense of security of receiving the money back, the use to which the borrower was going to put the money lent to. As held by the Supreme Court in the case of Sri Meenakshi Mills Ltd. , for the purpose of this part of section 42(1) of the 1923 Act corresponding to section 9(1)(i) of the 1961 Act, the knowledge of the fact that money lent is going to be brought into India in cash or in kind both to the lender and the borrower is an integral part of the transaction. This can happen only when the borrower and the lender are not merely borrower and lender in the strict sense of the term but are a little more involved with each other so as to form one transaction. This is what has happened in this case.
53. Accordingly, we are in agreement with the Tribunal that the provisions of section 9(1)(i) of the Income-tax Act, 1962, were attracted in this case. The question is, therefore, answered in the affirmative and in favour of the Revenue. No order as to costs.