COMMISSIONER OF INCOME-TAX Vs. PRALMMUTHUKARUPPAN CHETTIAR

JUDGEMENT

(1.) The assessee carries on business as a money-lender at Paganeri in the Ramnad District and at various places outside British India. Until the month of February, 1936, the assessee was a partner in the firm of P.R.A.M. carrying-on business at Singapore. In that month the partnership was dissolved and the assessee took over the business. On the 23 March, 1931, the P.R.A.M. firm advanced Rs. 1,00,000 to the S.P.K.A. firm of Zigon, Burma. On the 10th February, 1934, the S.P.K.A. firm repaid the loan with the interest then due, in all Rs. 1,22,659. The loan was discharged by payment of the amount to the assessee through the S.P.K.A.A.M. firm of Rangoon. The assessee retained the money in Rangoon, it being held on his behalf by the S.P.K.A.A.M. firm. The repayment of the loan to the P.R.A.M. firm was effected by the debiting of the assessee's personal account in that firm and crediting the Zigon firm with the amount. This was done on the 12 April, 1935. The amount debited to the assessee and credited to the P.R.A.M. firm was actually Rs. 1,26,463, the difference between this sum and the Rs. 1,22,659 representing the interest which had accrued between the 15 October, 1934, when the assessee received the money and the 12 April, 1935, when the loan to the S.P.K.A. firm was closed in the books of the P.R.A.M. firm. The Commissioner of Income-tax has treated the deposit of the Rs. 1,22,659 in the books of the S.P. K.A.A.M. firm as a remittance to British India of profits made by the assessee outside British India and this reference is concerned with the legality of the decision. The questions referred are as follows: (a) Whether by applying the provisions of Section 26(2) of the Act the petitioner should not be considered as having become the sole owner of the debt originally advanced by the firm and whether the sum of Rs. 1,22,659 was not assessable as realisation of the debt by the petitioner in British India. (b) Whether apart from the applicability of Section 26(2) of the Income- tax Act in any event the sum of Rs. 1.00,000 (out of the sum of Rs. 1,22,659) advanced more than three years prior to the account year was not assessable as a return of capital or profits earned more than three years prior to the account year.

(2.) Before us the learned Advocate for the assessee has conceded that the assessee is liable to tax on the Rs. 22,659, the amount of the interest gained on the Rs. 1,00,000 whether Section 26(2) applies or not.

(3.) It will be convenient to take the second question first and its decision does not require much discussion. The assessee had admittedly profits lying to his credit in the books of the Singapore firm in excess of the amount which he retained in Rangoon. The repayment of the assessee by the S.P.K.A. firm in Burma, of course, operated to discharge the S.P.K.A. firm and, if the assessee had remitted the money to Singapore, no question would have arisen. But, instead of sending the money to Singapore, the assessee retained it in Burma for his own purposes and, so far as the P.R.A.M. firm was concerned, the repayment came from his account with that firm. By doing this, the assessee in effect transferred the sum of Rs. 1,22,659 from Singapore to Burma and, as Burma was then within British India, it amounted to a transfer of profits to British India. It has been accepted that, if the amount is to be treated as a remittance of profits, it must be regarded as a sum having been received in British India within three years of the period in which the profits were earned.