TMI Blog1964 (10) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... eam Navigation Company Ltd.---hereinafter called " the Scindias ". The scheme of amalgamation was sanctioned by the High Court of Bombay and the Scindias were authorised by the scheme to float and establish a joint stock company with the object of taking over the services on the Konkan coast and in the Bombay harbour which were originally plied by the Bombay Steam Navigation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business carried on by it the assessee-company claimed the two amounts paid as permissible allowances Under section 10(2)(iii) or under section 10(2)(xv). Alternatively, the assessee-company claimed that in the computation of the true profits of the business under section 10(1) the amounts paid as interest are necessarily allowable. Section 10, by the first clause, provides : " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of which was secured by the execution of a promissory note and a charge on the assets of the assessee-company. The substance of the transaction, according to counsel, was a loan given by the Scindias to its subsidiary---the assessee-company---for procuring the assets required for carrying on the business, even though the formal transaction did not record it as a loan, and, as a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unpaid. But that is not a real ground of distinction. The amounts in both the cases were paid as interest, but in neither case was interest paid in respect of capital borrowed. In V. Ramaswami Ayyangar v. Commissioner of Income-tax the assessee, who was carrying on a money-lending business, claimed that in computing his business income he was entitled under section 10(2)(iii) to deduct 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to an end and that in any event the expenditure was necessary on grounds of business expediency and incurred in order directly or indirectly to facilitate the carrying on of business. If the principal or the interest accruing due was not paid, the Scindias had undoubtedly a right to enforce their lien against the assets of the asscssee-company's business, but that cannot be regarded as a ground 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 mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation. In this connection, it is pertinent to note that what the Act purports to tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
