TMI Blog1983 (11) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... nk of India Broadway Branch, where it had an overdraft account. The deposit of the sum of 5.94 lakhs of rupees temporarily brought about a reduction in the balance due (to the bank) from the assessee. By its letter dated May 3, 1971, the assessee informed the Madras Motors and General Insurance Company Limited that it had sold the 4,500 equity shares held by it to twenty-two persons and, enclosing the share transfer deeds duly completed along with the share certificates, requested the Madras Motors and General Insurance Company Limited to give effect to the transfers. During the pendency of the proceedings for transfer, the assessee addressed a letter on August 9,1971, to the Madras Motors and General Insurance Company Limited drawing attention to its earlier letter dated May 13, 1971, and stating that as the assessee and the transferees had since agreed that the transfers need not be put through, the assessee was withdrawing its request for effecting the transfer of the shares. Therein, the assessee had also requested that the application for transfer may be treated as cancelled and the share certificates as well as the share transfer deeds and the declaration forms relating to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Tribunal concluded that as the assessee had done everything to part with its title in the shares in favour of the purchasers and the deal was called off only on August 9, 1971, when the assessee became liable to repay the amount, there was no liability on the part of the assessee to pay interest for that period and the claim of the assessee for deduction of the interest paid was, therefore, not in order. For the August 9, 1971, the Tribunal was of the view that the assessee had utilised the amount of Rs. 5.94 lakhs in the overdraft account, which was admittedly for business purposes, and as the assessee had paid only 10 per cent. interest to the persons to whom the amounts were returned, while the rate of interest payable on overdraft account was 10 1/2 per cent., the payment of interest was not excessive and was for the purpose of business and, therefore, interest from August 10, 1971, till the date of repayment would be an admissible deduction. A direction to rework and allow this sum as a deduction was given to the ITO. The first question referred to this court for its opinion at the instance of the Revenue under s. 256(1) of the I. T. Act, 1961 (hereinafter referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been for the purpose of the business of the assessee; and (3) the assessee must have paid interest on the said borrowing and claimed it as a deduction. We shall now consider whether, on the facts, in this case, the assessee has fulfilled the aforesaid requirements. The business of the assessee is the manufacture of fasteners used in automobile industry. The assessee purchased 4,500 equity shares of Madras Motors and General Insurance Company Limited in May, 1970. Subsequently, the assessee decided to part with the shares held by it for a consideration, by a resolution dated April 9, 1971. That resolution refers to an earlier resolution dated March 13, 1970, enabling the assessee to invest in the shares of Madras Motors and General Insurance Company Limited. These shares were intended to be held from the beginning as an investment of the assessee. The resolution dated April 9, 1971, stated that owing to a scheme for expansion of the assessee-company, additional resources over the paid up capital and bank borrowings were necessary and that with a view to pool the internal resources, the assessee decided to dispose of its shares in the Madras Motors and General Insurance Company Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deal fell through, cannot be regarded as interest paid on a borrowing of capital made by the assessee for purposes of the business, as the amount received by the assessee was not as a result of a transaction of borrowing or even intended to be such for purposes of the business of the assessee. The circumstance that these amounts came to be deposited by the assessee in its bank account for business purposes cannot in any manner affect or alter the position and convert the character of consideration received for transfer of shares into one of amounts received by borrowing for purposes of business. The deposit of the amount by the assessee into its bank account for business purposes is not a criterion for considering the true nature of the transaction. It so happened that the consideration received by the assessee for the sale of its investment in the form of shares in Madras Motors and General Insurance Company Limited was just deposited into the bank account of the assessee. If, at the inception, the amount was not borrowed as capital, we do not see how its subsequent deposit in the overdraft account of the assessee for business, will make it a borrowing. In other words, what was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tenancing the claim for deduction of interest which is otherwise not made out. Nor does the use by the assessee, of the amount received by it as consideration for the sale of shares, even for business purposes, justify the deduction of interest paid by the assessee treating the transaction as one of borrowing after August 9, 1971, for which there is no basis at all. We have earlier pointed out how at the inception the transaction never partook the character of a borrowing and that it would not make any difference, even if the assessee had deposited the consideration for the sale of shares