National Bank of India v. Commissioner of Income Tax.
1939Present: Poyser S.P.J. and Hearae J.
NATIONAL BANK OF INDIA v. COMMISSIONEROF INCOME TAX
C. Inty. (Special) 59
Income tax—Interest on overdrafts given by bank to debtor in London—Changeof residence by debtor to Ceylon—Income arising in Ceylon or not—Liability of bank—Income Tax Ordinance, 1932, ss. 5 (1) (b) and 44U) (3).
A, who resided in England in the year 1928, obtained overdraftsfrom the National Bank of India, Ltd., which were secured by the depositof shares owned by him in companies registered in Ceylon and by sterlingsecurities, the property of A’s brother. It was one of the terms of thecontract implied, if not expressed, that both the principal and theinterest should be payable to the bank in England. In April, 1936,A became a resident in Ceylon within the meaning of section 33 of theIncome Tax Ordinance.
Held, that the interest payable on the overdrafts cannot be said to beincome “ arising in or derived from Ceylon ” within the meaning ofsection 5 (1) (b) of the Income Tax Ordinance and that the NationalBank of India cannot be assessed for income tax in respect of thesame.
HIS was a case stated for the opinion of the Supreme Court by theBoard of Review under section 74 of the Income Tax Ordinance.
The National Bank of India was assessed in the name of its agent, theNational Bank of India, Colombo, for the year of assessment 1937-1938-in respect of a sum of Rs. 13,102, as being income arising in or derivedfrom Ceylon by the National Bank of India, Ltd., London. The taxpayable has been assessed at Rs. 1,310.20.
The income consisted of interest payable in respect of the year ofassessment by a client, who has been resident in Ceylon within themeaning of section 33 of the Income Tax Ordinance as from April, 1936,but who was non-resident for several years prior to that. The interestaccrued upon two sterling overdrafts granted to the client in London,'while he was resident in London. One of these liabilities was a loan onthe security of shares in companies registered in Ceylon and owned bythe borrower, on which the interest taxable for the year was Rs. 1,147.The other liability was against sterling securities owned by the client’sbrother, on wliich the taxable interest amounted to Rs. 11,955.
Upon these facts the Income Tax Assessor assessed the National Bank•of India, London, as having a taxable income arising in or derived from’Ceylon equal to the two sums of Rs. 1,147 and Rs. 11,955.
The bank appealed against the assessment of the Commissioner under.section 69 of the Income Tax Ordinance and the Commissioner confirmedthe assessment. The bank thereupon appealed to the Board of Review-under section 71 of the Ordinance. The Board of Review allowed theappeal; whereupon the Commissioner applied to the Board to state a•case for the opinion of the Supreme Court.*
National Bank of India v. Commissioner of Income Tax
J. W. R Ilangakoon, K.C., A.-G. (with him S. J. C. Schokman, C. C.),for Commissioner of Income Tax, 'appellant.—The question is whethertwo sums of money which represent interest payable by A, who is nowresident in Ceylon, to a Bank in London (non-resident) on two overdraftsgiven to A while he was in London is taxable.
A has been resident in Ceylon since 1936. The two debts constituteproperty situated in Ceylon and therefore, the interest derived from themis taxable under section 5 (1) (a). See also sections 5 (2) and 6 (1) (e).The fact that A is in default in the payment of interest to the Bank makesno difference—section 9 (3) of Ordinance No. 2 of 1932, as amended byOrdinance No. 27 of 1934.
The question turns on whether the Bank can bd said to have derivedany income from property in Ceylon.
The two overdrafts constitute two simple contract debts. They areloans by the bank to a customer who had an account with them. Arethey “ property ” ? Is so, are. they situated in Ceylon ? These debtsare choses-in-action and come under section 5 (2). The locality of asimple contract debt must be ascertained with reference to the residenceof the debtor—English, Scottish and Australian Bank, Ltd. v. Commissionersof Inland Revenue *. A case almost on all fours with the present case isCommissioners of Inland Revenue v. Viscount Broome’s Executors’.
