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TMI Blog1951 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... comes, profits or gains which are assessable under sub-section (1) of Section 12. " The assessee is a private limited company which was incorporated on 3rd January, 1927. It is an investment company known as the Eastern Investments Limited. The objects set out in the Memorandum of Association are to buy, sell and otherwise deal with shares, securities, bonds and so forth generally. The company was originally form for acquiring, holding and otherwise dealing with shares and Government securities which had previously belonged to one Lord Cable. The share capital of the company at the date of its incorporation was 250 lacs and consisted partly of preference shares and partly of ordinary shares. Of these Lord Cable held the majority including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 12(2) of the Income-tax Act, that is to say, to use the words of the section, as " expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains. " This contention failed before the Income-tax Appellate Tribunal and also before the High Court. It was agreed all through that the expenditure was not in the nature of capital expenditure, but the view of the Income-tax Commissioner is that (a) it is not expenditure incurred for the purpose of earning the income, profits and gains of the company and (b) that even if it is, it is at any rate not expenditure incurred Solely for that purpose. In general, the Income-tax Appellate Tribunal and the High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business. " British Insulated and Helsby Cables Ltd. v. Atherton ; and (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word " solely ". A case somewhat similar to the present is Farmer v. Scottish North American Trust Ltd., where it was held that interest paid on an overdraft required for purchasing shares (the shares purchased being retained as security for the overdraft) was an outgoing which could be deducted from the receipts to ascertain the taxable profits and gains which were earned by them. In our opinion, the present case falls within these principles. One of the points whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Memorandum of Association. But we see no such difficulty. Clause 5 empowers a reduction of capital of the company and clause 3(3) empowers the company to borrow or raise money by the issue of debentures. The matter is clearly " writ in the bond ". Moreover, we do not think that this inquiry is relevant, for we are dealing with a question of income-tax and not judging the legality or propriety of the transaction on an application to reduce the capital of the company. The only question is whether this was done in the ordinary course of business for the purposes we have already pointed out however mistaken the directors and shareholders of the company may have been. Therefore, as stated by the Income-tax Appellate Tribunal in its stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequence the income accrued was in no way to be affected. " This has only to be stated to show the commercial nature of the transaction from the company's point of view. The High Court considered that the capital of the company could have been reduced in other ways. But that again is not the point. There are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income-tax Act. It was argued on behalf of the respondent (basing the same on paragraph 7 of the appellant's application to the High Court dated 5th April, 1947) that the company had at the time sufficient liq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that if the debentures were held by a third party, the interest payable on the same would be an allowable deduction in calculating the total income of the assessee company. What difference does it make if the holder of the debentures is a shareholder ? There appears to be none in principle in view of the fact that no suggestion of fraud is made in respect of the transaction which is carried out between the company and the Administrator and which has been sanctioned by the Court. If the debentures had been paid for in cash by the same party, no objection could have been taken to allowing the interest amount to be deducted. In principle, there appears to us no different, if instead of paying in cash the payment of the price is in the shape ..... X X X X Extracts X X X X X X X X Extracts X X X X
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