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

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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 and that he is to be deemed the assessee mean merely that the agent, as distinct from a guardian or trustee, is to be charged and assessed in his own name. This was a new form of tax, and there can be no liability unless it is imposed in plain terms Greenwood v. F. L. Smidth & Co. ([ 1922] I A. C. 417, 423.) That the liability is not clearly imposed is shown by the decision in this case, and that of the majority of the Calcutta High Court in Imperial Tobacco Company of India v. Secretary of State for India .(( 1922) I. L. R. 49 C. 74.) That decision related to corresponding sections of the Act of 1918, and if it did not express the intention of the

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legislature, the provisions would have been amended. But in any case the interest did not constitute profits or gains chargeable under the Act at all, since they did not arise or accrue in British India Board of Revenue v. Madras Export Co. (( 1922) I. L. R. 46 M. 360.); Rogers Pyatt Shellac Co. v. Secretary of State for India (( 1924) I L. R. 52 C. 1.); St. Lucia Usines and Estates Co. v. Colonial Treasurer of St. Lucia .([ 1924] A. C. 308.) Moreover, there was no "business connection" between the two companies. That phrase involves some community of interest, whereas here the relations were merely those of debtors and creditors. Dunne K.C. replied.

Nov. 26. The judgment of their Lordships was delivered by

VISCOUNT DUNEDIN. The respondents in this case are the Bombay Trust Corporation, Ld., who are a company having their office in Bombay. A company called the Hong Kong Trust Corporation, incorporated in Hong Kong (hereinafter called " the Hong Kong company "), lent money, from time to time, on deposit to the respondents at the rate of 5J per cent., and the respondents duly paid interest at that rate on the money deposited. The senior income-tax officer duly served a notice on the respondents in terms of s. 43 of the Indian Income-tax Act, 1922, that he intended to treat them as agents of the Hong Kong company, and after hearing the respondents as to liability, he assessed them to income-tax and super-tax as agents of the Hong Kong company in respect of the amount of interest in the year of charge. The respondents appealed to the Commissioner under s. 30 of the Act, contending that they were not liable to be so assessed and also raising questions as to amount. The Commissioner on the hearing of the appeals held that they were properly assessed as agents for the Hong Kong company but altered the assessment as to the amount. No further question on the amount arises. The respondents, in pursuance of s.66, sub-s.2, of the Act, required the Income-tax Commissioner to refer to the High Court the questions of law arising out of the decision of the Commissioner.

The questions so referred were as follows — “(1.) Whether the interest paid by the Bombay Trust Corporation, Ld., to the Hong Kong Trust Corporation, Ld., on loans taken by the Bombay Trust Corporation, Ld., from the Hong Kong Trust Corporation, Ld., is profits or gains accruing or arising to the Hong Kong Trust Corporation, Ld., directly or indirectly through or from any business connection or property in British India.

(2.) Whether such interest is liable to income-tax under the Indian Income-tax Act.

(3.) Whether the Bombay Trust Corporation, Ld., can be treated as the agent of the Hong Kong Trust Corporation, Ld., for the purpose of s. 42 of the Income-tax Act in respect of the interest so paid by the Bombay Trust Corporation, Ld., to the Hong Kong Trust Corporation, Ld.

(4.) Whether the Bombay Trust Corporation, Ld., can be deemed to be assessee under s. 42 of the Act in respect of any income-tax which might be levied on the interest so paid by the Bombay Trust Corporation, Ld., to the Hong Kong Trust Corporation, Ld.

(5.) Whether the relation between the Bombay Trust Corporation, Ld., and the Hong Kong Trust Corporation, Ld., was not purely that of a borrower and lender and whether the Bombay Trust Corporation, Ld., as borrower, could be deemed to be the agent of the lender the Hong Kong Trust Corporation, Ld., under ss. 42 and 43 of the Income-tax Act in respect of interest payable on such loan and in respect of any income-tax that may be chargeable on such interest."

The Court answered the questions submitted to them as follows—

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"(1.) Yes, from a business connection, but it also arises directly under s. 4, sub-s. 1, and s. 6 (iv.) and (vi.).

