ORDER
S. Kannan, Accountant Member
1. These two appeals by the assessee give rise to a single common issue. They were, therefore, heard together and are disposed of by a common order.
2. The material and undisputed facts of the case are that the assessee, a company in which public are not substantially interested, owns and exploits a rubber estate situate in Malaysia. It is a resident company. Its registered office is in India. Most of the shareholders are in India. Directors’ meetings are held in India. Annual general meetings are also held in India.
3. The details of the income/loss returned by the assessee for the assessment years 1984-85 and 1985-86 may be abstracted as below :
Assessment Assessment
Year year
1984-85 1985-86
Rs. Rs.
Income arising
at Malaysia 5,49,371 6,56,341
Add: Provision
for taxation 4,68,195 6,48,860
--------- ---------
Malaysian Income 10,17,566 13,05,201
Loss in India 3,48,472 4,40,658
Less : Donations 75,000 82,700
-------- --------
Indian Loss 2,73,472 3,57,958
-------- --------
Net Malaysian
income after
setting off
Indian loss 7,44,094 9,47,243
------- --------
One other material fact needs to be noticed and that is that foreign exchange was remitted to India with a view to making investments in suitable estates in India. The foreign exchange thus remitted was lying in the Bank till it was utilised for purchase of estates in India. The amount lying to the credit of the assessee’s bank account naturally earned interest. In the previous year relevant to the assessment year 1984-85 interest earned was Rs. 47,776, while in the immediately succeeding year of account the interest earned was Rs. 47,196. The said two receipts were taken into reckoning while computing what the assessee had chosen to label ‘Indian loss” for both the assessment years.
4. The assessee’s case before the Assessing Officer, in essence, was first that by reason of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion concluded by the Government of India and the Government of Malaysia, Indian income-tax is not exigible on the Malaysian income. Secondly, for purposes of computing Indian income- tax payable, the aforesaid interest income received in India should not be considered in isolation. The said interest income should be set off against the gross ‘Indian loss’.
5. The Assessing Officer rejected both the aforesaid claims of the assessee. On the exigibility issue relating to the Malaysian income, he took the line that the Malaysian income was chargeable to tax in India. While computing the Malaysian income, however, as may be seen from the impugned assessment orders, whereas in the assessment for the assessment year 1984-85, the Assessing Officer computed the Malaysian income at Rs. 7,44,094 (Malaysian income Rs. 10,17,566 minus ‘Indian loss’ Rs. 2,73,472), in the assessment for the assessment year 1985-86, he brought to charge the entirety of Malaysian income of Rs. 13,05,201 without setting off thereagainst ‘Indian loss’ of Rs. 3,57,958.
6. As for the assessee’s claim that Indian income-tax could not be levied on the interest income, the Assessing Officer took the line that the expenditure incurred in India was relatable exclusively to the Malaysian business and that consequently no part of the expenditure could be regarded as being laid out for purposes of earning the interest income in question. According to him, interest income in its entirety should be brought to charge in both the assessment years. Thus, in the assessment for the assessment year 1984-85 he brought to charge, on estimate basis, interest income of Rs. 60,000 under the head ‘Income from other sources’. (The Assessing Officer resorted to an estimate in this regard, obviously because the assessment was made exparte under Section 144 of the Act. But this aspect of the matter need not detain us here).
In the assessment for the assessment year 1985-86 he brought to charge interest income of Rs. 47,196 (as returned by the assessee) under the head ‘Income from other sources’.
7. Predictably the assessee took up the matter in appeal before the CIT (A), who, relying on the common order dated 25-3-1986 of the ITAT, Madras Bench in ITA Nos. 1335 and 1336 (Mds.)/85 relating to the earlier assessment years in the assessee’s own case, decided the exigibility issue relating to the Malaysian income in favour of the assessee.
As for the exigibility issue relating to the interest income, the CIT(A) declined to interfere in the matter. Rejecting the assessee’s contention that interest income must be assessed as business income, the CIT (A) held that foreign exchange remitted to India from Malaysia, no doubt, originally represented the assessee’s income from Malaysian estate: even so, the interest earned in India on the money lying in the bank was Indian income, which was chargeable to tax and was rightly brought to charge as such.
