The Commissioner of Income Tax vs The Nedungadi Bank Ltd.

Spencer, J.—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. u/s 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 31st 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.

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. Stretton (1904) 90 L T 756 , 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.

This is a reference u/s 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?

Section 4(2) refers to profits and gains of business arising outside British India of a person resident in British India. The Nedungadi Bank has its

Head Office in British India, namely, at Calicut. The question is whether the profits and gains of its business carried on in Travancore and Cochin

can be said to have been brought into British India so as to be liable to Income Tax. The question really turns upon the way in which these profits

and gains have been treated by the Bank. The Assistant Commissioner of Income Tax in his order has gone into the facts very fully and has come

to the conclusion that the profits and gains made in Cochin and Travancore must be treated as having been brought into British India, and the

Commissioner of Income Tax has supported that conclusion. The reasons are fully set out in the Assistant Commissioner''s order where he points

out the way in which the accounts were kept. All the income received by the foreign branches was transferred to the Head Office account and all

expenditure directly chargeable against revenue was similarly transferred to the Head Office account in the accounts of both the Head Office and

the branch offices in Cochin and Travancore. The result was that at the end of the year after these transfers took place there was really no balance

left in the revenue and expenditure account of the branch offices, the amount being treated as having been transferred to the Head Office account.

As pointed out by him, there was a frequent flow of remittances to and from the Head Office and the branch office. Flow of money by book

entries can also amount to remittances.'' There seems to be ample evidence which justifies the Assistant Commissioner''s conclusion that the

balances with the branches in Travancore and Cochin were really remitted to or brought into the Head Office at Calicut. The way in which the

profit and loss appropriation account is made out certainly seems to show that the whole income of the branches and the Head Office was treated

as one lump sum for the purpose of ascertaining payment of dividends. The balance is dealt with as partly special reserve funds and partly as a

general reserve fund, so that the whole profits including the profits of the branches in Cochin and Travancore are dealt with in Calicut. When

moneys are remitted without any special allocation to profit or capital accounts, between the branches and the Head Office of the Bank, the

contention that the profits were kept back in the branch offices and only other moneys were remitted to the Head Office cannot possibly be

accepted. It is quite true that for the payment of dividends there was enough money obtained as profits and gains by the branches in British India

alone. But the payment of the dividends were not restricted to those profits as shown by the way in which these accounts were kept by the Bank

and its branches. This is not a case merely of reliance being placed upon the balance sheet for the purpose of holding that the profits and gains

were brought into British India, which is a matter dealt with by the explanation to Section 4. Here there is very much more evidence to make it

quite clear that the amounts earned as profits in the foreign branches were transmitted to the Head Office and treated as so transmitted for the

Bank''s purposes and for payment of dividends. We are not bound to go into questions of fact in a reference u/s 66(2). We must take the facts as

stated by the Commissioner, and, unless it can be established by the assessee that there is no evidence to support the finding of the Commissioner

that the profits were brought into British India, we cannot decide the question in his favour. I am of opinion that there is sufficient evidence to justify

the finding of the Income Tax authorities, and on that ground I answer the first question in the affirmative.

The second question referred to us is with regard to the employees'' Provident Fund which the Bank has maintained. For every rupee paid by

the employee which represents a certain proportion of his pay every month the Bank contributes the same amount and the two amounts are

entered in the Bank''s books to the credit of the employee in question. It is claimed that the Bank is entitled to deduct the sums contributed by the

Bank towards this Provident Fund u/s 10(2)(ix) as expenditure incurred solely for the purpose of earning profits or gains. If the money had been

spent by the Bank, no doubt Section 10(2)(ix) would apply. But in the case before us it is clear that the Bank has not yet spent the money; all that

it has done is that it has made entries in its books admitting liability on its part to pay a certain sum of money to the employee when he retires or

goes out of office. That cannot be treated as an expenditure by the Bank. The expenditure will take place only when it pays, and it will be time

enough to claim deduction then. The deduction cannot be allowed now. I would therefore answer the second question in the negative.

Costs payable by the assessee will be Rs. 250.

Beasley, J.

I agree.