[Poyser S.P.J.—Was the debt incurred before 1936, before Mr. A. becamea resident in Ceylon?]
Yes, but the locality of the debt changes according to the residence ofthe debtor—Commissioner of Stamps v. Hope’.
H. V. Perera, K.C. (with him N. Qratiaen and C.C. Rasaratnam), forrespondent.—If the proposition which has been put forward is accepted,it will have very far reaching consequences. The transaction took placein England, the creditor is in England and the debtor during a particularyear, by 'mere residence for six months, happens to be in Ceylon. Hasthe creditor to pay income tax under these circumstances? There isobviously a fallacy in the argument.
The proposition relating to the locality of a chose-in-action is entirelya fiction of the law to which the English Courts were driven by necessity.But a chose-in-action cannot be regarded as property within the meaningof section 5 (2). The enactment interpreted in English., Scottish andAustralian Bank, Ltd. v. Commissioner of Inland Revenue (supra definitelyincluded property, both corporeal and incorporeal.
Under our Ordinance, is it correct to say that a chose-in-action arisingin respect of transactions or services rendered is property within themeaning of every enactment that one can think of ? There is no definitionof property in our Ordinance. It does not^ have the same meaning aswould be attached to “ property ” in action relating to the administrationof an estate.
Section 44 of our Ordinance expressly excludes interest on any loan oradvance made by a banker. This is a clear indication that interestdue on the overdrafts in question cannot be taxed. The case of
1 (1932) A. C. 2381 (1933) 19 Tax Cases G67.
3 (1391) A. C. 476.
POYSER S.P.J.—National Bank of India v. Commissioner of Income Tax. 195
Commissioners of Inland Revenue v. Viscount Broome’s Executors (supra)dealt with Interest paid on an investment and was decided on its ownspecial facts.
The overdrafts have been treated by the Commissioner of Income Taxas an investment on property situated in Ceylon. The interest due onthem is not necessarily nett income. The expenses and losses incurredby the Bank in their business should be taken into account for the purposeof assessment.
The item under consideration has to come under the category of profitsof business referred to in section 6 (1) (a). It cannot come under anyother class, such as section 6 (1) (e). No question, therefore, arises as tolocality. This is profit from business carried on outside Ceylon.
Ilangakoon, K.C., A-G., in reply.—A chose-in-action is incorporealproperty. It has been held that “copyright” is property for incometax purposes. Except by a legal fiction copyright has no absolute localexistence.
-If investment is made by bank as part of its banking business in Ceyloninterest would not be taxed separately under section 6 (1) (e). Profits ofbusiness would be taxed under section 6 (1) (a).
This case falls within the letter of the law as it obtains in Ceylon.Section 81 of the Ordinance enables the Commissioner of Income Tax tolevy the tax from the debt itself, if there is default on the part of the bank.
Cur. adv. vult.
January 17,1939. Poyser S.P.J.—
The material facts in this cas eare as follows:—A person referred tothroughout the proceedings as Mr. A. became a resident in Ceylon, withinthe meaning of section 33 of the Income Tax Ordinance, in April, .1936.Prior to that date Mr. A resided in England and had, about the year 1928,obtained overdrafts from the National Bank of India, Ltd., London.Such overdrafts were secured by the deposit of shares in companiesregistered in Ceylon and by sterling securities, the property of Mr. A’sbrother.
The Board of Review found that the overdrafts in question weregranted to Mr. A when he was resident in England, in pursuance of acontract made there, at a rate of interest fixed with reference to the Bankof England rate of discount, and that it was one of the terms of the con-tract, implied if not expressed, that both principal and interest should bepayable to the Bank in England.
The Board of Review held, reversing the Assessor and the Commissionerof Income Tax, that the interest payable on these overdrafts is not incomeof the National Bank of India, Ltd., London, “ arising in or derived fromCeylon ”.
The Commissioner of Income Tax appeals from that finding.
