GENERAL BANK OF NETHERLAND LIMITED VS COMMISSIONER OF INCOME-TAX, CENTRAL KARACHI
1991 P T D 687
[Supreme Court of Pakistan]
Present: Abdul Kadir Shaikh, Sajjad Ali Shah and Nasir Aslam Zahid, JJ
Civil Appeals Nos. 68 to 72-K of 1985
GENERAL BANK OF NETHERLAND LIMITED
versus
COMMISSIONER OF INCOME-TAX, CENTRAL KARACHI
(On Appeal from the judgment/order of Sindh High Court at Karachi, dated 29th May, 1984 in I.T.R. Nos. 211 to 214 of 1974 and 22 of 1982 and 14 of 1983 respectively).
Civil Appeal No. 217-K of 1986
Messrs AMERICAN EXPRESS INTERNATIONAL
versus
COMMISSIONER OF INCOME-TAX
(On appeal from the judgment/order of Sindh High Court at Karachi, dated 13th February, 1986 in Civil Reference No. 30 of 1976).
Civil Appeals Nos. 221-K. 359-K and 582-K of 1990
Messrs CITI BANK N.A.
versus
COMMISSIONER OF INCOME-TAX
(On appeal from the judgments/orders of Sindh High Court at Karachi, dated 13th October, 1988 in I.T.R. No.3 of 1980, dated 10th October, 1989 in I.T.R. No. 40 of 1982 and dated 20th December, 1989 in I.T.R. No. 67 of 1982 respectively).
Civil Appeals Nos. 68 to 72-K of 1985, 217-K of 1986, 221-K, 359-K and 582-K of 1990, decided on 27/02/1991.
(a) Banking Companies Ordinance (LVII of 1962)---
----Ss. 13(1)(3) & (4)---Banking Companies Rules, 1963, Rr. 5, 6, 7, 8 & 9-- Income-tax Act (XI of 1922), S. 42---Constitution of Pakistan (1973), Art. 185(3)---Leave to appeal was granted to examine the questions of law which were of general public importance that the High Court had erred in determining the place of accrual of income by reference to the provision of the Banking Companies Ordinance, 1962, and Banking Companies Rules, 1963; that the High Court had further erred in ignoring the legal position that the provisions of Banking Companies Ordinance, 1962 and Banking Companies Rules, 1963 were intended to control and regulate the business of banking in Pakistan and to protect the interest of Banks, customers, depositors and creditors of Banks and had no relevance on the determination of the place where income accrued or could be deemed to accrue; that the High Court had also erred in ignoring that the fact that the interest income from securities accrued to the owners of securities by virtue of ownership and not by virtue of the actual location of the scrips of the securities; that the High Court had erred in ignoring the legal position that the interest income on securities would accrue at the place where the securities were issued, could be encashed and where the interest income was receivable; that the High Court had erred in holding that the securities were assets transferred to Pakistan by the assessees as capital asset to Pakistan and that even if such a. transfer took place the interest on the securities would still accrue outside Pakistan; that the High Court had further erred in holding that deposit of security; amounts to transfer of capital asset under S. 42(1) of the Income-tax Act, 1922; that the High Court had also erred in holding that transfer of capital assets to Pakistan were taxable in Pakistan and that only transfer of capital assets in Pakistan attracted S. 42(1) of the Income-tax Act, 1922 and that for purposes of capital gains tax.
(b) Banking Companies Ordinance (LVII of 1962)---
----Ss. 13(1)(3) & (4)---Interpretation.
(c) Banking Companies Rules, 1963---
----Rr. 5, 6, 7,'8 & 9---Interpretation.
(d) Income-tax Act (XI of 1922)---
----S. 42(1)---Interpretation.