8. As already pointed out, in the assessment for the assessment year 1984-85 the Assessing Officer had estimated the interest income at Rs. 60,000. On this issue the CIT (A) directed the Assessing Officer to verify the details and to ascertain the exact quantum of interest income received by the assessee during the relevant year of account and bring to charge the current interest income.
9. As pointed out earlier, again, in the assessment for the assessment year 1984-85 the Assessing Officer had adjusted the ‘Indian loss’ of Rs. 2,73,472 against the assessee’s Malaysian income of Rs. 10,17,566 and brought to charge the resultant Malaysian income of Rs. 7,44,094. Consistent with the contention that no part of the Malaysian income was chargeable to tax in India, the assessee set up a claim before the CIT (A) that the ‘Indian loss’ of Rs. 2,73,472 was available for purposes of setting off the interest income of Rs. 47,776. The CIT (A) rejected the contention in the following words:
… It is ascertained that though Rs. 2,73,472 is claimed as loss incurred in India, there was in fact no business carried on in India. Though the company is having its registered office in India the business is that of running the estate and that estate is in Malaysia only. The loss of Rs. 2,73,472 is in fact the establishment charges, rent for the office premises and the salary of the Managing Director etc., incurred in India. These expenses are deductible only in computing the income from business. As the company is having only one business that of running the estate and that estate is in Malaysia only, the expenses incurred in India also can be considered only incurred in connection with the activities in Malaysia. In other words, the loss of Rs. 2,73,472 representing in reality the expenses incurred in India is to be adjusted against the Malaysian income only. The Inspecting Assistant Commissioner has thus rightly adjusted the sum of Rs. 2,73,472 against the income from Malaysia. It is the net amount after adjusting the so-called loss that is to be excluded as per the direction in para 2 of this order on account of the Double Taxation Avoidance Agreement. The claim for adjusting the interest income against the sum of Rs. 2,73,472 claimed as business loss in India cannot be therefore accepted.
10. It may here be highlighted that though in the assessment for the assessment year 1985-86 the Assessing Officer had brought to charge the entirety of the income of Rs. 13,05,201 arising in Malaysia without adjusting ‘Indian loss’ of Rs. 3,57,958, the decision of the CIT (A) that for both the assessment years interest income should be brought to charge in its entirety (without allowing any deduction) under the head ‘Income from other sources’, has the effect of negativing the assessee’s claim that in the assessment for the assessment year 1985-86 also interest income of Rs. 47,196 must be set off against ‘Indian loss’ of Rs. 3,57,958.
11. It is in these circumstances that the assessee is now before us.
12. Shri Palaniappan, the learned counsel for the assessee, strongly contended that the CIT (A) was not justified in holding that the interest income of the assessee could not be set off against ‘Indian loss’. According to him, the ‘Indian loss’ represented the expenditure incurred by the assessee on the maintenance of administrative office in India, holding board meetings, maintaining the register of shareholders and the like. This would mean that the expenditure in question was essentially expenditure incurred on “business operations carried on in India” and was not attributed exclusively to “holding property at Malaysia”. According to him, the management by the assessee from India of the rubber-estate situate in Malaysia is very much business in India.
In any event, the entire administrative expenses related to the business in Malaysia and, consequently, only the Indian expenses net of the interest income earned in India should have been considered as administrative expenses falling to be adjusted against the income arising in Malaysia.
Yet another point that was made by the learned counsel for the assessee was that earning of interest income in India was “effectively connected with the permanent establishment at Malaysia and should have been treated as derived from Malaysia in which the permanent establishment is situated”. According to the learned counsel, the provisions of Article 12(2) of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion concluded by the Government of India and the Government of Malaysia supported the assessee’s case.
Shri Palaniappan also referred to and relied upon the common order dated July 8, 1991 passed by the Single Member sitting on the ITAT Madras Bench-D in ITA Nos. 342 and 343 (Mds.)/89 relating to the assessment years 1980-81 and 1982-83 in the assessee’s own case. He highlighted the fact that in the said order the learned Single Member had held that by virtue of the inter-head adjustments contemplated by the Income-tax Act, the assessee was entitled to set off the interest income against the loss under the head ‘Income from business’.
