COMMISSIONER INCOME TAX VS MEENKASHI MILLS LTD: CRITICAL

ANALYSIS

SUBMITTED TO SUBMITTED BY
DR. DIPAK DAS NUPUR SINGH
ASSISTANT PROFESSOR, SEMESTER-V SEC-
B
CORPORATE LAW-I ROLL NO.- 125
HNLU, Raipur

DATE OF SUBMISSION

30th August, 2023

HIDAYATULLAH NATIONAL LAW UNIVERSITY

Uparwara Post, Naya Raipur – 492002 (C.G)

 DECLARATION

“I thusly pronounce that, this project submitted for Hidayatullah National Law University
(HNLU), Chhattisgarh is unique and not counterfeited without references. It is written in the
most natural sounding way for me as obscure from well-established realities subsequent to
perusing a variety of articles, diaries and books identified with this point. It is my own just as
pursue proficient assessment which till now, I comprehend and ready to communicate after
the examination.”
 CIT vs Shree Meenakshi Mills Ltd

FACTS

1. The three companies in this case were all located in India.

2. They had lent money at interest to their branches located outside India.
3. The ITO assessed the income earned from these loans as taxable income in India.
4. The companies challenged the assessment in the Appellate Tribunal, which upheld the
ITO's decision.
5. The companies then appealed to the Supreme Court.

The following are some additional facts that are relevant to the case:

1. The companies had branches in Pudukkottai, a former native state that was not part of
the taxable territory of India at the time.
2. The branches in Pudukkottai were set up for the purpose of lending money at interest.
3. The money that was lent by the branches in Pudukkottai was not brought into the
taxable territory of India.

ISSUE

1. Whether the income earned from loans made by Indian companies to their
branches outside India is taxable in India.
2. Whether the place where the money is lent is relevant for the purposes of taxation
under section 42(1) of the Income-tax Act, 1961.
3. Whether the money needs to be brought into the taxable territory in order to be
taxable under section 42(1).

JUDGEMENT

The Supreme Court ruled that the income generated from loans would be subject to taxation
in India, irrespective of the lending location or the money's entry into taxable regions. The
Court justified this stance by asserting that the section aimed to tax income derived from
money utilization, irrespective of the lending destination.
 CRITICAL ANALYSIS

The Apex Court held that the income earned from the loans was taxable in India. The Court
relied on the following provisions of the Income-tax Act, 1961:

Section 42(1): This particular provision states that income, profits, or gains that result from
money being lent at interest outside the taxable area will be considered as originating or
emerging within the taxable region, whether directly or indirectly.

Section 42(1) of the Income Tax Act, 1922, pertains to the tax treatment of 'profits and gains
of business or profession.' This provision encompasses the determination of taxable income
earned through business activities or professional engagements. The section mandates the
computation of taxable income by deducting allowable expenses and deductions from the
gross receipts. The scope of this provision extends to various aspects, including the definition
of income, valuation of assets, allowances for depreciation, and permissible deductions.

Under Section 42(1), taxpayers are required to accurately calculate their net income by
accounting for valid expenditures, such as operating costs, interest, and depreciation. The
provision also allows for the utilization of prescribed depreciation rates to determine the wear
and tear on assets. Additionally, this section covers the treatment of income from diverse
sources, ensuring equitable taxation for both business and professional income.

Furthermore, this provision's scope encompasses the prevention of tax evasion through the
establishment of rules for income computation. It also facilitates consistency in tax
assessments and legal clarity.

Section 2(29): This section defines "taxable territory" to include the whole of India and any
place outside India where the Central Government exercises jurisdiction.

The Court held that the income earned from the loans was clearly "income accruing or arising
directly or indirectly from money lent at interest outside the taxable territory". The Court also
held that the place where the money was lent was irrelevant for the purposes of section 42(1).
The Court reasoned that the section was intended to tax the income earned from the use of the
money, regardless of where the money was lent.
The companies' assertion that the income, by virtue of not being brought into the taxable
territory, remained non-taxable in India, was dismissed by the Court. It was ruled by the
Court that the section's stipulations did not mandate the income's physical entry into the
taxable territory for taxation purposes. The Court's rationale rested on the notion that the
section aimed to levy taxes on income derived from money utilization, irrespective of
whether the money itself was physically introduced into the taxable territory.

The judgment in CIT v. Sri Meenakshi Mills Ltd. (1967) is an important precedent on the
taxation of income earned from money lent at interest outside the taxable territory. The
judgment clarifies that such income is taxable in India, regardless of where the money is lent
or whether the money is brought into the taxable territory.

In addition to the above, the following case laws and sections were also involved in deciding
the case:

Firestone Tyre and Rubber Co. Ltd. v. Lewellen 1 (Inspector of Taxes) (1958): In the case
of Firestone Tyre and Rubber Co. Ltd. v. Lewellen (Inspector of Taxes), the House of Lords
determined that the location of the loan holds no significance in relation to section 42(1) of
the 1918 Income Tax Act. This particular section states that any income, profits, or gains
resulting from interest on money lent outside the United Kingdom will be considered as if
they have originated within the United Kingdom.

The House of Lords held that the place where the money was lent was irrelevant for the
purposes of section 42(1). The section is concerned with the income earned from the use of
the money, not with the place where the money is lent. The House of Lords reasoned that it
would be anomalous to tax the income earned from money lent outside the United
Kingdom if the income earned from money lent inside the United Kingdom was not
taxable.

A.H. Wadia, as Agent of the Gwalior Durbar v. CIT2 (1949): Court held that the section
42(1) does not require the money to be brought into the taxable territory in order to be

1
Firestone Tyre and Rubber Co. Ltd. v. Lewellen, (1957) 31 ITR 338
2
A.H. Wadia vs Commissioner Of Income-Tax, (1949) 51 BOMLR 287
taxable. The section is concerned with the income earned from the use of the money, not with
the place where the money is brought. The Bombay High Court reasoned that it would be
anomalous to tax the income earned from money lent outside the taxable territory if the
income earned from money lent inside the taxable territory was not taxable.

The judgment in A.H. Wadia, as Agent of the Gwalior Durbar v. CIT is an important
precedent on the taxation of income earned from money lent at interest outside the taxable
territory. The judgment clarifies that the money does not need to be brought into the
taxable territory in order to be taxable under section 42(1).

CONCLUSION

The High Court's interference with the appellate Tribunal's findings constituted a legal error.
In a reference, the High Court should uphold the factual findings made by the appellate
Tribunal. The challenging of these findings falls to the party seeking reference, requiring an
application under s. 66(1). Failure to present such an application forfeits the right to later
contest the factual validity before the High Court. Notably, Section 42 mandates that lending
outside taxable territory, subsequent accrual of income, and bringing money back within
taxable territories establishes territorial connection. The provision is valid and not ultra vires,
as it considers lender-borrower knowledge as transaction integral.