(e) Income-tax Act (XI of 1922)---
----S. 42(1)---Banking Companies Ordinance (LVII of 1962), S. 13---Banking Companies Rules, 1963, R.5---Assessee a non-resident company having its registered office out of Pakistan was engaged in the business of banking in Pakistan ---Assessee being a non-resident could not carry on banking business in Pakistan without complying with inter alia the requirements of S. 13, Banking Companies Ordinance, 1962 under which assessee was to deposit certain securities with the National Bank of Pakistan in United States of America-- Auditors of assessee while preparing audit reports showed certain amounts as interest accrued on said securities but remarked that according to the assessee the said amount of interest was not liable to tax---Income-tax Officer, however, during the relevant year of assessment included the amount of interest as a part of the income for income-tax purposes---Held. interest earned by assessee's head office from securities deposited outside Pakistan was not liable to tax under S. 42(1) of the Act---Income, profits or gains having once been received by the assessee outside Pakistan would not be chargeable to tax by reason of the moneys having been brought into Pakistan because what is chargeable is the first receipt of the moneys, and not a subsequent dealing by the assessee with the said amount as in that event they are brought by the assessee as his own moneys which he had already received and had control over and which cease to enjoy the character of income, profits or gains.
In order to bring a case under the head of "business connection", it is necessary that there should be some activity in the taxable territory which contributes, directly or indirectly, to the earnings of those profits or gains which are to be taxed. The interest earned on the securities in question cannot be said to be profits or gains accruing or arising from any business connection in Pakistan.
The provisions of the Banking Companies Ordinance, 1962 and the Rules framed thereunder are intended to control and regulate the business of banking in Pakistan and to protect the interest of banks, customers, depositors and creditors of banks, and have no relevance on the determination of the place where income accrues or can be deemed to accrue. The interest income from securities accrues to the owners by virtue of ownership, and not by virtue of actual location of the securities. The interest income on securities would accrue at the place where the securities are issued can be cashed any where the interest income is receivable.
The `receipt' of income refers to the first occasion when the recipient gets the money under his own control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in `receipt' if therefore, the income, profits or gains have been once received by the assessee even though outside they do not become chargeable by reason of the moneys having been brought in because what is chargeable is the first receipt of the moneys and not a subsequent dealing by the assessee with the said amount. In that event they are brought by the assessee as his own moneys which he has already received and had control over and they cease to enjoy the character of income, profits or gains.
It is the admitted position that assessee earned income from the securities deposited outside Pakistan and further that the interest income from the securities accrued to the assessee as the owner of the securities in its own right. The interest income on securities also accrued outside Pakistan and was also received outside Pakistan. The fact that the securities themselves were required to be transferred to Pakistan by the assessee as capital assets has no bearing to the fact of accrual of interest income which took place outside Pakistan and was the income of the assessee which accrued to it outside Pakistan. The receipt of the "income" refers to the first occasion when the recipient obtains the money under his own control. Once an amount is received as "income" any remittance thereof to another place does not result in the receipt of "income" in his hand at another place. The income, profits or gains having once been received by the assessee outside Pakistan would not be chargeable to tax by reason of the moneys having been brought into Pakistan because what is chargeable is the first receipt of the moneys, and not a subsequent dealing by the assessee with the said amount. In that event they are brought by the assessee as his own moneys which he had already received and had control over and they cease to enjoy the character of income, profits or gains.
Commissioner of Income-tax v. Bansilal Motilal AIR 1930 Bom. 381 ref.
Keshav Mills Limited v. Commissioner of Income-tax, Bombay (1963) 23 ITR 230 rel.
Iqbal Naim Pasha, Advocate Supreme Court and Nizam Ahmad, Advocate-on-Record for Appellant (in Civil Appeals Nos. 68 to 72-K of 1985).
Nasrullah Awan, Advocate Supreme Court and Muzaffar Hussain, Advocate-on-Record for Respondents (in Civil Appeals Nos. 68 to 72-K of 1985). Nasim Ahmed Khan, Advocate Supreme Court and M. Shabbir Ghaury, Advocate-on-Record for Appellants (in Civil Appeals Nos. 217-K of 1986, 221-K, 359-K and 582-K of 1990).
Nasrullah Awan, Advocate Supreme Court and Muzaffar Hassan, Advocate-on-Record for Respondents (in Civil Appeals Nos. 217-K of 1986, 221 x, 359-K and 582-K of 1990).
