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Petitioner: NATIONAL & GRINDLAYS BANK LTD. VS Respondent: THE COMMISSIONER OF INCOME-TAX JUDGMENT
Court Name: Sindh High Court Judge(s): Ajmal Mian, Syed Haider Ali Pirzada Title:NATIONAL & GRINDLAYS BANK LTD. vs THE COMMISSIONER OF INCOME-TAX
JUDGMENT
Reported As: 1985 PTD 299 Result: Reference answered accordingly Judgment JUDGMENT ' AJMAL MIAN, J.-- By this common judgment we intend to dispose of the above 10 Income-tax References. In Income-tax References No,211/74, 212/74, 213/74, 214/74, 22/81 and 14/83 filed by Messrs General Bank of Netherlands Limited (hereinafter referred to as the Netherland Bank) the following question has been referred to for the opinion of this Court under section 66(1) of the Income-tax Act, 1922:- "Whether in the facts and circumstances of the case the Tribunal is right in holding that the interest earned by the Applicant's Head Office from securities deposited outside Pakistan is liable to tax under section 42(1) of the Income-tax Act, 1922." ' Whereas in I.T.Rs, No,125/74, 127/74, 133/74 and 136/74, filed by Messrs National & Grindlays Bank Limited, Karachi (hereinafter referred to as the British Bank), the following three questions for the opinion of this Court have been referred to:- (1) Whether in the facts and circumstances of the case the Tribunal is right in holding that interest earned by the Applicant's Head Office from securities deposited outside Pakistan is liable to tax under section 42(1) of the Income-tax Act, 1922? (2) Whether in the facts and circumstances of the case the Tribunal was justified in failing to give any decision on the question of deduct-libility of expenses attributable to the interest earned on securities deposited outside Pakistan? , (3) Whether in the facts and circumstances of the case the tribunal was right in failing to give a decision on the question of relief under Pakistan - U.K Double Taxation Agreement as claimed?"
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2. The brief facts leading to the filing of the above references are that the Netherland Bank and the British Bank are non-resident companies engaged in the business of banking inter alia in Pakistan. It may be observed that the above two banks being non-residents cannot carry on banking business in Pakistan without complying with inter alia the requirements of section 13 of the Banking Companies Ordinance, 1962 hereinafter referred to as the Ordinance read with the Banking Companies Rules, 1963 (hereinafter referred to as the Rules). In order to comply with the above requirements of section 13 of the Ordinance, the Netherland Bank deposited certain securities with the National Bank of Pakistan, New York Branch, in terms of rule 5 of the Rules. Whereas the British Bank deposited certain securities in National Bank of Pakistan, London Branch. The auditors of the above two banks while preparing audit reports shown certain amounts as interest accrued on the above securities deposited, but remarked that according to the assessees the above item was not liable to be taxed. However, the Income-tax Officer during the relevant assessment years included the amount of interest as a part of the income for income-tax purposes. The Netherland Bank and the British Bank being aggrieved by the various assessment orders filed appeals inter alia challenging the above inclusion of the amount of interest for computing the profits. The four appeals filed by the Netherland Bank, namely, I.T.A 163 (K.B)/1972-73 (assessment year 1967-68), I.T.A No,1363 (KB) of 1972-73 (assessment year 1968-69), I.T.A No, 1364(KB) of 1972-73 (assessment year 1969-70) and I.T.A No,2074 (KB) of 1973-74 (assessment year 1970-71) were taken up together and were disposed of by the Income-tax Appellate Tribunal by its order dated 26-12-1973. The above order was followed by the Tribunal in the remaining appeals filed by the Netherland Bank and the appeals filed by the British Bank subsequently. It may be pertinent to give the break-up of the assessm ent years and the amount of interest involved, which is as under:- {{TABLE}} THE NETHERLAND BANK ASSESSMENT AMOUNT OF I.T.C. NO. YEAR INTEREST Rs, 211/74 1969-70 81,724 212/74 1967-68 80,325 213/74 1970-71 1,35,213 214/74 1968-69 80,325 22/81 1971-72 1,43,781 1972-73 1,58,884 14/83 1973-74 1,03,800 1974-75 THE BRITISH BANK Rs, 136/74 1967-68 9,80,333 127/75 1968-69 8,89,257 125/74 1969-70 12,89,426 133/74 1970-71 16,82,206 {{TABLE}} ' The Income-tax Appellate Tribunal in its order has held that in view of the language of section 13 of the Ordinance, the amount of interest in terms of subsection (1) of section 42 of the Income-tax Act, hereinafter referred to as the Act, is undoubtedly an income of the assessees through and from the business connection in Pakistan and, secondly, the deposit of the securities is, tranfer of the capital asset in Pakistan and, therefore, the income shall further be liable to tax even within the head "through or from transfer of a capital asset in Pakistan". The applicant Banks being aggrieved by the above order have filed the above Income-tax References.