13. On his part, Shri Y.R. Rao, the learned Departmental Representative strongly supported the impugned common order of the CIT (A).
14. At the time of the hearing, we wondered aloud whether the intervention of the aforesaid Avoidance Agreement did not introduce new dimensions which could not be ignored while resolving the issue before us. The learned counsel for the assessee responded by stating that he was relying on the aforesaid order of the Single Member Bench. On his part, the learned Departmental Representative contended that the decision of the first appellate authority was in consonance with the relevant provisions of the Avoidance Agreement.
15. We have looked into the facts of the case. We have considered the rival submissions.
16. The assessee, it is a matter of record, is a resident company. Now under the scheme of the Act the ambit of taxation varies with the factor of residence in the relevant previous year. As respect residents, the following categories of income are charged to tax:
(a) income received or deemed to be received in India in the accounting year, the date or place of its accrual being immaterial [Section 5(1) (a)];
(b) income which accrues or arises or is deemed to accrue or arise in India during the accounting year, the date or place of its receipt being immaterial [Section 5(1)(b)];
(c) income which accrues or arise outside India during the accounting year, even if it is not received in or brought into India [Section 5(1)(c)].
It should, therefore, follow that normally the income derived by the assessee from its Malaysian estate is exigible to Indian income-tax.
Normally, again, if in the course of its business the assessee keeps surplus funds with banks and earns interest thereon, such interest income will have to be treated as business income and taxed as such.
On this general principle, interest income earned by the assessee will normally have to be assessed as business income.
And, again normally speaking, the expenditure incurred by the assessee in India for purposes of running the Malaysian estate would be adjusted against the income derived by the assessee from that estate.
In other words, normally, the assessee would have succeeded in its claim. For a fact, even if the interest income in question were to be treated as income falling under the residuary head ‘Income from other sources’, the assessee would have succeeded in its claim because of the provisions of the Income-tax Act relating to inter-head adjustments.
17. But, as pointed out earlier, we have the Double Taxation Avoidance Agreement concluded by the Government of India and the Government of Malaysia. This Agreement introduces new dimensions which should be taken note of.
18. Article 7 of the Agreement, which deals with ‘Business profits’ may be noticed first. Paragraph (1) of the said Article stipulates:
(1) The income or profits of an enterprise of one of the Contracting States shall be taxable only in that Contracting State, unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid tax may be imposed in that other Contracting State on the income or profit of the enterprise but only on so much of that income or profits as is attributable to that permanent establishment.
To ascertain the true meaning and intention of the aforesaid provision, it is necessary to notice the definitions of (a) ‘Malaysian enterprise’ and ‘Indian enterprise’; (b) the terms “enterprise of one of the Contracting States” and the “enterprise of the other Contracting State”, both contained in Article 3 of the Agreement; and (c) the term “permanent establishment” contained in Article 5(2) of the Agreement.
Article 3(g) defines the terms “Malaysian enterprise” and “Indian enter prise” to mean respectively “an enterprise carried on by a resident of Malaysia” and “an enterprise carried on by a resident of India”.
Article 3(h) defines the terms “enterprise of one of the Contracting States” and “enterprise of the other Contracting State” to mean “a Malaysian enterprise or an Indian enterprise as the context requires”.
Article 5(2) defines the term “permanent establishment” in an inclusive fashion. According to the said definition, “a firm or plantation”, “a place of management”, “a branch”, “an office” or “a factory” will each be regarded as permanent establishment.
19. In relation to the facts of the case before us, as we see it, the legal consequences of the aforesaid provisions of the Avoidance Agreement may be summarised as follows: Since the assessee before us is a resident of India, the enterprise carried on by it, namely manufacture and sale of rubber, is by definition an Indian enterprise. [Article 3(g)]. It is also, by definition again, an enterprise of India. Therefore, as stipulated in Article 7(1), the income from the enterprise carried on by the assessee-cornpany shall be taxable only in India.
