TMI Blog1977 (6) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1952-53, three more questions should be referred to. After the reference was filed in this court the assessee took out a notice of motion for directing additional questions to be raised by the Tribunal which it desired to raise. That motion was partly allowed by this court and the court directed the two additional questions to be referred to by the Tribunal and a supplementary statement of case to be submitted. These two additional questions are as under : " 1. Whether the income-tax department and/or the Tribunal were justified in disallowing the payment of interest under section 10(2)(iii) of the Act, if the amount was initially borrowed for purposes of the assessee's business and subsequently spent or utilised for the purposes of meeting the tax liability of partner ? 2. Whether there was any evidence and/or material before the Tribunal to hold that the amounts aggregating to Rs. 77,000 could in law be added as the undisclosed income of the Bombay head office ? " At the outset, it may be stated that the original question No.1, which has been referred to by the Tribunal has not been pressed by the assessee in view of additional question No. 1 directed to be referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erable thereto ought not to be permitted as a deduction while calculating income, profits and gains of the business. The income-tax Officer in his order took the view that the total liabilities of the assessee-firm amounted to Rs. 92,27,618 which was made up of these two items, viz., Rs. 21,22,874, partners capital account, and Rs. 71,04,746, deposits from creditors. He felt that the total interest paid to the creditors came to Rs. 1,43,243. According to him, the entire borrowings made by the assessee-firm were not fully utilised for the business activities of the firm but they had been partly applied for certain activities not connected with the business of the assessee-firm. In the extract annexed to his order he pointed out that funds to the extent of an aggregate sum of Rs. 18,85,630 were used by the assessee for non-business purposes and out of the total interest paid by the firm he disallowed an amount of Rs. 32,047 on the ground that the interest to that extent was referable to the utilisation of the borrowings made by the firm for non-business purposes. In an appeal preferred by the assessee, some of the claims of the assessee were accepted but the Appellate Assistant Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est on borrowing referable to that expenditure is clearly inadmissible. Ordinarily, it is true that in general law there is no distinction between a firm and the partners, but for purposes of income-tax they are separate entities and even according to general law, investments in the name of the individual partners do not necessarily belong to the firm, Similarly, income-tax liabilities of individual partners do not arise only out of their relation with the firm but they also arise out of the sources of income other than the firm itself. Even otherwise, amounts borrowed for the purpose of meeting tax liabilities cannot be said to be capital borrowed for the purpose of business, profession or vocation carried on by the assessee. After all, taxes are levied only after incomes or profits are determined and ordinarily they can be paid out of the income or profits to which they relate. It would not be necessary to borrow moneys in order to pay taxes because they ordinarily relate to the income that is earned and that is available for the payment of taxes. The Tribunal further pointed out that there would have been no need to borrow funds for discharging tax liabilities if the profits ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is incidentally for the purposes of business and must be allowed as a deduction falling under section 10(2)(iii) in computing the profits and gains of business. Mr. Joshi, on the other hand, on behalf of the revenue, submitted that it is not enough that the capital is borrowed for the purposes of business. In order that an allowance may be claimed under section 10(2)(iii) it must further be established that the capital that is borrowed is utilised for the purposes of business and if that is not done the interest referable to capital not used for purposes of business is not a permissible deduction under section 10(2)(iii). He emphasised that liability to pay tax is not an expenditure incurred for the purpose of business. According to his submission such liability arises for the first time after income has accrued and any utilisation of income after it is accrued cannot be regarded as a permissible deduction for computing the profits and gains of business. The provisions as regards liability to pay tax in respect of profits or gains of business are contained in section 10 of the Act. The relevant part of that section is as under : " 10. Business.--(1) The tax shall be payable b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-firm which carried on the business of bleaching, dyeing and printing cloth borrowed money in the year of account in order to extend its business, purchased land and erected additional plant and machinery and paid interest on the borrowed capital. In its assessment to income-tax in the relevant assessment year the claim of the assessee to deduction of the interest so paid under section 10(2)(iii) of the Act was rejected on the ground that the plant and machinery were not used for the business in the year of account. On a reference before the High Court, the Division Bench took the view that the assessee was entitled to the deduction claimed, even though the plant and machinery were not used in the year of account. The High Court pointed out the circumstances in which the provisions of section 10(2)(iii) will be attracted. According to the High Court, where the assessee claims deduction of interest paid on capital borrowed under section 10(2)(iii) of the Indian Income-tax Act, all that the assessee has to show is that the capital which was borrowed was used for the purposes of the business of the assessee in the relevant year of account. It does not matter whether the capital i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of business ; and, thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. It is not the requirement of the provision that the assessee must further show that the borrowing of the capital was necessary for the business so that if at the time of borrowing the assessee had sufficient amount of its own, the deduction could not be allowed. The above ingredients as laid down by the Madhya Pradesh High Court in Ram Kishan Oil Mills Ltd. v. Commissioner of Income-tax [1965] 56 ITR 186 were approved by this court, but at page 730 of the report, it is quite evident that at more than one place this court was careful enough to point out that the capital borrowed by the assessee from outsiders was admitedly used by the assessee for the purposes of business. Further, it also cited with approval a quotation from the case of Calico Dyeing and Printing Works [1958] 34 ITR 265 (Bom) referred to above. Thus, it is quite evident that the court proceeded on the footing that