(2.) Yes.

(3.) and (4.) No, because the Bombay company is not in receipt of any such interest on behalf of the Hong Kong company as required by s. 40.

(5.) The relation between the two companies is that of borrower and lender, but having regard to s.43 the Bombay company, though deemed to be an agent of the Hong Kong company for the purposes of ss. 40 and 42, should not be assessed as they were not in receipt of income."

Appeal has been granted to His Majesty in Council against the above answers. The sections of the Act referred to in the answers are as follows—

"Sect.40. In the case of any guardian, trustee or agent of any person being a minor, lunatic or idiot or residing out of British India (all of which persons are hereinafter in this section included in the term beneficiary) being in receipt on behalf of such beneficiary or any income, profits or gains chargeable under this Act, the tax shall be levied upon and recoverable from such guardian, trustee or agent, as the case may be, in like manner and to the same amount as it would be leviable upon and recoverable from any such beneficiary if of full age, sound mind, or resident in British India, and in direct receipt of such income, profits or gains, and all the provisions of this Act shall apply accordingly."

"Sect.42.—(1) In the case of any person residing out of British India, all profits or gains accruing or arising to such person, whether directly or indirectly, through or from any business connection or property in British India, shall be deemed to be income accruing or arising within British India, and shall be chargeable to income-tax in the name of the agent of any such person, and such agent shall be deemd to be, for all the purposes of this Act, the assessee in respect of such income-tax

Provided that any arrears of tax may be recovered also in accordance with the provisions of this Act from any assets of the non-resident person which are, or may at any time come, within British India."

"Sect.43. Any person employed by or on behalf of a person residing out of British India, or having any business connection with such person, or through whom such person is in the receipt of any income, profits or gains upon whom the Income-Tax Officer has caused a notice to be served of his intention of treating him as the agent of the non-resident person shall, for all the purposes of this Act, be deemed to be such agent

Provided that no person shall be deemed to be the agent of a non-resident person unless he has had an opportunity of being heard by the Income-tax Officer as to his liability."

The High Court were in their Lordships opinion clearly right in holding that the interest in question was a profit or gain accruing or arising to a person residing out of British India—to wit the Hong Kong company—from a business connection in British India, and therefore falling under the words of s. 42. But the High Court, noting that the Act goes on to declare that such profits or gains shall be chargeable to income-tax in the name of the agent who shall be deemed to be the assessee in respect of such income-tax, held that the term " agent" was used in the same sense as " agent " is used in s. 40, i.e., a person who receives the said profits and gains, and as the respondents, the Bombay Corporation, did not receive the money, but on the contrary paid it, they answered questions 3 and 4 in

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the negative. In the same way they considered that " agent " in s. 43 was also overridden as regards its meaning by s. 40, and only applied to agents in receipt of the profits and gains. Their Lordships are unable to accept this view, as they feel constrained by the explicit words of s. 43, which being explicit must rule whatever may be the general considerations as to what the legislature was minded or was likely to do. Taking the words as they stand the respondents have a business connection with the Hong Kong company and "through them" the company is in receipt of profits or gains. The necessary notice of the intention of the tax officer to treat them as agents provided for has been served on them. All this being so, what says the section? They are "for all the purposes of the Act to be deemed to be such agent." Now one of the purposes of the Act is s. 42. They are therefore to be "deemed to be" the agent who is chargeable to income-tax, are deemed to be the assessee—the assessee being in terms of s. 2, sub-s. 2, defined as the person by whom income-tax is payable. Now when a person is " deemed to be " something, the only meaning possible is that whereas he is not in reality that something the Act of Parliament requires him to be treated as if he were. It follows that although the High Court was perfectly right in holding that if s. 42 stood alone " agent " in that section would mean an agent in actual receipt of the profits or gains which were to be assessed, they failed to appreciate that s. 43 puts the person who comes within its term artificially into the position of the agent and of assessee under s. 42.

Their Lordships will therefore humbly advise His Majesty that this appeal should be allowed and the judgment of the Commissioner restored. The respondent^ must pay the costs before this Board and in the Courts below.