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TMI Blog1971 (10) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... did not pay it. The levy of the cess was challenged by some of the sugar factories in U.P. who filed writ petitions alleging that the levy was ultra vires. An application was moved in the writ petition for grant of stay which was granted by the Allahabad High Court as a result of which the factories went on adjusting the cane cess without being required to pay the same. However, the writ petitions were eventually dismissed. The cess became payable on which penal interest was also charged for default to pay the cess in time. In an appeal before the Supreme Court the contention of the sugar factories was allowed and it was held that the U.P. Sugar Cane Cess Act, 1956, was ultra vires of the Constitution and that the recovery of the cess could not be made from the sugar factories. The Government issued an Ordinance validating the 1956 Act which was subsequently validated by the U.P. Sugar Cess (Validation) Act, 1961. The factories accordingly had to pay arrears of cess along with interest. The Commissioner of cess appointed by the U.P. Government recovered from the assessee the arrears of cess along with interest. The interest payable for the accounting period for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee on the arrears of the cess in assessment years 1959-60 and 1960-61, respectively, as revenue expenditure?" In I.T.R. No. 41 of 1970 the assessment year is 1961-62 for the accounting period ending on 30th June, 1961, and the assessee claimed a sum of Rs. 2,00,439 on account of interest paid by it to the U.P. Government as revenue expenditure, advancing precisely the same plea as discussed earlier in I.T.R. No. 40 of 1970. The lncome-tax Officer disallowed the claim on the ground that it did not represent business expenditure On appeal the Appellate Assistant Commissioner and the Tribunal upheld the contention of the assessee and allowed take amount of interest as bona fide business expenditure. On the application of the department the Tribunal in this reference has referred the following Question of law to this court: "Whether, on the facts and in tile Circumstances of the case, the Tribunal was justified in allowing the interest of Rs. 2,00,439 paid by the asssee on the arrears of cess as revenue expenditure?" Mr. G. C. Sharma, the learned counsel appearing for the revenue, contended that what has to be seen is as to what was the real object for paying the penal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which now corresponds to section 10(2)(xv) of the Income-tax Act, 1922, was claimed on the amount of interest paid on the ground that the aforesaid amount should be treated as if it was interest on the capital borrowed or that the amount was expended in the business of the applicant and the interest paid should be treated as an expenditure laid out or spent wholly or exclusively for the purposes of the assessee's business. Satyanarayana Rao J., with whom Viswanatha Sastry J. agreed, held that in order to justify the deduction it must be established that there was capital borrowed for the purposes of their business, profession or vocation and that the assessee in order to succeed in his claim must bring himself within one or other of the provisions of the Act recognising his claim as an allowable deduction. It was further held that borrowing implied a consensual act by a debtor receiving money from a creditor and in the said case none of these elements were present. Besides, the Government never advanced any amount as a loan to the assessee. Further, the amount that the assessee was having in his hands was an amount belonging to the Government of Ceylon and in no sense could be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of interest was necessarily allowable. Their Lordships of the Supreme Court, while considering the contention of the assessee that the interest paid should be treated as interest paid on the "amount borrowed", held that under clause (iii) of section 10(2) interest to be permissible as an allowance must be paid in respect of the capital borrowed and that interest paid, but not in respect of capital borrowed, cannot be allowed and that the assessee-company in truth did not borrow any capital. In this connection their Lordships observed as follows at pages 57 and 58: "A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources, and a loan is only one of such sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender. If the requisite amount of consideration had been borrowed from a stranger, interest paid thereon for the purpose of carrying on the business would have been regarded as a permissible allowance; but that is wholly irrelevant in considering the applicability of clause (iii) of sub-section (2) to the problem arising in this case. The legislature has under claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionship of a creditor and debtor came into existence whereby the assessee undertook to pay interest to the creditor. It may be said in fairness to the learned counsel for the respondent that he did not claim allowance in respect of under this clause but primarily sought to bring his case within the provisions of section 10(1) or in the alternative, under section 10(2)(xv) of the Act. It was also contended by the learned counsel for the revenue that in computing the profits or gains of business, profession or vocation carried on by the assessee only such allowances are to be made in favour of the assessee which are enumerated under sub-section (2) of section 10 of the Income-tax Act, 1922. The being so, it was contended, the amount of interest can be allowed only if it could be covered under clause (iii) of sub-section (2) of section 10, i.e., if the amount of interest could be in respect of the capital borrowed for the purposes of business, profession or vocation of the assessee. The learned counsel for the revenue, therefore, vehemently contended that since the interest had been specifically provided for in section 10(2)(iii), resort could not be had to clause(xv) of sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10(2)(xi). The claim was not accepted as it was held that in expanding the amount no debtor came into existence with a liability to pay the debt and as such it could not be said that the debt was irrecoverable. The assessee in that case in the alternative claimed the amount under section 10(2)(xv) which claim was also negatived because the Tribunal found that there was absence of adequate business consideration. The learned counsel for the revenue also relied upon Birla Gwalior Private Ltd. v. Commissioner of