Date of hearing: 27th February, 1991.
JUDGMENT
ABDUL KADIR SHAIKH, J: --These appeals arise out of various judgments of Sindh High Court in which the following question referred for the opinion of the High Court under section 66(1) of the Income-tax Act, 1922, was answered in the affirmative:---
"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."
The facts of all the cases are common for the purpose of disposal of the appeals and we may for the sake of convenience state the facts of the Appeal No. 67-K of 1985 (General Bank of Netherland Limited v. Commissioner of Income-tax, Central Karachi), which are as under:
The appellant-Bank is a non-resident company having its registered office in Holland, and is engaged in the business of banking in Pakistan. Being a non-resident, the appellant-Bank 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 Banking Companies Rules, 1963 (hereinafter referred to as the Rules). In order to comply with the requirements of section 13 of the Ordinance, appellant deposited certain securities with the National Bank of Pakistan, New York Branch, in terms of Rule 5 of the Rules. The auditors of the appellant-Bank while preparing audit reports showed certain amounts as interest accrued on the above securities, but remarked that according to the assessee the above item was not liable to tax. However, the Income-tax Officer during the relevant assessment year included the amount of interest as a part of the income for income-tax purposes. Appellant 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 Income-tax Tribunal agreed with the view of the Income-tax Officer and dismissed the appeals so far as the aforesaid point is concerned. It was in these circumstances that the aforesaid question was referred to the High Court under section 66(1) of the Act.
In order to appreciate the legal question involved in these appeals it is appropriate to reproduce the provisions of sections 13(1), (3) and (4) of the Ordinance and Rules, 5, 6, 7, 8 and 9 of the Rules:
Section 13.---Requirement as to minimum 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 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 percent. 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 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:
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 remittable 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 the 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 realization 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 realized 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 would be noticed from above that subsection (1) of section 13 of tile Ordinance provides that notwithstanding anything contained in section 103 of the Companies Act, a banking company in existence on the commencement of this 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. Subsection (3) of section 13 of the Ordinance provided that in. 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 off the last working day of the previous calendar year whichever is higher. Proviso to the above subsection (3) is to the effect 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 in this subsection either in cash or in any unencumbered approved securities or, partly in cash and partly in securities. The second proviso to the above subsection lays down that the deposits so made with the State Bank shall be by transfer of funds by the banking company from outside Pakistan. Subsection (4) of section 13 provides that any amount deposited and kept deposited with the State Bank under the proviso to subsection (3) by a 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 asset of the company on which the claims of all the creditors of the company in Pakistan shall be a first charge.
However, under Rule 5 a banking company has been given the 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 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 is the admitted position that the National Bank of Pakistan, Branch in New York, was also notified for the above purpose 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, and these securities are required to be duly transferred to the State Bank by the banking company. Rule 7 provides for withdrawal of the security but not without the permission of the State Bank of Pakistan and under Rule 8 it has been provided that when a security in deposit, matures and 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 discharged value and hold the amount in deposit for the purposes of subsection (3) of section 13 of the Ordinance. Under Rule 9 no interest is payable where interest on foreign accrued securities on realization is required to be credited if so desired by a banking company to an account at the place where the office of 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 rates of exchange after deducting usual charges upon receipt of the amount of the interest, the State Bank is required to credit the same in the current account, of the banking company maintained with it.
Having stated the position above, reference may be made 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 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."
As would 'be seen from above 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 increase 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 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."
