TMI Blog1982 (6) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... tative also very ably replied the contentions of Shri Shah. However, in order to proceed further it may be necessary to state the facts which are in brief. 3. The assessee is a limited company carrying on business in manufacturing textiles in Ahmedabad. The assessee paid interest under section 220(2) of the Income-tax Act, 1961 ("the Act") in the assessment year 1977-78 which is the year under appeal (accounting year of the assessee being calendar year). The details of such interest are as follows: DETAILS OF INTEREST PAID TO INCOME-TAX DEPARTMENT UNDER SECTION 220(2) I Assessment year 1973-74 [Order dated 1-1 1-1976] Rs. Rs. i. On Rs. 12,00,477 from 12-12-1975 to 5-7-1975 79,379 ii. On Rs. 24,254 from 27-2-1975 to 5-7-1975 968 --------------- 80,347 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing amounts: Rs. 1. Bank charges 18,114 2. Credit extension charges 5,884 3. Counciling charges 140 4. Pump charges 243 5. Ocean freight 2,38,158 6. Mukadami 22,588 7. Dock charges 2,524 ----------------- 2,87,651 ----------------- Shri Shah fairly stated that the items are covered by the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re directly on the point, Shri Shah no doubt had difficulty in convincing us that the decisions should not be followed. His main plank of arguments is based on certain observations of Justice M.H. Beg, as he then was, in the decision rendered by the Supreme Court in the case of Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 and the observations of the Supreme Court in the case of CIT v. Birla Cotton Spg. Wvg. Mills Ltd. [1971] 82 ITR 166. No doubt he has also referred to the observations of the Supreme Court in the cases of Sassoon J. David Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 and Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429. The observations of Justice Beg in the case of Indian Aluminium are referred to for the purpose of accepting Shri Shah's proposition that in the case of a limited company any expenditure incurred is necessarily for the purpose of the business as a company comes into existence only with the object of carrying on business. This argument is advanced for the purpose of distinguishing all those decisions dealing with the claim for payment of interest on the ground that those cases dealt with individual or partnership firms. It is necessary at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is wholly and exclusively for the purpose of business. There are several tests laid down as to whether the expenditure is wholly and exclusively incurred for the purpose of business. Commercial expediency is one of the important tests laid down. It is equally well settled that the expression "for the purpose of business" is very much wider than the expression "for the purpose of making or earning income" occurring in section 57. But it is well known that, however, wide the terms of the expression "for the purpose of business" may be, there are inherent limits which have to be discerned with reference to the facts of each case. The expenditure must be incurred by an assessee as a trader. Recently, the Supreme Court had occasion to consider the claim regarding interest on money borrowed in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200. While dealing with the claim under section 10(2)(xv) of the 1922 Act the Supreme Court referred to various decisions on the point right from the decision of the Bombay High Court in the case of Bai Bhuriben Lallubhai v. CIT [1956] 29 ITR 543. It was observed by their Lordships in Jatia's case: "Proceeding to consider the claim for deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrying on the business." It is evident from the above that the expenditure in order to be allowed as a deduction must be incurred by an assessee in the capacity as a person carrying on business. Any expenditure incurred not in the capacity as a person carrying on business cannot be allowed as a deduction. It is unnecessary to multiply other decisions on the general principle. 11. In the above background let us consider whether the decisions of the Supreme Court in the case of Birla Cotton and Dalmia case lay down any principle by which the claim before us be allowed. In other words, whether the decisions of the Calcutta High Court in the case of National Engg. and that of the Punjab and Haryana High Court in the case of Oriental Carpet, disallowing a claim of the nature involved in this case, can be ignored on the ground that they are contrary to the decisions of the Supreme Court. 12. Birla Cotton's case dealt with the claim for expenditure incurred by an assessee in the proceedings before the Income-tax Investigation Commission. While allowing the assessee's claim, their Lordships observed: "The essential test which has to be applied is whether the expenses were incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has not paid the tax. In a way it is committing a default by retaining the Government dues. The statute provides for the payment of compensation by way of interest because the money is not paid. There is no question of reducing the tax liability so far as the assessee's conduct is concerned. We are, accordingly, of the opinion that the principle in the case of Birla Cotton is totally inapplicable to the case on hand. 14. Coming to Dalmia's case, the question that arose there is different. But Mr. Shah drew our pointed attention that the Supreme Court approved the decision of the Bombay High Court in the case of CIT v. H.H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67. Though, according to Shah, those cases dealt with deduction from out of income from other sources under section 57, the decision is very pertinent so far as this case before us is concerned. This leads us to the consideration of the decision of the Bombay High Court. There the question that arose was whether the expenditure in the form of interest paid on borrowings for the purpose of payment of estate duty, on the death of the owner, by the trustees under section 12(2) of the 1922 Act is allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to claim expenditure from the business income, any benefit which results in consequence of the expenditure must be taken to be simply a by-product and not its purpose. This principle is well recognised in law and we may refer to the decision of the House of Lords in the case of IRC v. Korner [1969] 74 ITR 584. Lord Donovan in his speech made the pertinent observations to the above effect. What we want to bring to light is that as a consequence of the assessee's default in not paying the taxes, the assessee was, no doubt, left with more funds. There is no positive step taken by the assessee by which it can be held that an expenditure was incurred which has direct or indirect connection with its business. 15. There were some arguments as to whether the interest charged under section 220(2) is penal in character and so, it cannot be claimed as deduction. The Gujarat High Court, no doubt, held that it is not penal in character but it is only compensation for the retention of the money---Bharat Textiles Works v. ITO [1978] 114 ITR 28 and Chandrakant Damodardas v. ITO [1980] 123 ITR 748. It is unnecessary for us to deal with this aspect further in view of the reasons given by us. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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