TMI Blog1970 (2) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... of the bank's interest on the overdraft ? " The facts giving rise to this question lie within a small compass. The assessee is a sterling company and its status is that of a non-resident under the Indian Income-tax Act, 1922. The assessment years involved in this reference are 1958-59, 1959-60, 1960-61 and 1961-62, for which the corresponding previous years are the calendar years 1957, 1958, 1959 and 1960, respectively. The assessee-company owns tea gardens in the taxable territories. This tea is mostly exported to foreign countries. As a non-resident company, it has remitted profits from time to time to the United Kingdom for the purpose of declaration of dividends to its shareholders and the surplus balance has been kept with the bank in the United Kingdom as deposits. During the relevant accounting years the assessee-company paid interest accruing on its overdrafts to the banks in India. For the assessment years under reference, the assessee-company claimed deduction of the amounts of Rs. 26,468, Rs. 11,650, Rs. 4,613 and Rs. 1,840, respectively, as interest paid on overdrafts incurred for the purpose of its business. The Income-tax Officer rejected the claim for each of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue authorities could not compel such an assessee to carry on the business in India only by ploughing back its own profits without any remittance whatsoever. The Tribunal rejected the contention of the revenue authorities that the remittances should be confined to the sums required to meet only liabilities on account of dividends payable in the United Kingdom. The Tribunal was of the opinion that on the facts the correct way to interpret the transaction would be that the remittances to U.K. came out of the profits earned in India and that the bank overdrafts in India had in fact been utilised in carrying on the assessee's business. Therefore, the Tribunal held that the income-tax authorities were not justified in disallowing any part of the bank interest paid by the assessee in the taxable territories on its bank overdrafts. The Tribunal allowed the assessee's appeals. The Commissioner now comes to this court on the above reference. If the facts found by the Tribunal are taken as correct, as they should be, because the Tribunal is the last fact-finding authority, then the facts found by the Tribunal are that the remittances by the assessee to U.K. came out of the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds which was the purpose of the business within the meaning of section 10(2)(iii) of the Income-tax Act. That being so, the rest must follow. The interest then becomes one of the items which should be allowed under that section as deduction. The next argument for the revenue is that this is not borrowed capital within the meaning of section 10(2)(iii) of the Income-tax Act, and, therefore, the interest upon this amount cannot be deducted in computing profits and gains of business under section 10 of the Income-tax Act. The argument is developed in this way by Mr. Pal for the Commisioner. It is contended by him that dividend cannot be paid out of capital. Therefore, this remittance cannot be treated or regarded as remittance of borrowed capital within the meaning of section 10(2)(iii) of the Income-tax Act. A part of this contention is based on his further submission that dividends can only be paid out of profits, and, therefore, it has to be established by the assessee that this remittance came out of the profits. His next step of the argument on this branch is that profits had already been ploughed back in the working of the company and there was no money available and, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase sterling securities, which were retained and the income from which was received outside British India had to be treated as a charge on the interest from those securities which was not liable to Indian income-tax and not deductible under the then section 10(2)(iii) from the other income of the assessee liable to tax in British India. This case, in our opinion, has no application to the instant reference and the point which we have to decide. That was a case of a salaried person. The assessee in that case was a civil servant in India. It was no part of his profession or vocation to invest money. He did it entirely on his personal account. What he did was that he used to deposit his salary in the bank as a fixed deposit and borrowed from the bank certain sums of money on the security of that fixed deposit and, in fact, purchased certain shares in England, the dividends of which were payable in England and not taxable in India. Mr. Pal for the revenue relied on the observations of that court, appearing at page 308, which are as follows : " Even if it be presumed that he was engaged on a foreign business there is authority for the view that the interest paid on sums borrowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax." Finally, Mr. Pal for the revenue cites a Division Bench decision of this court in Commissioner of Income-tax v. Bibhuti Bhusan Dutt, to show that this principle just mentioned has been followed by this court by drawing our attention to the observations appearing at page 241 of that report. In our view, that proposition of Lord Greene M. R. or Viscount Simon is not in question. It is not a question in the instant reference before us of the assessee in this case adopting a method or arrangement which attracts the tax. Mr. Pal for the revenue tried to apply the decisions by suggesting that the assessee in this case if it had sent the money alter the permission of the Reserve Bank of India had been obtained or without anticipating it, then he would not have been liable to pay tax on this interpretation which he has been taxed by the Income-tax Officer or the Appellate Assistant Commissioner. Mr. Pal contends that because the assessee chose the other method of borrowing the capital from the bank, therefore, this adopted method a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dify the purpose of the business for which it was sent and can, in our view, claim the deduction on the principle laid down by the Supreme Court in this case. At pages 79 and 80 in Commissioner of Income-tax v. Indian Bank Ltd. the significant observations relevant on the point for decision in the instant reference are as follows : " Then is there such a principle as has been formulated above ? If there is one, can it be invoked to cut down the express language of section 10(2)(iii), which expressly allows as a deduction interest on capital borrowed for the purpose of the business ? In our opinion, in construing the Act, we must adhere closely to the language of the Act. If there is ambiguity in the terms of a provision, recourse must naturally be had to well established principles of construction, but it is not permissible first to create an artificial ambiguity and then try to resolve the ambiguity by resort to some general principle." The Supreme Court in that case, Commissioner of Income-tax v. Indian Bank Ltd., at page 80, gives the logical steps which the court should follow in construing section 10 of the Income-tax Act. The relevant observations on the point, at page 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48-150 of that report). We have no hesitation in holding, as we have done, that payment of dividend is a purpose of the business of the assessee in this case. We cannot help feeling that in this matter the taxing authorities made a preliminary confusion between section 10(2)(xv) and section 10(2)(iii). The confusion first appears at page 6 of the paper book where the Income-tax Officer under the heading " Interest account " says : " The assessee claimed that an interest on Rs. 26,468 was paid to bankers for overdrafts. When we look to the cash balance and investment, the overdraft cannot be said to have been raised for the purpose of wholly and exclusively for business. The same is therefore disallowed. " Now, this expression " laid out or expended wholly and exclusively for the purpose of such business " appears in section 10(2)(xv) but this test of expenditure " wholly and exclusively for the purpose of such business " is absent in section 10(2)(iii) which is the section relevant and applicable to the point for determination in this reference. There the only common expression is the " purpose of business " and not the other parts of the expression " expended wholly and ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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