In the light of the above provisions of law, the Income-tax Tribunal observed as under:
"Therefore, the moment the assessee-company deposited the said securities persuant to and in compliance with the requirements of section 13(3) of the Ordinance with the State Bank of Pakistan (although lodged with National Bank of Pakistan, New York) it became the paid-up capital of the assessee. Supposing the said securities would have actually been deposited and lodged with the State Bank of Pakistan and it would have earned interest thereon within the territories of Pakistan, then its taxability under the Income-tax Act could not be obviously disputed for the said income would have accrued to it in Pakistan. Therefore, if the said interest income has been earned by the assessee and accrued to it as it has in fact accrued to it even in terms of the note appended to the audited profit and loss account, it cannot escape tax liability. It is for such income that section 42 of the Income-tax Act has been brought on the Statute providing that all incomes, profits or gains shall be deemed to accrue or arise within Pakistan. Section 42 of the Income-tax Act set; out various heads in respect of which a non-resident can be charged toy tax. Having determined that the non-resident in this case is liable to tax, the question arises as to the head under which this income can be brought to tax."
It was contended on behalf of the appellant that being an interest income it cannot be subject to tax as it did not accrue through or from any money lent as interest and brought into Pakistan in cash or in kind as envisaged by subsection (1) of section 42 of the Income-tax Act. This plea was rejected by the Income-tax Tribunal for the following reasons:
"It is undoubtedly an income of the assessee through and from the business connection in Pakistan. If in compliance of a legal requirement the assessee deposited the securities, then the income accruing and arising on that securities in the form of interest, cannot be taken beyond the conception of income. Now simply because it is an interest income it cannot escape the incidence of taxation on the plea as agitated by the learned counsel for the appellant that this being the interest income otherwise than the specific incomes from interest mentioned in the section, it will stand excluded. We are, therefore. clearly of the view that this income has a relevancy to an income through or from the business connection in Pakistan and as such it falls within the ambit of section 42(1) of the Income-tax Act and is to be deemed as an income accruing and arising within Pakistan for the purposes of Income-tax Act, 1922. It was not an income of the assessee but that of the Head Office, on the plea that the securities in question were owned and held by the Head Office, then there was no occasion to have mentioned in the audited profit and loss account of the, assessee earned interest amounting to U.S. $............."In view of this specific admission on the part of the assessee,the mere fact that the securities were allegedly purchased by the Head Office at a time prior to the commencement of the business of the assessee in Pakistan, will have no effect on the taxability of the income arising from the said securities in Pakistan. With a view to commence the business in Pakistan the Head Office of the assessee-company impliedly, if not expressly, surrendered all its rights and interests in the said securities in favour of the assessee in order to enable it to commence business in Pakistan. Under subsection (4) of section 13 of the Ordinance it has been specifically provided that `any amount deposited and kept deposited with the State Bank of Pakistan under the proviso to subsection (3) by any banking company incorporated outside Pakistan shall, in the event of company ceasing for any reason to carry on business in Pakistan, be an asset of the assessee on which the claim of all the creditors of the company in Pakistan shall be first charged'. We cannot accept the contention of the learned counsel for the appellant without doing violence to subsection (4) of section 13 of the Income-tax Act. To that extent the Head Office shall also be deemed to have transferred the capital assets in Pakistan and hence this income shall further be liable to be taxed even within the head "through or from transfer of a capital asset in Pakistan." For the foregoing reasons we have not the least doubt in holding that the Income-tax Officer has acted properly and legally in subjecting to tax the income in question by applying the provisions of section 42(l) of the Income-tax Act:'
The High Court approached the case as follows:--
"The consensus of the judicial view seems to be that in order to bring a case under the head of `business connection', it is necessary that there should be some activity in the taxable territories which contributes directly or indirectly to the earnings of those profits or gains which are to be taxed. It postulates an element of continuity between the business of non-resident and the activity in the taxable territories but a stray or isolated transaction is normally not to be regarded as a business connection. Furthermore, there also seems to be consensus of judicial view that in each case the question, whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and the circumstances of the case. We are inclined to agree with Mr. Ali Athar that the interest earned on the securities in question cannot be said to be profits or gains accruing or arising from any business connection in Pakistan. However, we are not agreeable to his contention that the above amount of interest cannot be considered as profits and gains accruing or arising directly or indirectly through or from assets it Pakistan, :We are of the view that in terms of section 13(3)(4) read with the above-quoted Rules the securities are the assets transferred h the applicants assessees as capital asset to Pakistan as held by the Income-tax Appellate Tribunal. The factum that the above securities were deposited in National Bank of Pakistan in New York and London is of no consequence as the National Bank of Pakistan for all intents and purposes is the agent of the above securities which in fact stand transferred in favour of the State Bank of Pakistan in terms of sub-rule (4) of Rule 5. The amount of interest accrued upon the above securities is to be credited in the National Bank of Pakistan or to be remitted to the State Bank of Pakistan as per above-quoted Rule 9. The receipt of the above amount of interest by National Bank of Pakistan in New York or London again is a receipt on behalf of the State Bank of Pakistan. The above securities are in fact part of the capital of the applicants assessees operating in Pakistan in terms of section 13 of the Ordinance. The above securities are to be utilised for meeting the liabilities of the applicants-assessees in case eventuality specified in subsection (4) of section 13 happens. It may again be observed that under Rule 6 the State Bank may substitute the securities by new scrip of securities of the same description and amount. It may again be observed that upon maturity of the securities the State Bank is to collect the amount on behalf of the applicants-assessees."