received by it in the overdraft account with the bank maintained for business purposes and refunded the amounts as well from out of that account. The Tribunal was, therefore, in error in holding that payment of 10 per cent. interest by the assessee was not excessive and was for business purposes and would be eligible for deduction. We may now refer to the decisions to which our attention was invited by the learned counsel for the Revenue. In Metro Theatre Bombay Ltd. v. CIT [1946] 14 ITR 638 (Bom), under an arrangement to receive a long-term lease of property, the assessee agreed to pay the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded as a lender. Applying this to the present case, the assessee, at best, was a debtor, but the transaction by which the assessee became such a debtor, was not a loan borrowed and he cannot claim that there was a borrowing and the interest paid thereon by the assessee should be deducted. Again, in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC), where the assessee made a borrowing to meet her personal obligation and not any business obligation and had paid interest on such borrowing, the Supreme Court had no hesitation in holding that the expenditure incurred by the assessee by way of interest was not for carrying on business in her capacity as a person carrying on that business, and would not, therefore, be deductible either under s. 10(2)(iii) or under s. 10(2)(xv) of the Indian I.T. Act, 1922. In this case also, the business of the assessee is not dealing in shares, but the manufacture of fasteners used in automobile industry. Therefore, the payment of interest can, at best, be viewed as a self-imposed obligation on the part of the assessee to pay interest to the purchasers of the shares held by the assessee as its investment and totally unrelated to its business. We may n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... February 14, 1945, had all the essentials of a contract of loan and, therefore, the deposits received after that date constituted borrowed money for the purposes of r. 2A and that the deposits received by the assessees from May 5, 1944, to February 14, 1945, partook more of the nature of trading receipts than of security deposits and, therefore, the sums received during that period could not be regarded as borrowed money for the purpose of r. 2A. In doing so, the Supreme Court pointed out that the term " borrowed money " must be construed in its natural and ordinary meaning and implies a real borrowing and a real lending. In the light of the aforesaid principles and on the facts and in the circumstances of this case, the amount was received by the assessee only as consideration for the sale of the shares held by the assessee as its investment in another company and did not partake the character of any borrowing by the assessee from the buyers of those shares or lending by them to the assessee and the circumstance that the amounts were deposited by the assessee in its overdraft account for purposes of business was of no consequence and could not convert the transaction into one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be pressed into service by the assessee. We answer question No. 1 in the negative and against the assessee. That takes us on to a consideration of the second question referred and this relates to the allowance of deduction by way of depreciation on the full value of assets utilised for scientific research. In the assessment year 1971-72, depreciation was allowed to the extent of Rs. 2,082 in respect of assets acquired by the assessee in the immediately preceding year at a cost of Rs. 18,000 and used in research. The assessee sought to write off the balance in the assessment year 1972-73. The ITO, however, was of the view that at the time of the original assessment for 1971-72, no outright deduction of the whole of the capital expenditure under s. 35(2)(iv) was claimed and since some depreciation had been allowed, the depreciation admissible in this year would only be with reference to the written down value of Rs. 16,084. The AAC was of the view that since there was no incurring of expenditure, the assessee would not be entitled to a write off for the assessment year 1972-73 of either the original expenditure in full or the balance of the cost of the assets. It was also further f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevents the assessee from claiming the benefit of depreciation in respect of the assets for which relief had been granted under s. 35(2) only in the same year and there is no bar against claiming the relief of depreciation for the other years. Section 35(2)(iv) has been amended by Finance (No. 2) Act of 1980, with retrospective effect from April 1, 1962, which states that where a deduction is allowed for any previous year under s. 35 in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under s. 32 of the Act for the same or other previous years in respect of that asset. In view of this retrospective amendment, the reasoning of the Tribunal that the assessee is entitled to allowance of depreciation on the capital assets used for scientific research, even though the full value of the assets was allowed as a deduction under s. 35(2) in the earlier year, cannot hold good and since the amendment has been brought into effect from April 1, 1962, it would apply to the assessment year in question. We, therefore, answer the second question referred to us in the negative and against the assessee. However, there will be no order as to costs. - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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