Income-tax, in which the High Court held that it was well settled that if an allowance was specifically dealt with by any one of the clauses of section 10(2), then clause (xv) which was a residuary clause, could not be resorted to. It is not necessary to deal with this aspect of the case as the contention of the learned counsel for the assessee is that the assessee is entitled to claim allowance of the amount of interest because, according to him, it was an expenditure laid out or expended wholly and exclusively for the purposes of business, profession or vocation of the assessee and not on account of interest on borrowed capital. The contention to be considered, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act." On the facts of that case the court held that the loss arising from misappropriation by an agent whose employment was incidental to the carrying on of business must be held to arise out of the carrying on of business and to be incidental to it. The court, however, pointed out that the loss for which a deduction could be made under section 10(1) must be one that springs directly in the carrying on of business and was incidental to it and not any loss sustained by the assessee even if it had come connection with his business. Applying the principle laid down by their Lordships of the Supreme Court only such-expenditure is allowable which is laid out or expended wholly and exclusively for the purpose of business, profession or vocation and which expenditure is incidental to the carrying on of the business of the assessee and which must be incidental to the business. The question, therefore, is whether it can be said in the present case that the amount of interest paid by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax v. Hindus' in Motors Ltd. In that case the assessee-company was engaged in the business of manufacturing motor cars. Its factory was situated within the territorial limits of Kotrang Municipality, at a little distance away from the G.T. Road. An approach road connecting the factory with the G.T. Road which belonged to the Government had fallen into disrepair and thus caused difficulty to the assessee in transport of manufactured motor cars from the factory premises to the place of their sale. The Government undertook to repair the approach road on the assessee's contributing in advance a sum of Rs. 39,7'70 to meet the costs of the repair to be carried out. The company paid the aforesaid sum to the Government and claimed the amount as expenditure, allowable under section 10(2)(xv) of the Income-tax Act, 1922. The Income-tax Officer and the Appellate Assistant Commissioner held that the expenditure was of a capital nature. On appeal the Tribunal allowed the appeal stating that the expenditure was wholly laid out for the purpose of facilitating the carrying on of its business that the enduring benefit went to the owner of the road and not to the assessee. On the asking of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r held that at the payment of interest on the amount borrowed for the purchase of plantation when the whole transaction of purchase and the working of the plantation was viewed as an integrated whole, was so closely related to the plantation that the expenditure could be said to be laid out or expended wholly or exclusively for the purpose of the plantation and from the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts. But in the case before us what is to be seen is whether the assessee by infringing the provisions of the statute and not depositing the cess in time whereby penal interest was imposed on him could claim that the amount deposited by way of penal interest was in any manner closely related to the assessee's business as a result whereof the expenditure incurred by way of penal interest could be said to be laid out or expended wholly or exclusively for the purpose of the assessee's business. We are unable to answer the question in favour of the assessee as the origin of the liability flows from a statute and in meeting his liability of depositing the penal interest it cannot be said that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant case the interest was paid by way of penalty by the assessee for having breached, the provisions of a statute. Lastly, the learned counsel for the assessee contended that if interest paid by the assessee was not allowable under section 10(2)(xv) the assessee was certainly entitled to the same under section 10(1) of the Act as tax has to be paid in respect of profits or gains of the business, profession or vocation carried on by the assessee and for computing the profits and gains of business, profession or vocation all relevant and legitimate expenses incurred by the assessee during the course of the business, profession or vocation have to be allowed. The learned counsel contended that when the amount of cess paid was itself an allowable deduction it does not stand to reason why interest paid on it should not be allowable. Besides, it was contended that the nature of the amount paid by way of interest was nothing but additional tax paid. In other words, the interest paid amounted to an increase in tax and has to be allowed under section 10(1) and that both logical and commonsense view of the aforesaid section would be that interest paid by the assessee was by way of augmenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and not by way of deduction under section 10(2)(xv). We do not think that any help can be drawn by the assessee from the above-cited case. Non-payment of Government dues cannot be said to be an act integrally connected with the business of the assessee because such an act is contrary to law and if penalty had to be paid, it cannot be urged that it was a legitimate business expenditure allowable under section 10(1). Support was also drawn from Calcmtta Company Ltd. v. Commissioner of Income-tax, in which their Lordships of the Supreme Court observed that the words "profits and gains" have to be understood in their commercial sense and there can be no computation of profits and gains until the expenditure which was necessary for the purpose of earning profit was deducted therefrom-- whether the expenditure was actually incurred or the liability in respect thereof had accrued even though it may have to he discharged at some future date. Now the point to be considered is whether the amount of penal interest paid was on account of the expenditure which was necessary for the purpose of earning the receipts of the assessee and hence deductible therefrom with a view to arrive at "prof ..... X X X X Extracts X X X X X X X X Extracts X X X X
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