It was for these reasons that the High Court rendered the answer in the affirmative.
Leave to appeal was granted by this Court in order to examine the following questions of law which were considered to be of general public importance:
"(a) The High Court has erred in determining the place of accrual of income by reference to the provisions of the Banking Companies Ordinance, 1962, and Banking Companies Rules, 1963.
(b) The High Court has further erred in ignoring the legal position that the provisions of Banking Companies Ordinance, 1962 and Banking Companies Rules, 1963 are intended to control and regulate the business of banking in Pakistan and to protect the interest of Banks, customers depositors and creditors of Banks and have no relevance on the determination of the place where income accrues or can be deemed accrue.
The High Court has also erred in ignoring the fact that the interest income from securities accrues to the owners of securities by virtue ownership and not by virtue of the actual location of the scrips of the securities.
(d) The High Court has erred in ignoring the legal position that the interest income on securities would accrue at the place where the securities are issued, can be encashed and where the interest income is receivable.
(e) That the High Court has erred in holding that `the securities are assets transferred to Pakistan by the applicants-assessees as capital asset to Pakistan. Petitioners submit that even if such a transfer took place the interest on the securities would still accrue outside Pakistan.
(f) The High Court has further erred in holding that deposit of security amounts to transfer of capital asset under section 42(1) of the Income-tax Act, 1922.
(g) The High Court has also erred in holding that transfer of capital asset to Pakistan is taxable in Pakistan. Petitioner submits that only transfer of capital assets in Pakistan attracts section 42(1) of the Income-tax Act, 1922 and that for purposes of capital gains tax."
In support of these points reliance was placed on the decision in the case of Commissioner of Income-tax v. Bansilal Motilal A I R 1930 Bombay 381.
At the hearing of the appeals, Mr. Iqbal Naim Pasha, learned counsel for the appellants submitted that the High Court has erred in determining the place of accrual of income by reference to the provisions of the Banking Companies Ordinance, 1962 a4d Banking Companies Rules, 1963 ignoring the legal position that the said Ordnance and the Rules are intended to control and regulate business of banking in Pakistan and to protect the interest of banks, customers, depositors and creditors of the banks and have no relevance on the determination of the places where income accrues or can be deemed to accrue. Learned counsel further submitted that it has escaped the notice of the High Court that the fact that the interest income from securities accrued to the owners of the securities by virtue of ownership, and not by virtue of the actual location of the securities and has further ignored the legal position that the interest income on securities would accrue at the place where the securities are issued, can be cashed and where the income is receivable. Learned counsel submitted that it is an error in law to hold that the securities are assets transferred to Pakistan by the appellant/assessee as capital assets to Pakistan and further argued, in this behalf, that even if such transfer took place the interest on the securities would still accrue outside Pakistan.
