TMI Blog1974 (12) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... estate raising mainly coffee in Yercaud. Each of them contributed Rs. 3,00,000 for the purchase of the said agricultural estate. The capital was provided by the two assessees by withdrawal of a like sum from the firm of Messrs. M.S.P. Nadar Sons with which they had a running current account. To the said account there are debits on account of drawings for personal income-tax, life insurance premia, etc. While the firm of Messrs. M. S. P. Nadar Sons gave credit to the two assessees in regard to the interest on the deposit put in by them, it also charged interest to the assessees on the drawings made by them at 9 per cent. per annum. The net result was that M. S. P. Rajah had to pay and M. S. P. Rajes Rs. 33,422 as interest on the debit balances in their account, as mentioned above. These payments of interest were for the accounting year ended March 31, 1964. The relevant assessment year with which we are now concerned is 1964-65. The two assessees claimed before the Income-tax Officer deduction for the aforesaid sums of Rs. 18,236 and Rs. 33,422 under section 36(1)(iii) of the Income-tax Act, 1961, against their share income from the two partnership concerns, namely, "M. S. P. Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve sums of Rs. 3,00,000 withdrawn from the firm of Messrs. M. S. P. Nadar Sons were provided to Riverdale Estate, which produced agricultural income exempt from Central income-tax, the expenditure relating to such activity had to be completely left out of account. The Tribunal, accordingly, held that the interest payable by the assessee on monies borrowed as mentioned above was not a permissible deduction under section 36(1)(iii). It is as against these conclusions of the Tribunal that the matter has been taken on reference before us. The learned counsel for the assessees submitted that the view of the Tribunal that because the activity of Riverdale Estate was agricultural, it would justify the disallowance, was erroneous. He contended that so long as the income from investment was liable to be taken into account as income (whether assessable or not) the interest paid for the investment was allowable under the Act. His point was that the agricultural estate represented a business asset and the question as to whether the income from this asset was taxable or not was not at all relevant. In the submission of the counsel, a partner could claim deduction under section 36(1)(iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conduct of the Ipoh business. Deduction was claimed in respect of the interest paid by the assessee on his borrowings. The question before the court was whether the interest paid to the extent referable to the remittances to Ipoh was liable to deduction in India. At that time the income from a foreign business was not liable to tax except when the profits were remitted and that too within a period of three years of being earned. At page 487 this court observed: "The question is, can this capital be said to be borrowed for the purposes of the business' ? What is the business? Obviously, the business whose profits are being assessed to taxation." The learned judges pointed out that to allow deductions in respect of interest on borrowed capital on the facts there would be inconsistent with the whole tenor and language of the Act and in their view-- " 'the business' meant the business whose profits were being assessed in the year under consideration." The same question came up for consideration before the Bombay High Court in Provident Investment Company Ltd., In re. In that case the Provident Investment Company Ltd., the assessee, an Indian finance company, borrowed so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral lands in repayment of his debts from such constituents. The question was whether he was entitled to deduction of the interest paid by him on so much of the capital borrowed for business purposes as was represented by the agricultural lands got in, under section 10(2)(iii) of the Act of 1922, in computing the profits and gains of his money-lending business. When the matter came on reference to this court, it quoted with approval the passage from the judgment in Provident Investment Company Ltd., In re set out already. This court held, after discussing the other authorities on the point, that the agricultural activities of the assessee were inextricably mixed with and incidental to the money-lending business and that the assessee was not to be deprived of the advantages conferred by section 10(2)(iii) because the capital benefiting therefrom happened to produce a non-taxable income. The same question as to whether in a single business there could be a partial disallowance, came up before the Supreme Court in a few cases. In Commissioner of Income-tax v. C. Parakh Co. (India) Ltd. the assessee carried on a single business at a number of places. In that case the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business, invested a large sum in Government securities, including securities the interest from which was exempt from tax. The question before the Supreme Court was whether the interest paid by the bank on monies borrowed had to be allowed in its entirety under section 10(2)(iii) of the Act of 1922 or could be disallowed proportionately to the extent invested in tax-free securities. At page 80 Sikri J., as he then was, observed: "Sub-section (1) (to section 10 of the Act of 1922) directs that an assessee be taxed in respect of the profits and gains of business carried on by him. What is the business of the assessee must first be looked at. Does he carry on one business or two businesses or along with the business carried on by him some activity which is not a business? If he is carrying on an activity which is not business, we must leave out of account the receipts of that activity. That is the first step. Secondly, we must look at section 10(2) and deduct all the allowances permissible to him. In allowing a deduction which is permissible the question arises: Do we, look behind the expenditure and see whether it has the quality of directly or indirectly producing taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cases in considering the question of deductibility of the expenditure. In the present case there is a finding by the Tribunal, which is binding on us, that the businesses carried on by the assessee through three different firms do not constitute a single business. This finding as such was not attempted to be challenged. In these circumstances, we have to apply the law as laid down consistently in cases where the assessee carries on distinct and separate businesses, and exclude from deduction the interest in so far as it related to the non-taxable activity. We have so far discussed the question as if it is bereft of authority