MEENAKSHI MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is consolidated reference made under section 66(1) of the Indian Income-tax Act on the application of three different assessees covering three assessment years and three chargeable accounting periods under the Excess Profits Tax Act. The assessee are public limited companies engaged in the manufacture and sale of yarn at Madurai. Each of the assessee has a branch at Pudukkottai for effecting sales of yarn. The Madurai Bank, which has its head office at Madurai, has also a branch at Pudukkottai. The sale proceeds of the yarn of the three assessees realised in Pudukottai which was during the assessment years and chargeable accounting periods a Native State, were being banked by the respective assessees with the Pudukottai branch of the Madurai Bank. The accumulation of such sale proceeds was in the shape of fixed deposits with that branch. Interest was earned on these fixed deposits. Now it would appear that in the usual course of their businesses, the assessee-companies borrowed moneys from the head office of the Madurai Bank at Madurai on the security of the fixed deposits kept with the banks branch at Pudukkottai. The Income-tax officer held that the interest income realised by the assessees on their fixed deposits at Pudukottai was liable to be taxed as amounting to constructive remittances to the taxable territory, for the reason that the assessees by making the borrowals from the bank at Madurai had by that means brought that income into the taxable territory. Appeals were taken to the Appellate Assistant Commissioner whose view was that section 42 of the Income-tax Act applied, and justified the assessments. There were further appeals to the Appellate Tribunal; while the Tribunal appeared to be conscious of the fact that the weight of judicial opinion was against inferring any arrangement between the assessee and the bank preceding the transfer of funds from Pudukottai to the taxable territory, it was still induced to take the view that because Pudukottai did not appear to be a fertile area for the investment of the funds and because there was at least one common director of both the bank of and the assessee-mills, it was reasonable to conclude "that the bank itself was started at Madurai and a branch of it was opened at Pudukottai only with a view to help the financial operations of Thyagaraja Chettiar and the mills in which he was vitally interested." Dealing with the position occupied by the head office and the branch of both the bank and the assessee-mills at the two places, the Tribunal further observed :

(2.) AND the "principle" which the Tribunal apparently derived was that the department was entitled to draw the inference on the facts and circumstances, which will be amplified in greater detail in the due course, that there was an understanding between the assessee-mills and the bank that the money deposited with the branch at Pudukottai was to be brought over to the taxable territory and utilised for the purpose of the assessee-mills at Madurai; and the Tribunal Concluded :

(3.) IT is necessary to refer in some detail to the reasoning adopted by the Appellate Assistant Commissioner in applying section 42 of the Income-tax Act. During the course of the appeal, the department shifted its stand and dropped the applicability of section 4 of the Act and relied upon section 42. The Appellate Assistant Commissioner agreed that the amounts brought to tax could not be regarded as remittances. He set out the position thus :