Mr. Nasrullah Awan, learned counsel for the respondents, on the other hand, supported the view taken by the High Court that the interest earned on the securities in question is profit or gain accruing or arising from the business connection in Pakistan and is, therefore, liable to tax under section 42(1) of the Income-tax Act, 1922. In this behalf, learned counsel submitted that the following view taken by the learned Judges in the High Court reflects the correct position in law:
"We are of the view that in terms of section 13(3)(4) read with the above quoted Rules the securities are the assets transferred by the applicants assessees as capital asset to Pakistan as held by the Income-tax Appellate Tribunal. The factum that the above securities were deposited in National Bank of Pakistan in New York and London is of no consequence as the National Bank of Pakistan for all intents and purposes is the agent of the above securities which in fact stand transferred in favour of the State Bank of Pakistan in terms of sub-rule (4) of Rule S. The amount of interest accrued upon the above securities is to be credited in the National Bank of Pakistan or to be remitted to the State Bank of Pakistan as per above-quoted Rule 9. The receipt of the above amount of interest by National Bank of Pakistan in New York or London again is a receipt on behalf of the State Bank of Pakistan. The above securities are in fact part of the capital of the applicants assessees operating in Pakistan in terms of section 13 of the Ordinance. The above securities are to be utilised for meeting the liabilities of the applicants-assessees in case eventuality specified in subsection (4) of section 13 happens. It may again be observed that under Rule 6 the State Bank may substitute the securities by new scrip of securities of the same description and amount. It may again be observed that upon maturity of the securities the State Bank is to collect the amount on behalf of the applicants-assessees."
Now it is the admitted position that the appellant deposited the securities with the National Bank of Pakistan, New York Branch, as per requirement of section 13 of the Banking Companies Ordinance read with the Rules, and these deposits are controlled and governed by the provisions of the Ordinance and the Rules, but the real question for consideration in these appeals is whether the interest earned on the aforesaid securities deposited outside Pakistan is deemed to accrue or arise within Pakistan in the meaning of section 42 of the Income-tax Act, 1922.
After survey of case-law, learned Judges in the High Court correctly took the view that in order to bring a case under the head of "business connection", it is necessary that there should be some activity in the taxable territory which contributes, directly or indirectly, to the earnings of those profits or gains which are to be taxed. Their Lordships also agreed with the view canvassed by the appellant that "the interest earned on the securities in question cannot be said to be profits or gains accruing or arising from any business connection in Pakistan". However, their Lordships agreed with the view of the Income-tax Tribunal that in terms of section 13(3)(4) read with the above-quoted Rules, "the securities are the assets transferred by the applicants (appellants) assessees as capital assets to Pakistan". According to learned Judges "the factum that the above securities were deposited in National Bank of Pakistan in New York and London is of no consequence as the National Bank of Pakistan for all intents and purposes is the agent of the above securities which in fact stand transferred in favour of the State Bank of Pakistan in terms of sub-rule (4) of Rule 5."
After having heard the learned counsel for the parties, we find force in the argument that the view taken by the learned Judges in determining the place of accrual of income by reference to the provisions of the Banking Companies Ordinance, 1962 and the Rules seems to be misplaced, for, the provisions of the Banking Companies Ordinance, 1962 and the Rules framed thereunder are intended to control and regulate the business of banking in Pakistan and to protect the interest of banks, customers, depositors and creditors of banks, and have no relevance on the determination of the place where income accrues or can be deemed to accrue. It is not to be forgotten that the interest income from securities accrues to the owners by virtue of ownership, and not by virtue of actual location of the securities. It is to be always remembered that the interest income on securities would accrue at the place where the securities are issued, can be cashed and where the interest income is receivable. In case of Commissioner of Income-tax v. Bansilal Motilal A I R 1930 Bombay 381 referred to above, the question arose whether interest received by the assessee at Hyderabad (Daccan) on Government of India Promissory Loan Notes issued in British India but enfaced for payment at Hyderabad (Daccan) Treasury can be said or deemed to accrue or arise or to be received in India within the meaning of section 4(1) of the Act. It was held that the words "accruing or arising" are used with reference to the place from which the income is derived and therefore the interest on a security and debt of Government of India issued and contracted in British India and repayable there accrued or arose in British India notwithstanding that it was actually payable and paid outside British India.