binding on us. Mr. Jayaraman for the Commissioner of Income-tax brought to our notice the decision in P. Rm. S. Ramanathan Chettiar v. Commissioner of Income-tax, which appears to us to conclude the issue before us. In that case the assessee was doing money-lending business and was also receiving income as a partner in an agricultural estate. In computing his income from the money-lending business, he claimed deduction of a sum of Rs. 20,700 by way of interest on borrowed money. Out of this amount the Income-tax Officer disallowed a part being the portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has dealt with the income from different heads under different sets of provisions. Where one considers, for instance, the head "Business", it is necessary to find out whether the assessee carried on a single business or more than one business. If he carries on a single business, there is no difficulty in accepting the claim for deduction of a common item of expenditure, for, the fact that a part of the profits of the single business was not liable to be taxed, had no relevance in the disposal of the case for deduction. If, however, the assessee carried on more than one business, the claim for deduction in respect of each such business will have to be exempted. It is only after this first stage of arriving at the final result of each such business that the respective amounts of income will have to be aggregated and brought to tax under the head "Business". Thus, the stage of aggregation is posterior to the stage of examining the claim for deduction of any particular item of expenditure. Where an assessee is left with some expenditure which he cannot get deducted in the absence of a taxable source, then he cannot get the deduction from any other business to which it does not relate. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusion was identical. In Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax the question of the adjustability of unabsorbed depreciation against capital gains arose. The assessee had derived capital gains to the extent of Rs. 90,400. The business income of that year came to Rs. 37,703. The depreciation claimed was Rs. 52,985. There was thus a balance of unabsorbed depreciation of Rs. 15,282. The assessee contended that this unabsorbed depreciation had only to be carried forward and could not be set off against Rs. 90,400 determined as capital gains. The reason for this plea of the assessee was that the sum of Rs. 90,400 was eligible for relief from super-tax. The income-tax authorities did not dispute the eligibility of the claim of the assessee for his relief in respect of the capital gains. They, however, took the view that the capital gains had to be reduced to Rs. 15,282 so that the assessee would be eligible for the relief from super-tax only to the extent of the balance. It is in consideration of this claim that the Bombay High Court examined the question of adjustment of an unabsorbed depreciation. While pointing out that the unabsorbed depreciation could be ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court was considering the claim under section 12(2) after negativing the claim under section 10(2)(iii) cannot be lost sight of. Further, the income which was liable to be earned from the shares as dividends could be brought to tax under section 12, when earned. If the purpose of the assessee to earn the income by making the investment failed, it was considered to be a common misfortune to the revenue as well as the assessee. An expenditure remaining unadjusted will have the quality of loss only after computation under the Act. There is no scope for any such computation here, as far as Riverdale Estate is concerned. Further, loss cannot be the subject of consideration under section 36(1)(iii). The learned counsel for the assessee pointed out that in a later year the interest income and income from the sale of trees had been brought to tax. But those facts have not been adverted to in the statement of the case and are outside our purview. We cannot, at this stage, go into fresh facts adverted to by the assessee. The learned counsel for the assessee sought the aid from another principle, viz., that business carried on by a firm was the business carried on by the partners and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r setting up a tin printing factory. It had not commenced production in the relevant year. He advanced a sum of Rs. 1,68,334 to this firm for running the business of tin printing factory. He claimed allowance for interest on the said amount. The Kerala High Court upheld the claim of the assessee under section 10(2)(iii) of the Act of 1922. What is to be borne in mind in examining this decision is that the assessee in that case was liable to be taxed on the share income from the said firm. It was not a case where the activity was outside the scope of the Income-tax Act. The principle applicable to such a case is different from the principle applicable to a case where the income is outside the purview of the Income-tax Act itself. In fact, agricultural income is not something which is otherwise assessable to tax under the Income-tax Act but which was exempted from payment of such a tax. Agricultural income is so wholly outside the scope of the legislative power that the exemption thereof set out in section 10(1) of the Income-tax Act, 1961, can only be taken to be a clarificatory provision. Even without the exemption conferred by section 10(1), agricultural income would not be liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtner on capital borrowed by him for the purpose of investment in the firm. It proceeds on the basis that in computing the income chargeable on the profits and gains of business or profession, which the share income would come under, interest paid could be deducted from the share. There must be some share income in order to justify the assessee's claim for deduction under section 67(3). When there is none, it is not possible to accept the claim for deduction under that provision. When the claim for deduction under this provision is negatived, it is not possible to fall back under section 36(1)(iii) for a consideration of the same claim as, as pointed out already, in the case of interest payable by a partner for investment in a firm, the claim has to be considered only under section 67(3) and not under any other provision. In this view also, the claim under section 36(1)(iii) has to be negatived. Though the question mentions whether any "part" of the claim of the assessee could be allowed as deduction, there was no point taken before us that the figures required any further adjustment for any reason whatsoever. With reference to the amounts set out in the question, the answer is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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