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3. In support of the above references Mr. Ali Athar, the learned counsel for the applicants assessees, has urged as follows:- (i) That the amount of interest accruing on the securities in question cannot be by any stretch of imagination can be construed as an income of the assessee through and from the business connection in Pakistan. (ii) That since the situs of the securities in case of Netherland Bank is Netherland and in respect of British Bank is U.K., the income on account of interest cannot be treated as income through or from transfer of a capital asset in Pakistan. ' On the other hand, Mr.Nasarullah Awan and Mrs. Reshida Patel, appearing for the respondent department, have contended that in view of section 13 of the Ordinance read with section 42(1) of the Act, the amount of interest has been correctly included for taxation purposes. 4. Before taking up the above contentions of the learned counsel for the parties, it may be pertinent to quote hereinbelow section 13(1),(3) and (4) of the Ordinance and rules 5, 6, 7, 8 and 9 of the Rules, which read as follows:- Sec.13. Requirement as to minium paid up capital and reserves:- 13(1) Notwithstanding anything contained in section 103 of the Companies Act, 1913 (VII of 1913), no banking company in existence on the commencement of this Ordinance shall, after the expiry of two years from such commencement, if it is incorporated in Pakistan and of six months if it is incorporated outside Pakistan, carry on business in Pakistan, and no other banking company shall, after the commencement of this Ordinance commence or carry on business in Pakistan, unless it has paid-up capital and reserves of such aggregate value as is hereinafter required by this section: ' Provided that the State Bank may, if it thinks fit in any particular case, extend the period referred to in this subsection by a further period not exceeding one year in the case of banking companies incorporated in Pakistan and six months in the case of banking companies incorporated outside Pakistan. (2) (3) In the case of a banking company incorporated outside Pakistan aggregate value of its paid- up capital and reserves shall not at the close of any day be less than twenty lakhs of rupees or an amount representing 5 per cent of the total demand and time liabilities of such company in Pakistan as at the close of the last working day of the previous calendar year, whichever is higher: ' Provided that no such banking company shall be deemed to have complied with the provisions of this subsection unless it deposits and keeps deposited with the State Bank an amount not less than what is required to be maintained under this subsection, either in cash or in unencumbered approved securities or partly in cash and partly in such securities: ' Provided further that a deposit so made with the State Bank shall be by transfer of funds by the banking company from outside Pakistan. (4) Any amount deposited and kept deposited with the State Bank under the proviso to the subsection (3) by any banking company incorporated outside Pakistan shall, in the event of the company ceasing for any reason to carry on banking business in Pakistan, be an asset of the company on which the claims of all the creditors of the company in Pakistan shall be a first charge." Rule 5. Deposits.--(1) The deposit specified in subsection (3) of section 13 of the Ordinance shall be maintained at the principal office of the State Bank: ' Provided that, if a banking company desires to keep the whole or any part of the deposit in foreign approved securities, such securities shall be held, on behalf of the principal office of the State Bank, at the office of the National Bank of Pakistan at London or at such other place outside Pakistan as may be notified by the State Bank in the official Gazette from time to time:
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' Provided further that the State Bank may also accept, for the purpose of the deposit specified in subsection (3) of section 13 of the Ordinance, assets, either in cash or approved securities, required by banks out of profits made from deposits in Pakistan and remitable outside Pakistan or out of funds remitted by their Head Offices. (2) The value of each security deposited under sub-rule (1) shall be estimated at its market rate, ex-dividend. (3) Deposits in foreign approved securities shall not be brought on the books of the principal office of the State Bank until that office has received an intimation from the office of the National Bank of Pakistan concerned; and that date on which such deposits are so brought on the books of the principal office of the State Bank shall be the date of the deposit for the purposes of subsection (3) of section 13 of the Ordinance. (4) Securities shall be duly transferred to the State Bank by the banking company. (5) Upon receipt of a deposit under sub-rule (1) or of an intimation of deposit under sub-rule (3), the principal office of the State Bank shall, as soon as possible send to the principal office of the banking company a certificate in Form-I. (6) The market value of the foreign approved securities shall be converted at the par value. Rule 6. Withdrawals of deposits.