In Keshav Mills Limited v. Commissioner of Income-tax, Bombay (1963) 23 I T R 230, facts were that the assessee-company was registered in an Indian State and, therefore, was non-resident in British India. It manufactured texthe goods and sold the same ex-mills. The assessee had employed his guaranteed broker who guaranteed the sale prices of the goods sold by the assessee ex-mills to purchasers from British India for which the broker received commission. As observed hereinabove the assessee was a non-resident and its accounts were maintained according to the mercanthe system. The assessee contended that it wits not liable to pay Indian Income-tax in respect of two sums namely, (a) 12,68,480 and (b) 4,40,878. The first amount was debited in the account of the broker which represented sales made by the assessee to the merchants in British India and credited the said amounts to the sales account. The broker collected the amounts of the bills and credited the same in the assessee's account with the hanks in British India and made disbursements under the assessee's instruction to its creditors in British India. The assessee also credited these amounts to the account of the broker. During the relevant accounting year the assessee receivedRs.12,68,480 against the above total debits of Rs.13,41,744. The second figure namely, Rs.4,40,878 was received by the assessee by drawing hundis or drafts for the amounts of its sales bills on the merchants in favour of banks or shroffs in British India and by sending the same to those banks or shroffs with the railway receipts duly endorsed in favour of the merchants. The amounts of the above sales bills were debited by the company to' the account of the respective merchants and credited to the sales accounts and the sums recovered by the banks or shroffs from the merchants in British India against the delivery of the relative railway receipts were on receipt of the same by the company credited to the accounts of the respective merchants in their books of accounts. Upon a reference under section 66(1) of the Income-tax Act, the High Court held that the sums of Rs.12,68,480 and Rs.4,40,878 were sales proceeds of the goods sold by the assessee to the merchants in British India and were not debts due by the said merchants and that the sales proceeds were received in British India and that the profits of the assessee were included in those sums. The Indian Supreme Court maintained the judgment of the High Court and held that the above two sums were liable to subject to taxation. The following observation in the majority judgment of the Supreme Court may usefully be reproduced:
"The `receipt' of income refers to the first occasion when the recipient gets the money under his own control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in `receipt' within the meaning of this clause at the other place. This was definitely established by the Privy Council in Pondicherry Railway Co. v. Commissioner of Income-tax and Commissioner of Income-tax v. Mathias. If therefore, the income, profits or gains have been once received by the assessee even though outside British India they do not become chargeable by reason of the moneys having been brought in British India, because what is chargeable is the first receipt of the moneys and not a subsequent dealing by the assessee with the said amount. In that event they are brought by the assessee as his own moneys which he has already received and had control over and they cease to enjoy the character of income, profits or gains."
As mentioned earlier it is the admitted position in these cases that appellants earned income from the securities deposited outside Pakistan and further that the interest income from the securities accrued to the appellants as the owners of the securities in their own right. The interest income on securities also accrued outside Pakistan and was also received outside Pakistan. The fact that the securities themselves were required to be transferred to Pakistan by the appellants as capital assets has no bearing to the fact of accrual of interest income which took place outside Pakistan and was the income of the appellants which accrued to them outside Pakistan. The receipt of the "income" refers to the first occasion when the recipient obtains the money under his own control. Once an amount is received as "income" any remittance thereof to another place does not result in the receipt of "income" in his hand at another place. 1t is well-settled that the income, profits or gains having once been received by the assessee outside Pakistan would not be chargeable to tax by reason of the moneys having been brought into Pakistan because what is chargeable is the first receipt of the moneys, and not a subsequent dealing by this assessee with the said amount. In that event they are brought by the assessee as his own moneys which he had already received and had control over and they cease to enjoy the character of income, profits or gains.
On this view of the case, these appeals are allowed, the impugned judgments of the High Court are set aside and the answer rendered by the High Court on the question referred to it which has been reproduced above is reversed and the reply shall be in the negative. In the circumstances, the parties are left to bear their own costs.
M.B.A./G-329/SQuestion answered in the negative.