Law:

Section:

Section 9 of the Income-tax Act, 1961 (Corresponding to section 42 of the Indian Income-tax Act, 1922) - Income - Deemed to accrue or arise in India - Assessment years 1946-47 to 1950-51 - Assessee-companies engaged in manufacture and sale of yarn had a branch at Pudukottai, a former native state - Sale proceeds was deposited with a Bank at Pudukottai - Assessees thereupon borrowed moneys from Madurai branch of said bank on security of fixed deposits made by their branches with Pudukottai branch of bank - From records, it was clear that Pudukottai branch of bank used to transmit funds to Mudurai branch to enable it to advance loans at interest to assessee-companies - Besides, assessee - companies had a preponderant voice in creation, running and management of bank in question - Whether, on facts it could be said that entire transactions formed part of a basic arrangement or scheme between assessee-companies and bank that money should be brought to British India after it was taken by borrower outside taxable territory - Held, yes - Whether, therefore, provisions of section 42 of 1922 Act applied and, consequently, taxing of entire interest earned on fixed deposits made out of profits earned in Pudukottai by assessee's branches in Pudukottai branch of bank was correct - Held, yes FACTS The assessee-companies engaged in the manufacture and sale of yarn had a branch at Pudukottai, a former native state. The sale proceeds was deposited with a bank there only. The assessee thereupon borrowed moneys from the Madurai branch of that bank on the security of the fixed deposits made by their branches with the Pudukottai branch of the bank. It was the admitted case that the loans granted to the assessees were far in excess of the available profits at Pudukottai. In the assessment proceedings of the assessee companies for the various years under dispute, the ITO was of the view that the borrowings in British India on the security of the fixed deposits made at Pudukottai amounted to constructive remittance of the profits by the branches of the assessee-companies to their head offices in India, within the meaning of section 4 of 1922 Act. Accordingly, he included the entire…

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