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TMI Blog1964 (10) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... igation Co. Ltd. Pursuant to this authority the Bombay Steam Navigation Co. (1953) Private Ltd., hereinafter called " the assessee-company ", was incorporated on August 10, 1953. The assessee-company contracted with the Scindias on August 12, 1953, to purchase certain steamers, launches, boats, barges, buildings, furniture, fixtures and vehicles for a consideration provisionally estimated at Rs. 80 lakhs. It was provided by the agreement that the price of the assets sold will be satisfied by allotment to the Scindias of 29,900 shares credited as fully paid-up of the face value of Rs. 200 each in the share capital of the assessee-company, and the balance will be treated by the assessee-company as a loan granted by the Scindias. The agreement by clause 3(b) provided for payment of interest at 6 % on the unpaid balance of the purchase price. The clause stood as follows : " The balance shall be treated by the transferee company as a loan granted by the transferor company secured by a promissory note duly executed by the transferee company in favour of the transferor company and until it is repaid in full it shall carry interest of 6% per annum (simple) and shall be further secured by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovides : " The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him." Tax is payable under section 10(1) by an assessee on its profits or gains earned in the business, profession or vocation carried on by him in the year of account. If no business at all is carried on in that year, liability to tax does not arise under section 10(1). Clause (iii) of sub-section (2) of section 10 provides : " Such profits or gains shall be computed after making the following allowances, namely : --- .... (iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid. " The proviso and the Explanation with which we are not concerned in these appeals need not be set out. The expression " such profits or gains " in sub-section (2), on the plain language used by the legislature, means profits or gains of a business carried on in the year of account. In the computation of profits and gains of a business carried on in the year of account, allowances set out in clauses (i) to (xv) are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contractual liability to pay a debt was incurred, the court would be justified in regarding the transaction as one involving borrowing of the amount agreed to be paid by the assessee-company. It was said that if the assessee-company had borrowed the amount of Rs. 51,56,000 from a stranger and had paid the entire consideration to the Scindias, interest paid to the stranger would indisputably be an allowance admissible in the computation of taxable profits of the assessee-company, and there was no reason why a different principle should be applied when the Scindias in substance had made the requisite funds available to enable the assessee-company to purchase the assets. The transaction with the vendor could be regarded, it was also urged, as a composite transaction : (i) a transaction of borrowing Rs. 51,56,000 from the Scindias, and (ii) a transaction for payment of the entire consideration due for purchasing the assets from the Scindias. In our judgment this is not a permissible approach in ascertaining the true nature of the transaction. The parties had agreed that assets of the value of Rs. 81,55,000 be taken over by the assessee-company from the Scindias. Out of that considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct interest, paid on death duty to the Government of Ceylon on properties left by a deceased person. The court negatived the claim for such deduction. The amount which was not paid as death duty was used for the purposes of the business, but it could in no sense be regarded as a borrowing from the Government of Ceylon. The court held that section 10(2)(iii) contemplates lending of money and borrowing of the lender's money by the borrower with a contractual stipulation for repayment with interest on the loan : if a loan so borrowed is employed in or for the purpose of the business of the assessee, interest paid on such loan is a permissible deduction. But an amount due under a statute cannot be regarded as borrowed capital, for the expression " capital borrowed " predicates the relation of a borrower and a lender, which relationship did not exist in that case. The principle of Commissioner of Income-tax v. S. Ramsay Unger, on which strong reliance was placed by Mr. Viswanatha Sastri, does not come to his aid, for in that case the court held on the facts and circumstances that in substance the transaction which gave rise to the liability to pay interest was one of borrowing capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round for holding that the expenditure fell within section 10(2)(xv). Even in respect of a liability wholly unrelated to the business, it would be open to a creditor to sequester the assets of the assessee's business and such sequestration may result in stoppage of the operation of the business. Expenditure for satisfying liability unrelated to the business even if incurred for avoiding danger apprehended or real to the conduct of the business cannot be said to be revenue expenditure. Nor can it be said that because a liability has some relation to the business which is carried on, expenditure incurred for satisfaction of such liability is always to be regarded as falling within section 10(2)(xv). Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts an circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regared as an integral part of the profit-earning process and not for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax is agricultural income and not agricultural receipts. From the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts ... In principle, we do not see any distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of existing plantations : both are for the purposes of the plantation. " The test laid down by this court therefore was that expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business. The assessee-company had undoubtedly acquired the assets by pledging its credits. The assessee-company was formed for the purpose of taking over the business which the Scindias had acquired and for carrying on that business the assets with which the business was to be carried on were required. For obtaining those assets the assessee-company rendered itself liable for a sum of Rs 5,56,000 and agreed to pay that sum with interest at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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