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Issues Involved:
1. Permissibility of deduction of Rs. 64,239 paid as interest to H.H. the Nawab of Rampur and others in computing the business income of the assessee. 2. Admissibility of deduction of Rs. 3,000 paid to Dalmia Cement Company Ltd. from the office allowance received by the assessee from its managed companies. Issue-wise Detailed Analysis: 1. Permissibility of Deduction of Rs. 64,239 as Interest: The primary question was whether the sum of Rs. 64,239 paid as interest on loans taken for purchasing shares from H.H. the Nawab of Rampur and others was a permissible deduction under sections 10(2)(iii) and 10(2)(xv) of the Indian Income-tax Act in computing the business income of the assessee. The assessee, a private limited company, was acting as the managing agent for two sugar companies and had purchased shares from the Nawab to secure a controlling interest and ensure the continuation of its managing agency. The assessee financed this purchase through loans and remained indebted to the Nawab for part of the purchase price, paying interest on these loans. The Income-tax Officer disallowed the deduction, stating that the loan was incurred not for the purpose of the assessee's business but for the benefit of the shareholders and beneficiaries of Dalmia Cement Company Ltd. and Dalmia Jain Trust. He further held that the purchase and subsequent transfer of shares were a device to reduce the tax liability of the assessee. The Appellate Assistant Commissioner initially supported the Income-tax Officer's view but later allowed the deduction, stating that the purchase was ostensibly made to safeguard the managing agency. The Tribunal, however, reversed this decision, concluding that the debt incurred for the purchase of shares and the interest paid had no connection with the business carried on by the assessee. The Tribunal found that the shares were sold only eight months after their purchase and were not used as a business asset. Therefore, the interest paid could not be allowed as a deduction under section 10(2)(iii) or 10(2)(xv). The High Court upheld the Tribunal's decision, stating that for an amount to be allowed as a deduction under section 10(2)(xv), it must be "wholly and exclusively" expended for the purpose of business. The assessee's claim that the expenditure was "mainly" for business purposes was insufficient. Furthermore, the purchase of shares was intended to bring into existence a capital asset, making the interest paid a capital expenditure, not a revenue expenditure. Under section 10(2)(iii), the Court noted that the managing agency was still to run for four years at the time of borrowing. The subsequent sale of shares to Dalmia Cement Company indicated a pre-determined scheme, and the arrangement was deemed illusory and not genuine or bona fide. Therefore, the interest paid was not allowable as a deduction under section 10(2)(iii). 2. Admissibility of Deduction of Rs. 3,000 Paid to Dalmia Cement Company Ltd.: The second issue was whether the sum of Rs. 3,000 paid to Dalmia Cement Company Ltd. from the office allowance received by the assessee from its managed companies was an admissible deduction under the Indian Income-tax Act. The Income-tax Officer disallowed the deduction, but the specific reasons for this disallowance were not included in the paper book for the relevant assessment year. The Appellate Assistant Commissioner and the Tribunal both concluded that the amount could not be allowed under section 12A, which relates to the division of managing agency commission. Since the claim related to the office allowance and not the managing agency commission, the deduction was not permissible under section 12A. The Tribunal also held that the payment of Rs. 3,000 was a diversion of part of the office allowance to which the assessee was entitled, influenced by considerations of relationship and the desire to evade tax liability. The High Court agreed with the Tribunal's conclusion, stating that the payment was not influenced by business considerations and could not be allowed as a deduction under any part of section 10 of the Income-tax Act. Conclusion: Both questions were answered in the negative, and the references were returned to the Tribunal with the above answers. The department was awarded costs of Rs. 100 for each reference.
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