But the enterprise carries or business in the other Contracting State, namely, Malaysia, through a permanent establishment situated therein -in this case, the rubber plantation. Therefore, by virtue of the latter part of Article 7(1), the Malaysian Government is competent to levy tax on the income or profits of the enterprise in question to that extent that the income or profits is attributable to the permanent establishment in Malaysia, namely, the rubber plantation. And it is common ground that the Malaysian Government had brought to charge so much of the income or profits as is attributable to the rubber plantation.
20. True, under Article 5(2)(a), a place of management is also a permanent establishment within the meaning of the said Article. It is also not disputed that the registered office of the company, which is the source of general direction and control of the Malaysian rubber plantation, is situate in India, even though the day-to-day affairs of the rubber plantation are looked after by a foreign company situate in Malaysia. The question that arises for consideration is whether any part of the income of the Malaysian rubber plantation could justifiably be regarded as being attributable to the permanent establishment situate in India. In other words, the question is whether any part of the income of the Malaysian rubber plantation could be regarded as having accrued in India. It is well settled that this question should be decided on the facts of each case in the light of commonsense and plain thinking and too much importance should not be attached to or emphasis laid upon the niceties of verbal definitions.
Now the well settled legal principle is that profits accrue at the place where the business transactions are actually effected and not at the place from which the business is controlled and directed. The general rule is that profits accrue at the place where sales are effected. However, where goods are manufactured in one place and sold in another, profits may have to be apportioned and part of the profits should be held to accrue at the place where the goods are manufactured and the rest at the place where the sales take place. In CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 (SC), which arose under the Excess Profits Tax Act, the assessees manufactured oil in their mill in the Hyderabad State and sold it in British India. The Supreme Court held that not all the profits accrued in British India, but a part of the profits accrued in Hyderabad State where the manufacturing process took place and the profits should accordingly be apportioned. Speaking for the Bench Mahajan J. observed: “profits are not wholly made by the act of sale and do not necessarily accrue at the place of sale….To the extent that the profits are attributable to the manufacture of oil it is not possible to say that they accrue or arise at any place different from the place where the manufactured article came into existence.
[Emphasis supplied]
21. Now, in the case before us, it is a matter of record that not only rubber (latex) was produced in Malaysia but was sold in Malaysia. To be precise, no sale of rubber whatsoever took place in India. It should, therefore, follow that simply because the source of direction and control, namely the registered office of the assessee-company, is situate in India, it cannot be said that the assessee was doing any business in India. Secondly, not only, factually but also by virtue of Article 7(3) of the Avoidance Agreement, the expenditure incurred in India are all attributable only to the enterprise carried on by the assessee in Malaysia. In other words, no part of the expenditure incurred in India can be treated as “business loss in India” as claimed by the assessee.
22. Since no part of the Malaysian income accrued or arose in India, there is no question of apportioning the Malaysian income between the activities conducted Malaysia and those conducted in India. Therefore, the provisions of paragraph (2) of Article 7 of the Avoidance Agreement cannot be invoked. In other words, under the terms of the said Agreement, the entire business relating to the enterprise must be held to be situate in Malaysia. Consequently, as has been held by the ITAT in the case of P.V.AL. Kulandayan Chettiar v. ITO [1983] 3 ITD 426 (Mad.) (SB), no part of the Malaysian income could enter into the computation of the total income of the assessee under the Income-tax Act, 1961.
23. What is the treatment to be given to the interest income earned by the assessee in India ? To this question we may now turn. Here again, whatever might be the position under general principles, by virtue of Article 7(6) of the Avoidance Agreement, interest income in question cannot be treated as business profits, inasmuch as interest income is dealt with separately in Article 12 of the said Avoidance Agreement. In other words, even though normally interest income of the type under consideration could well get subsumed under the head ‘Business profits’, yet by operation of Article 7(6) it cannot be regarded as business profit. Such interest income will necessarily have to be dealt with under Article 12, which specifically deals with ‘Interest’.
The first paragraph of Article 12 stipulates that interest derived by a resident of one Contracting State from the other Contracting State may be taxed in the other Contracting State. In the case before us, the assessee-company, a resident of India, received interest not from Malaysia but in India itself. Therefore, the said provisions are not applicable to the case before us.
