TMI Blog1985 (6) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... 31, 1965, made a voluntary disclosure of income to the tune of Rs. 41.50 lakhs on which it had to pay income-tax of Rs. 24.09 lakhs within six months. The assessee had approached the Dena Bank of Bombay for furnishing the guarantee for the payment of tax within such time. The assessee claimed that it had to pay commission of Rs. 36,215 to the said bank for guaranteeing the payment of tax. The assessee-firm claimed deduction of this commission amount as business expenditure in the computation of its profit for the assessment year 1966-67. The Income-tax Officer, however, disallowed this claim. On appeal to the Appellate Assistant Commissioner, this disallowance was confirmed. On further appeal to the Income-tax Appellate Tribunal, the disallowance was confirmed following the decision of the Punjab and Haryana High Court in CIT v. Oriental Carpet Mfg. (India) P. Ltd. [1973] 90 ITR 373. The assessee prayed for a reference which was granted and the question set out above has been referred to us. On behalf of the assessee, the claim has been sought to be supported on three grounds. In the first place, the expenses incurred by way of commission charges paid to the bank for obtaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC)]. All that has to be considered by the court when such a question arises as to whether a particular item of expense is admissible or not is to see as to whether it is permissible under the Act, in the sense that it is not specifically prohibited and has been wholly and exclusively laid out for the business. It is also well established on authority that the expenses need not have been incurred necessarily. In Sassoon J. David Co. P. Ltd. v. CIT [1979] 118 ITR 261, the Supreme Court ruled in the context of section 10(2)(xv) of the Indian Income-tax Act, 1922, that the expression " wholly and exclusively " used in the said sub-section does not mean " necessarily ", and ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. It is ruled that such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act, even though there was no compelling necessity to incur such expenditure, and the fact that somebody other than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to the learned judge, gives a more liberal meaning to the expression " for the purpose of the trade " so as to include the purpose of protecting the assets of the company carrying on the trade, and also to the opinion of Lord Davey in Strong and Co. of Romsay Ltd. v. Woodifield L1906] 5 TC 215, where, over and above another accepted meaning of the words, " wholly and exclusively laid out for business " to mean that the disbursement must be made for purposes of earning profits, the test has been expanded to meet diverse situations, namely, whether the expenditure was incurred for removing the obstacles and impediments in the conduct of the business, and whether the amount has been paid in his capacity as a businessman or in his personal capacity. A reference was also made to the decision in Inland Revenue Commissioners v. Anglo-Brewing Co. Ltd. [1925] 12 TC 803, as to the meaning of " for the purpose of such business " which includes for the purpose of keeping the trade going and of making it pay. Subba Rao J. thereafter summed up the position as under : "The aforesaid discussion leads to the following result: The expression 'for the purpose of the business' is wider in sco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rning of profits and the payment of taxes are not isolated and independent activities of a business since these activities are continuous and take place from year to year during the whole period for which the business continues, and if the assessee takes any steps for reducing its liability to tax which resulted in more funds being left for the purpose of carrying on the business, there is always the possibility of higher profits. In the light of the above legal position, we have to answer the question referred to us for our opinion. It cannot be gainsaid that the purpose of obtaining the bank guarantee is to obtain the maximum time for the payment of tax as prescribed under section 68(1)(ii) of the Finance Act, 1965. Section 68(1)(i) requires a person making a disclosure to pay the amount of income-tax as computed at the rate prescribed along with his disclosure proposal or to furnish adequate security for the payment thereof in accordance with sub-section (2) and undertakes to pay such income-tax within a period not exceeding six months from the date of declaration as may be specified by him thereon. Sub-section (4) says that a person shall not be considered to have furnished a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses since, in the ultimate analysis, it is for the purpose of payment of tax. In support of this contention, the learned counsel relied on a number of decisions of different High Courts. The basic decision on which strong reliance has been placed is that of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. CIT [1961] 42 ITR 774, where a Division Bench of the Patna High Court held that the amount of income-tax paid by an assessee could not be deducted as a business expenditure for the obvious reason that the income-tax is not a deduction before an assessee can arrive at his net profit, and that it is not an expenditure for the purpose of earning profits, and, on the contrary, it is a case of application of profits after they have been earned and not expenditure necessary to earn such profits and, therefore, interest on money borrowed for payment of tax is not a legitimate deduction in computing the business profits. This principle has been approvingly reiterated by the Calcutta High Court in Mannalal Ratanlal v. CIT [1965] 58 ITR 84. The Calcutta High Court ruled that income-tax is not a part of the expenditure of the assessee and, therefore, interest that is paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty against the income-tax demands for purposes of computation of profits. This court in CIT v. Indumati Ratanlal [1968] 70 ITR 353, was concerned with a claim made by the assessee that a certain amount of interest paid on moneys borrowed for payment of estate duty was deductible under section 57(iii) of the Income-tax Act, 1961, from the dividends derived from the shares and securities. The Division Bench consisting of Bhagwati C. J. and Diwan J. (as they then were) held that there was no difference between interest paid on money borrowed to pay income-tax and interest on money borrowed to pay estate duty since the former was not paid for the purpose of making or earning the income, the latter was not made for the purpose of making or earning the assets, and whether interest paid is allowable under section 57(iii) of the Act or not depends upon the facts of each case. If, therefore, the property is received by person subject to a charge for payment of a liability and moneys are borrowed for clearing that liability, the interest paid on such borrowed moneys will be an allowable expenditure. In Gopaldas v. CIT [1977] 108 ITR 531 (Guj), the Division Bench consisting of Divan and T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incurred for the payment of tax either in the nature of payment of interest to the Government on delayed payment of taxes, or in payment of the interest on moneys borrowed from third parties are inadmissible does not stand at par when an assessee entails expenses for obtaining bank guarantee for securing adequately for the payment of tax as required under the Finance Act, 1965. The situation in the latter case is for staying the enforcement and giving time for satisfying the statutory requirement which otherwise would result in the assessee exposing himself to the liquidation of his assets or facing coercive processes. In the ultimate analysis, it is for the assessee to decide as to how best he can keep his trade going on and protect the business assets. We are, therefore, of the opinion that the income-tax authorities, and for that matter, the Tribunal, were clearly in error of law in holding that these expenses are not admissible expenses since, in our opinion, the authorities below have, with respect, not properly appreciated the full import and width of the words " for the purpose of business ". In that view of the matter, we must accept this reference and answer the question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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