--The principal office of the State Bank shall not be bound to return securities actually deposited, but may substitute therefore new scrip of securities of the same description and amount. Rule 7. Changes in deposits.--(1) The office of the National Bank of Pakistan holding securities under sub-rule (1) of rule 5 shall permit the withdrawal of foreign approved securities only under instructions from the principal office of the State Bank. (2) When the form or amount of deposit is changed by reason of a subsequent deposit or withdrawal, the principal office of the ' State Bank of Pakistan shall, as soon as possible, send to the principal office of the banking company a fresh certificate in Form-I. Rule 8. Maturing of security deposits.--When a security in deposit matures or when any yield on such a security ceases to accrue, the principal office of the State Bank shall not be bound to inform the banking company; but upon the receipt of a requisition in writing from the banking company, the principal office of the State Bank shall, as soon as possible, collect the discharge value and hold the amount in deposit for purposes of subsection (3) of section 13 of the Ordinance. Rule 9. Interest on deposits.--(1) No interest shall be payable on cash deposits. (2) Interest on foreign approved securities shall on realisation be credited if so desired by the banking company concerned, as soon as possible, to an account at the place where the office of the National Bank of Pakistan holding the securities under sub-rule (1) of rule 5 is located, subject to the usual charges; and, in other cases, such interest shall be remitted by the office of the National Bank of Pakistan to the principal office of the State Bank at the prevailing rate of exchange, after deducting the usual charges. (3) The principal office of the State Bank shall credit, as soon as possible, the current account of the banking company maintained with it with the interest realised on rupee securities, subject to the usual charges, and with the amounts, if any, remitted from abroad by the office of the National Bank of Pakistan under sub-rule (2)." ' It may be noticed that under subsection (1) of section 13 of the Ordinance it has been provided that notwithstanding anything contained in section 103 of the Companies Act a banking company in existence on the commencement of the Ordinance shall after expiry of two years from such commencement, if it is incorporated in Pakistan and of six months if it is incorporated outside Pakistan carry on business in Pakistan and no other banking company shall after the commencement of the Ordinance commence or carry on business in Pakistan unless it has paid- up capital and reserves of such aggregate value as is hereinafter required by the above section. It
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may further be noticed that subsection (3) of section 13 of the Ordinance provides that in the case of a banking company incorporated outside Pakistan the aggregate value of its paid-up capital and reserves shall not at the close of any day be less than twenty lakhs of rupees or an amount representing 5 per cent of the total demand and time liabilities of such company in Pakistan as at the close of the last working day of the previous calendar year whichever is higher. It may also be mentioned that proviso to above subsection (3) of section 13 provides that no such banking company shall be deemed to have complied with the provisions of this subsection unless it deposits and keeps deposited with the State Bank an amount not less than as required to be maintained in this subsection either in cash or in unencumbered approved securities or partly in cash and partly in securities. It may also be pointed out that the second proviso to the above section lays down that the deposits so made with the State Bank shall be by transfer of funds by the banking company from outside Pakistan. It may also be stated that subsection (4) of section 13 of the Ordinance provides that any amount deposited and kept deposited with the State Bank under the proviso to subsection (3) by any banking company incorporated outside Pakistan shall, in the event of the company ceasing for any reason to carry on banking business in Pakistan, be the assets of the company on which the claims of all the creditors of the company in Pakistan shall be a first charge. ' It may further be noticed that under rule 5 a banking company has been given option to deposit the securities instead of depositing cash at the principal office of the State Bank or at the office of the National Bank of Pakistan at London or such other place outside Pakistan as may be notified by the State