For the same reasons, paragraph (2) of Article 12 is also not applicable to the case before us.
With the result, the interest income in question will have to be brought to charge as such under the Income-tax Act, 1961. This would mean that the provisions of Section 56(1) read with those of Section 57 get activated. Since the focus of Section 57 is on “expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning” the income that is to be brought to charge under the head ‘Income from other sources’, it needs to be examined whether at all the assessee could be regarded as having incurred any such expenditure for the purpose of earning the interest income in question. As we see it, in the facts and circumstances of the case, the assessee has not incurred any such expenditure. All that had happened in this case was that the rupee equivalent of the foreign exchange remitted from Malaysia stood credited/deposited in the bank account of the assessee till the money was withdrawn and in the meanwhile it earned interest at the stipulated rates. No expenditure at all was incurred in India for earning the interest income. It should, therefore, follow that the entirety of interest income is chargeable to tax under the head ‘Income from other sources’. And, this is exactly what the lower authorities had held.
24. It may be recalled that one of the contentions of the assessee was that it was entitled to the benefit of inter-head adjustments as respects interest income brought to charge under the head ‘Income from other sources’ on the one hand and the so-called Indian loss on the other. We are unable to accept this contention. For more reasons than one. First, as already demonstrated, no part of the Malaysian income accrued to the assessee in India. Secondly, the so-called ‘Indian loss’ was nothing but the aggregate expenditure incurred by the assessee in India for purposes of running the Malaysian plantation. Consequently, not only on general principles but also by virtue of the specific provisions contained in the Avoidance Agreement (see Article 7(3)) the said expenditure will have to be taken into reckoning for purposes of computing the income from the Malaysian plantation. For a fact, even according to the assessee, the Malaysian income-tax authorities had taken into reckoning the aforesaid Indian expenditure for the purposes of computing the income from the plantation chargeable to Malaysian income-tax. Thirdly, the entirety of the income of the Malaysian plantation is chargeable to Malaysian income-tax under the provisions of Article 7(1) of the said Agreement. Consequently, as has been held by the Tribunal in the case of P.V.AL. Kulandayan Chettiar (supra), no part of the said income could enter into the computation of total income of the assessee for the purposes of Indian income-tax. Insofar as Indian income-tax is concerned, the assessee, in relation to the Malaysian plantation, has neither income nor loss under the head ‘Profits and gains of business’. It should therefore, follow that the question of making inter-head adjustments as claimed by the assessee does not arise.
25. It may also be recalled that the assessee’s counsel had referred to and relied upon the order dated July 8, 1991 passed by the Single Member sitting on the ITAT Madras Bench-D in ITA Nos. 342 and 343(Mds.)/89 relating to the assessment years 1980-81 and 1982-83 in the assessee’s own case. We have carefully perused the said order of the Single Member. We find that it does not contain any reference either to the provisions of Article 7 (and in particular to paragraphs 1, 2 and 6 of the said Article) and Article 12 of the Avoidance Agreement, or to the decision of the ITAT in the case of P.V.AL. Kulandayan Chettiar (supra). As already pointed out, Article 7(6) in terms stipulates that where income or profits included items of income which are dealt with separately in other Articles of the Agreement, then the provisions of those Articles shall not be affected by the provisions of Article 7. With the result, the interest income earned by the assessee in India could not be regarded as business profits and dealt with under Article 7. It could be regarded only as interest and dealt with under Article 12. Further, as has been held by the ITAT in the case of P.V.AL. Kulandayan Chettiar (supra), no part of the business profits which fall to be charged to Malaysian income-tax under the provisions of Article 7, can enter into the computation of total income for purposes of Indian income-tax.
26. The aforesaid facts – dimensions if you like – which have a material bearing on the resolution of the issue before us were not noticed by the learned Single Member. We are, therefore, unable to subscribe to the view taken by him that the assessee is entitled to the benefit of inter-head adjustments as claimed by it.
27. In view of the foregoing, therefore, we decline to interfere in the matter.
28. In the result, both the appeals of the assessee are dismissed.