TMI Blog1951 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... This is an assessee's appeal from a judgment of the High Court at Calcutta delivered on a reference made to it under Section 66(1) of the Income-tax Act. The question submitted for the High Court's opinion was as follows :--- " Whether in the circumstances of this case, the interest paid by the assessee on debentures was incurred solely for the purpose of making or earning such incomes, 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, bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annum " redeemable at the option of the registered holder at any time. " The sanction of the Calcutta High Court was obtained in due course and the agreement was carried out by the parties. The 5 per cent. interest paid to Scott on these debentures forms the subject-matter of the question before the Court. The company claims to deduct this from its income as part of its working expenses under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax, Bombay, and Tata Hydro-Electric Agencies Ltd. v. The Commissioner of Income-tax, Bombay; (b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned: Moore v. Stewarts and Lloyds and Usher's case ; (c) it is enough to show that the money was expended " not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily 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 Farm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction which resulted in ultimate gain to the appellant, but whether it was properly entered into as a part of the appellant's legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business. The High Court doubted whether the transaction could be brought within the functions of an investment company and found it difficult to reconcile it with the objects set out 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing year only 3 1/2 per cent. interest as against 5 per cent. on the debentures because we do not know to what extent the holdings of the company would have been disturbed if this had not been done. What we do know is what the Income-tax Appellate Tribunal has stated, namely, that---- " the change brought about had been so designed that the investments of the company were not to be disturbed and as a consequence 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned income, the interest paid by it on the loans will clearly be a permissible deduction under Section 12(2) of the Income-tax Act. Whether the loan is taken on an overdraft, or is a fixed deposit or on a debenture makes no difference in law. The only argument urged against allowing this deduction to be made is that the person who took the debentures was the party who sold the ordinary shares. It cannot be disputed 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 suggestio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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