Bank in the official Gazette from time to time. It may be pertinent to mention that the National Bank of Pakistan, Branch in New York was also notified through a Gazette under the above Rules. It may be noticed that the above securities are to be brought on the books of the principal office of the State Bank on receipt of the intimation from National Bank of Pakistan concerned. It may also be noticed that the securities are required to be duly transferred to the State Bank by the banking company. It may also be mentioned that under rule 6 it has been provided that the principal office of the State Bank shall not be bound to return the securities actually deposited out may substitute thereof new scrip of securities of the same description and amount. It may also be pointed out that under rule 7 the National Bank of Pakistan cannot allow withdrawal of the securities without the permission of the State Bank of Pakistan. It may also be stated that under rule 8 it has been provided that when a security in deposit matures or when any yield on such a security ceases to accrue the principal office of the State Bank is not bound to inform the banking company but upon the receipt of requisition in writing from the banking company the principal office of the State Bank is required as soon as possible to collect the discharge value and hold the amount in deposit for purposes of subsection (3) of section 13 of the Ordinance. It may further be noticed that under rule 9 no interest is payable, whereas interest on foreign approved securities on realisation is required to be credited if so desired by a banking company to an account at the place where the office of the National Bank of Pakistan holding the securities under sub-rule (1) of rule 5 is located subject to usual charges and in other cases such interest is required to be remitted by the office of the National Bank of Pakistan to the principal office of the State Bank at the prevailing rate of exchange after deducting the charges upon receipt of the above amount of interest, the State Bank is required to credit the same in the current of the banking company maintained with it. 5. Having dealt with section 13 of the Ordinance and the relevant rules, it may also be pertinent to refer to the relevant portion of subsection (1) of section 42 of the Act, which reads as follows:-- ' Section 42. Income deemed to accrue or arise within Pakistan.-- (1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in Pakistan or through or from any property in Pakistan or through or from any
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asset or source of income in Pakistan or through or from any money lent at interest and brought into Pakistan in cash or in kind, or through or from the sale, exchange or transfer of a capital asset in Pakistan shall be deemed to be income accruing or arising within Pakistan and where the person entitled to the income, profits or gains is not resident in Pakistan shall be chargeable to Income tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax." ' It may be noticed that under the above-quoted subsection (1) of section 42 of the Act, it has been provided that all income, profits or gains accruing or arising whether directly or indirectly, through or from any business connection in Pakistan or through or from any property in Pakistan or through or from any asset or source of income in Pakistan or through or from any money lent at interest and brought into Pakistan in cash or in kind or through or from the same exchange or transfer of a capital asset in Pakistan, shall be deemed to be income accruing or arising within Pakistan. It may further be noticed that it also provides that where a person entitled to income, profits or gains, is not resident in Pakistan shall be chargeable to income-tax either in his name or in the name of his agent and in the latter case such agent shall be deemed to be, for all the purposes of the Act, the assessee in respect of such income. 6. Mr. All Athar, the learned counsel for the applicants assessees, has referred to the following cases in furtherance of his submissions:- (i) Commissioner of Income-tax Bombay v. Currimbhoy Ebrahim & Sone Limited (1935) 3 I T R 395, in which the facts were that the assessee-company was carrying on business in Bombay. They obtained a loan of Rs, 50 lacs from the Nizam of Hyderabad on the undertaking to pay interest thereon at Hyderabad and to repay the capital in five years. In the assessment year 1931-32, the assessee-company paid to the Imperial Bank at Hyderabad to the credit of Nizam a sum of Rs, 3 lacs odd on account of interest due to the Nizam on the loan. The assessee-company was treated as the Nizam's agent and assessed under section 42(1) of the Act on the above sum of Rs,3 sacs. The Commissioner of Income-tax filed an appeal against the judgment of the High Court of Bombay in which it was held that the above amount of interest was not subject to taxation in terms of