The Attorney-General argued that Mr. A’s overdraft was a simplecontract debt, that in law a debt was situated wherever the debtor wasresident for the time being, and that as Mr. A resided in Ceylon fromApril, 1936, the obligation to pay interest on the debt arose in Ceylonfrom that date and that such interest was liable to Ceylon Income Tax.
196 POYSER S.P.J.—National Bank of India v. Commissioner of Income Tax.
The case he principally relied on was English, Scottish and AustralianBank, Ltd. v. Commissioners of Inland Revenue
In that case it was held that an agreement for the sale of (amongstother things) simple contract debts owed by debtors resident out of theUnited Kingdom is exempt from ad valorem stamp duty in respect ofsuch debts upon the ground that they are “ property locally situate outof the United Kingdom” within the meaning of the exception in section59, sub-section (1) of the Stamp Act, 1891.
In Lord Buckmaster’s judgment the following passages occur:—
(Page 245). “But debts do, in one form or another, representproperty of very considerable value in the modern world, and it appearsto m64f is desirable that they should possess a locality, even if they areinvested with it by means of a legal fiction. Nor can I see why, whenthat locality has been attributed for several centuries for purposes ofjurisdiction in the administration of estates, it should be regarded asimpossible when dealing with the Stamp Act ”.
“It is in my opinion a fair assumption that the Statute was passedwith knowledge of the well established law relating to probate, and thephrases then used would be perfectly proper, to cover debts where thedebtors were out of the United Kingdom ”.
(Page 246). “ If however, once it be assumed that a debt must havea local situation, as I think it must, it can only be where the debtor orcreditor resides, and the fact that it has for other and similar purposesbeen assumed to be determined by the residence of the debtor and notthe creditor is a sufficient reason for holding that that is its situationfor the purpose of the Statute ”.
If the argument of the Attorney-General succeeds the consequences willbe far-reaching.
No doubt many Ceylon residents incur debts in the United Kingdom,not only overdrafts but debts for goods supplied and if the payment ofsuch debts or the interest on them renders the payees liable to CeylonIncome Tax, it is difficult to foresee what the consequences would be. Inthe great majority of cases it would be no doubt be impracticable to collectsuch tax. The present case is exceptional in that National Bank of Indiahave a' branch in Colombo who are agents for the bank’s office inLondon.
There is a further difficulty in regard to upholding the argument of theAttorney-General. The Commissioner of Income Tax has assessed theBank on the interest due on the overdrafts without any deductions. Hehas treated such overdrafts as an investment on a property situated inCeylon when it is common ground that the interest payable to a bank onoverdrafts is not necessarily nett income,—all the expenses incurred bythe bank in their business, bad debts, &c., have to be taken into accountin assessing their income.
When the attention of the Attorney-General was drawn to this aspectof the case he argued that it was no hardship on the bank as they wouldget credit for the amount of Ceylon Income Tax they paid from the InlandRevenue.
i (1933) A. C. 338.
HEARNE J.—Roslin Nona v. Abeyweera.
I have very considerable doubts on that point but I think the fallacyof the Attorney-General’s argument lies in treating an overdraft incurredin England by a person at the time resident in England as something inthe nature of an investment in Ceylon when the debtor became residentin Ceylon.
I do not think legal fictions can be applied to the Ceylon Income TaxOrdinance and in the latter I can find no provisions under which thisassessment can be upheld. In fact the reverse appears to be indicated,for in section 44 which, deals with interest, &c., payable to persons out ofCeylon, the following occurs:—
Section 44 (1) (iii)—“ this section shall not apply to any interest paidout of income not arising in Ceylon, or to interest-on any loan or advancemade by a banker ”.
In this case it was not suggested that the interest on the overdraftswas remitted from Ceylon, in fact interest was not paid at all but added tothe overdrafts, and I agree with the Board that such interest cannot besaid “ to arise in or be derived from Ceylon ”.
The decision of the Board is confirmed and the Bank is entitled to thecosts of the proceedings in the Supreme Court.
Hearne J.—I agree.
NATIONAL BANK OF INDIA v. COMMISSIONER OF INCOME TAX