COMMISSIONER OF INCOME-TAX Vs. NEDUNGADI BANK LTD

JUDGEMENT

(1.) The first question referred to us relates to the liability to income-tax of the profits of the Nedungadi Bank at Calicut which are asserted to have been earned in Cochin and Travancore. This Bank has these two branches outside the limits of British India. under Section 4(2) of the Income-tax Act the profits and gains of a business accruing or arising outside British India may be deemed to have accrued or arisen in British India, provided that they are received or brought into British India within three years or the end of the year in which they accrued. The balance sheet of this Bank for the year ending 31 December, 1923 shows Rs. 1,38,460 as net profits of the Bank. No separate account has been drawn up to show what the profits in its branches amounted to. There is only one account and no separate profit and loss account of the branches. This sum of Rs. 1,38,460 is shown in the appropriation account on the credit side, and the unappropriated balance of the previous year is added to it, and on the debit side figures are given which show how these profits were distributed, e. g., Rs. 71,000 were paid out in dividends; Rs. 20,000 as Managing Director's remuneration; Rs. 2,869 towards Provident Fund; and certain amounts were allotted to the Special Reserve Funds which included bad debts, pensions and gratuities; and the balance of Rs. 24,000 is transferred to the balance sheet. There is no Reserve Fund representing the profits of the branches kept apart from this general fund. The Assistant Commissioner in his order concluded that the entire profits of these branches had been actually remitted to the office in British India by book transfer because, as he finds, the profits and expenses have been transferred by a regular book transaction from the foreign branch offices to the head office, and there are no materials left at the branch offices for drawing up a separate profit and loss statement. Therefore the profits which may be held to have remained with the branch offices so as to be available for the branches for employment for their own business are not ascertainable, and no balance is left at the end of the year in the revenue and expenditure account of the branch offices from which a profit and loss account could have been drawn up, all income received by the branches having been transferred to the Head Office account and all expenditure directly chargeable against revenue having been similarly transferred to the Head Office account. The explanation to Section 4 merely states that profits or gains arising outside British India are not necessarily to be deemed to be brought into British India by reason that they are taken into account in the balance sheet. It seems to me that in this case there has been a good deal more done to the profits arising out of the transactions in the branch banks than merely taking them into account in the balance sheet for the information of the shareholders. These sums have been amalgamated with the net profits of the Head Office and out of the amalgamated sum dividends have been paid and Directors have been remunerated, and otherwise the branch banks profits have been appropriated. Under such circumstances I am prepared to hold that the sums which were appropriated for payments made at the Head Office must be deemed to have been "received or brought into" the Calicut office,, which is in British India, and therefore that the whole of the amount shown as net profits of the Bank is liable to income-tax.

(2.) The second question is whether the Bank can exclude the amount paid as contribution to the employees Provident Fund under the heading of "Expenditure incurred for the purpose of the business" within the meaning of Section 10, Clause (2)(ix). It appears that the Bank makes itself liable for paying a certain proportion of the sums Which are invested with itself for the benefit of its employees. Until the employee withdraws the amount standing to his credit in the Provident Fund, it is no "expenditure" for the purpose of the business but only a liability. The case quoted on behalf of the assessee, Smyth V/s. Stretton (1904) 90 L T 756 : 5 Tax Cases 36, can be distinguished on the ground that in that case the college invested ?35 annually for the benefit of its assistant masters in an insurance fund. The money was actually paid out to the insurance company and was claimed as an expenditure. Upon these facts the High Court held that each master had obtained an addition to his salary on which he was liable to pay tax. The liability of Dulwich College which made those contributions was not considered at all. Even supposing that the College treated these sums as expenditure, it does not follow that the Bank in the present case can so treat these amounts which have not been actually expended. I therefore consider that the second question should be answered in the negative. Krishnan, J.

(3.) This is a reference under Section 66(2) of the Income-tax Act of 1922 by the Commissioner of Income-tax with reference to the assessment of income-tax of the Nedun- gadi Bank at Calicut. That Bank has branches both in British India and Travancore and Cochin. The first question submitted for our opinion is: Whether that portion of the Bank's profits Rs. 56,567 which can be conventionally held to have been earned in Cochin and Travancore can be said to have been brought into British India within the meaning of Section 4(2) of the Indian Income- tax Act?