section 42(1) of the Act. The Privy Council while affirming the judgment of the High Court of Bombay observed as follows on the meaning of the phrase "business connection and the word "property" used in section 42(1) of the Act:- "It was contended on behalf of the respondents that the words "business connection" and "property" in section 42(1) are intended as repetitions of the expressions "business" and "property" appearing in section 6 to describe "heads of income", and that the interest income now in question, being admittedly taxable under the 6th heading "other sources", cannot be said to accrue or arise through or from any business connection or property in British India within the meaning of the subsection. In support of this argument their Lordships were referred to certain observations in the case of Rogers Pyatt Shellac & Co. v. Secretary of State for India and Commissioner of Income-tax Burma v. Messrs Steel Brothers & Co. Ltd. This contention, however, does not appear to their Lordships to be valid. The phrase "business connection" in different from, though doubtless not unrelated to, the word "business" of which there is a definition in the Act. The word "property" when used in section 6 to describe a head of income is not defined by the statute, but by section 9 it is provided that under this head tax shall be "payable in respect of the bona fide annual value of property consisting of any buildings or lands appertaining thereto. In their Lordships' opinion the word "property" as it occurs in the subsection (1) of section 42 cannot be given so special a colour, but is used as an ordinary English word to be taken in its usual signification subject to the context provided by the rest of the subsection. There is nothing in the subsection to exclude from its scope any of the six classes of income mentioned in section 6 of the Act."
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(ii) Commissioner of Income-tax, Punjab v. R.D. Aggarwal & Company and another (1965) 65 I T R 20. In the above case the facts were that the assessee used to obtain orders from the dealers from Amritsar for the supply of goods and communicated the same to certain nonresident exporters. The assessee had no authority to accept the orders on behalf of the non-resident which used to be accepted by the non-residents. The price used to be received and delivery used to be made outside the taxable territory. No operation such as procuring raw materials or manufacture of finished goods used to take place within the taxable territory. The assessee was entitled to certain commissions on the same. The Income-tax Department treated the assessee as an agent within the meaning of section 42(1) of the Act for non-residents. The Supreme Court of India maintained the judgment of the High Court of Punjab and held that since there was no business connection within the meaning of section 42(1) of the Act of the assessee with the nonresidents, the assessee could not be treated as the agent of the non-residents for the purpose of taxing the profits that accrued to them from their export business. It was pointed out by the Supreme Court of India that the expression "business" is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture but the Act contains no definition of the expression "business connection". It was observed that the precise connotation of the above expression is vague and undefined but undoubtedly it means more than "business". It was further observed that business connection contemplated by section 42 of the Act involves relations between the business carried on by a non-resident which yields profit or gains and some activity in the taxable territories which attributes directly or indirectly to the accruing of those profits or gains. It was also observed that business connection predicates an element of continuity between the business of the non-resident and the activity in the taxable territories and a stray or isolated transaction not being normally regarded as a business connection. (iii) Commissioner of Income-tax, Bombay City 1 v. Tata Chemicals Limited (1974) 94 I.T R 85. In which case the facts were that a German concern Messrs Lichema G.m.b.H entered into an agreement with the assessee-company for supplying chemical know-how etc. The question before a Division Bench of the Bombay High Court was, whether the assessee-company could be treated as an agent for non-resident in terms of section 9(1)(i), Explanation (2) of the Indian Income-tax Act, which corresponds with section 42(1) of the Act with certain additions and modifications. It was held that since no operation was carried out in India by the German concern, the above provisions could not be invoked and the assessee-company could not be taxed as the agent for the non-resident. (iv) Carborandum Company v. Commissioner of Income-tax, Madras, Motor Industries Co. Ltd.-- Intervenors (1977) 108 I T R 335.…
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