SOUTH INDIA BANK LTD Vs. I T COMMISSIONER

JUDGEMENT

(1.) This is a reference made under S.50(2) of the Travancore Income Tax Act, VIII of 1096 by the Commissioner of Income Tax at the instance of the assessee, the South India Bank, Limited. Two questions have been referred and they are as follows:-

(2.) The facts may be briefly started. The South India Bank Limited is a Company registered under the Indian Companies Act having its head Office in Tinnevelly (now Thirunelvely) in the Province (now State) of Madras. It had branches in various parts of India including three in the erstwhile Travancore State located at Nagercoil, Trivandrum and Quilon. The questions relate to the assessment year 1119, that is the accounting year 1118. In the year of account the company had a working capital of Rs. 29,17,100/- of which Rs. 24,83,100/- was borrowed and Rs. 4,34,000/- inclusive of subscribed capital and uninvested reserves. In that year an amount of Rs. 85,600/- was transferred from the Head Office to the Branches in Travancore. The Income tax Collector, Trivandrum, assessed the Bank on an income of Rs. 7070-2-3. Exception was taken to this assessment and an appeal was made to the Deputy Commissioner of Income Tax claiming two deductions namely an amount of Rs. 568-0-0 for supervision charges, and Rs. 642-8-6 on account of interest upon the amounts transferred from the Head Office. The Deputy Commissioner allowed the first deduction but rejected the second. The assessee sought relief in respect of this amount of Rs. 642-8-0 by filing a revision before the Commissioner of Income Tax which yielded no better result as the Commissioner concurred in the view taken by the Deputy Commissioner and dismissed the revision. The questions referred are those arising from out of the order of the Commissioner passed on revision.

(3.) The Company was assessed as a non resident under S.32 of the Act (Travancore) in the name of the Agent. The income sought to be assessed arose out of a business connection that the Company had in Travancore which that section provides ''shall be deemed to be income accruing or arising within Travancore and shall be chargeable to income tax." The branches in Travancore have no separate existence apart from the Head Office. The work done by the branches is really a part of the business of the company. The Head Office supervises the working of the branches and the funds necessary for the branches for investment are sent from the Head Office from time to time. The charges for supervision would be an expenditure incidental to and necessary for the running of the branches. Such charges were therefore sought to bo deducted from the income received at the branches to estimate assessable income. This claim for deduction was, as already stated, granted by the Deputy Commissioner and that view has been accepted by the department. The rejection of the claim in deduct Rs. 642-8-0 also from the gross income of the branches is, it appears to us, attributable to the shape in which the claim was put forward. It was urged on behalf of the assessee that the amounts transferred from the Head Office to the branches must be regarded as loans taken by the branches on which interest is payable by them to the Head Office. The branches being parts of the Head Office, there is but one entity namely the company and one part of it cannot have a transaction of a loan with the Head Office which is but another part of itself. The claim to deduct the amount of Rs. 642-8-0 from the gross income made by the branches is not to be viewed as interest payable by the branches to the Head Office. The enquiry is as to what is the amount that can be deemed to be income within the meaning of S.32. That question has to be answered from a business point of view. The assessable income is only that which has to be deemed to have accrued to the assessee on account of a business connection in Travancore. That business connection consisted also of sending moneys for investment in Travancore and doing business there with such moneys as also with amounts received at the branches from depositors. The money transferred from the Head Office is from out of the funds available there. The bulk of that fund was, as already stated, borrowed. It is not possible to earmark the amounts transferred as having been made from out of the one or the other of the two kinds of capital available at the Head Office. The two funds were not and could not have been kept separate as there is no need for doing so. There being no question of a trustee mixing trust funds with his own in which case, if a loss arises to the investment made from out of that mixed funds, the cestui que trust could claim to have the loss allocated to the trustee's own fund and not to theirs. In the absence of any principle or rule of law requiring the transfer to be taken from out of one or the other of the two sources available, the only reasonable way is to regard the transfer as having been made from both the sources proportionately. That part of the amount transferred which is in this manner attributable to borrowed capital must be taken to have been from the aggregate amount borrowed, there having been no borrowing specifically for the purpose of transfer to the branches. Again taking a reasonable view of the matter the rate at which interest could be charged is only the average rate upon all the borrowings made by the Head Office. The interest upon the amounts transferred is payable at the Head Office. All the same it will constitute interest upon the capital borrowed for the purpose of the business. The principles guiding the determination of questions of this description can be gathered from the decision of the Supreme Court in Commissioner of Income Tax v. Ahmedbhai Umarbhai and Co. ( 1950 (18) ITR 472 ), and of the Privy Council in Bank of Chettinad Ltd. v. C. I. T. (1940 ITR 522 PC). Indeed there does not appear to be scope for much of a controversy as the matter is to be approached from a reasonable and business point of view and no more reasonable approach than the one above indicated is possible.