the amounts borrowed from outsiders on which interest has been paid have been used for the purposes of the business of the assessee. Even in the Madhya Pradesh High Court judgment (Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant year for the purposes of the business and paid interest amounting to Rs. 93,611. In the course of the year, monies amounting to Rs. 1,77,984 were withdrawn from time to time for household expenses. The question was whether a part of the interest paid on borrowed capital could be disallowed. The Andhra Pradesh High Court took the view that as the amounts were borrowed for the purposes of the business of the family and as no particular sum purporting to be borrowed on behalf of the business was spent for household expenses and the family was entitled to withdraw from the capital supplied by it thereby depleting the capital, the fact that part of the amounts borrowed was later on used for personal expenses did not deprive the assesses of the benefit of deduction of the entire interest paid on borrowed capital under section 10(2)(iii) and a part of the interest could not, therefore, be disallowed. With respect to the learned judges, it may be said that in the judgment not much reasons are assigned. It does not appear to have been argued before the High Court that the correct interpretation of the expression "capital borrowed for the purposes of business " is capital borrowed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he United Kingdom. He sustained a disallowance of Rs. 18,920 for the assessment year 1958-59 and also maintained in full the disallowance by the Income-tax Officer of the claims for interest for the other years. The Tribunal was of the opinion that, on the facts, the correct way to interpret the transaction would be that the remittances to the United Kingdom 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 and the income-tax authorities were not justified in disallowing any part of the bank interest paid by the assessee in India on its bank overdrafts. On a reference before the High Court, the High Court confirmed the view that was taken by the Tribunal. The High Court took the view that the inference of the Tribunal that remittances to the United Kingdom came out of the Profits earned in India and the bank overdrafts in India had, in fact, been utilised in carrying on the assessee's business, was sustainable in law, and on such inference or finding of fact, the Tribunal was right in holding that the income-tax authorities were not justified in disallowing any part of the bank's interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of taxes. He, therefore, submitted that even when any amount from the borrowed capital is utilised for the purpose of paying taxes such user is for the purposes of business and directly falls under section 10(2)(iii) and interest in respect thereof can be claimed by way of deduction. Reliance was placed by him on a decision of the Supreme Court in the case of Commissioner of Income-tax v. Malayalam Plantations Ltd. [1964] 53 ITR 140. In this case, the Supreme Court has taken the view while considering the provisions of section 10(2)(xv) of the Act that the expression " for the purpose of the business " is wider in scope than the expression " for the purpose of earning profits ". Its range is wide ; it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business ; it may comprehend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax is not a deduction before you arrive at the net profits of the assessee. It is said in an English case that income-tax represents ' the Crown's share of the profits '. It is not an expenditure for the purpose of earning profits. It is, on the contrary, a case of application of profits after they have been earned and not expenditure necessary to earn such profits. " Reliance was placed by the Patna High Court in the above case on a decision of the House of Lords in Ashton Gas Co. v. Attorney-General [1906] AC 10, At page 12, the Lord Chancellor states in the course of his speech as follows : " My Lords, so presented the case appears to me to be perfectly clear. The fallacy has been in arguing as if you can deduct from the income tax which you have got to pay something which alters what is the real nature of the profit. Now the profit upon which the income tax is charged is what is left after you have paid all the necessary expenses to earn that profit. Profit is a plain English word ; that is what is charged with income tax. But if you confound what is the necessary expenditure to earn that profit with the income tax, which is a part of the profit itself, one can understand h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore. The first two credits were made on March 26, 1951, as of March 19, 1951. The third credit was made on March 21, 1951, as of March 21, 1951 and the last credit was made on March 31, 1951, as of March 27, 195 1. The Income-tax Officer did not accept these deposits as genuine and added to the aggregate amount of Rs. 77,000 to the total income of the assessee as undisclosed profits on the following grounds : 1. That the assessee-firm, has not produced the deposit receipts in connection with these deposits, when it is the usual practice of the assessee to give a receipt for the amount deposited with them, which are subsequently returned to the assessee duly discharged on repayment of the deposit. This procedure does not appear to have been followed in these cases ; 2. The signatures in the sahi book alleged to be of the depositors do not bear any stamp ; 3. The deposits were repaid by means of bearer cheques and in two cases mentioned at Nos. 3 and 4 they have been encashed by persons other than those who have deposited the amounts ; 4. Where the depositor himself is purported to have signed in the sahi book of the assessee-firm, the cheque has been encashed by another p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been paid either in cash or by bearer cheques as appears from the sahi book. He also emphasised the fact that if these deposits are repaid within a period of less than three months from the date of the deposit there would be no earthly reason for the assessee to bring it as an undisclosed profit of his business. If regard be had to the common course of natural events then ordinarily a businessman if he wants to use undisclosed profits in business he will do so for a reasonably long period and not for a few weeks only. Alternatively, he submitted, if at all this is to be treated as undisclosed profits, it is that of the Pithore branch at Karachi and not of the Bombay branch because only by book entry the credit is given to these parties in the Bombay firm. On the other hand, Mr. Joshi on behalf of the revenue submitted that each one of the circumstances that has been relied upon by the Income-tax Officer as well as the Tribunal justified in coming to the conclusion that this was undisclosed profit which was liable to be added as profits and gains of business. At the outset it may be stated that, having regard to the facts and circumstances of the case, each one of the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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