Case: Eastern Investments Ltd Vs. Commissioner Of Income-Tax,West Bengal

we see no such difficulty. C1. 5 empowers a reduction of capital of the Co. and cl. 3(3) empowers the Co. 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 appln. to reduce the capital of the Co. 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 Co. may have been.15. Therefore, as stated by the Income-tax Appellate Tribunal in its statement of the case, the executors of Lord Cables estate needed money. In the next place, the transaction was brought about "at the instance of the holder of the majority of ordinary shares", and also that the shares were originally held by Lord Cable and his nominees. It seems evident therefore that Scott could have compelled the Co. to pay him cash for the shares. He seems to have had the whip hand. Instead of doing that he entered into an arrangement which, while giving him the necessary facilities, appears to have satisfied the Co. by allowing it to retain its investments without apprecipitate liquidation of a large portion thereof. It does not matter whether the Co. was right in this view or wrong, and in any event we are in no position to judge of the soundness of its decision because we have not all the materials before us. It has to be remembered that considerations of this kind go deeper than the apparent profit or loss on an isolated transaction standing by itself. It is not enough to say that the 50,000 shares which were cancelled earned in the following year only 31/2 per cent. interest as against 5 per cent. on the debentures because we do not know to what extent the holdings of the Co. 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 Co. were 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 Co.s point of view.16. The H. C. consd. that the capital of the Co. 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 Ct. to decide which of them should have been employed when the Ct. is deciding a question u/s. 12 (2) Income-tax Act.17. It was urged on behalf of the resp.(basing the same on para. 7 of the applts appln. to the H. C. dated 5-4-1947) that the Co. had at the time sufficient liquid resources to effect the reduction of capital desired and so it was not necessary to resort to this process. But that again is not the point. The Co. chose to do it this way and as there was not even a suggestion of fraud, the only question is whether it was gone through as an ordinary commercial proposition. But we doubt if that is what para. 7 meant because in para. 4 of the appln. to the H.C. dated 11-2-1944 the petnr. stated that the money on hand and at short notice was only Rs. 8,94,379. This is a good deal short of 50 lacs. However, we need not enter into this in detail.18. On a full review of the facts, it is clear that this transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the Co. and was made on the ground of commercial expediency. It therefore falls within the purview of S. 12 (2), Income-tax Act, 1922 before its amendment in 1939.19. This being an investment Co. if it borrowed money and utilised the same for its investments on which it earned income, the interest paid by it on the loans will clearly be a permissible deduction u/s. 12(2), 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 Co. 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 Co. and the Administrator and which has been sanctioned by the Ct. 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 difference, if instead of paying in cash the payment of the price is in the shape of giving over shares of the Co. when the transaction is not challenged on the ground of fraud and is approved by the Ct. in the re-organisation of the capital of the Co. In our opinion, therefore, the ground on which the Income-tax Appellate Tribunal and the R. C. disallowed the claim of the assessee is not sound.20. In our opinion, the H. C. has failed to appreciate the true position and the question submitted for its opinion should be answered in the affirmative.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]In our opinion, the law on this point has been correctly summarised in the judgment of the H. C. The following principles are relevant :(a) though the question must be decided on the facts of each case the final conclusion is one of law. Indian Radio and Cable Communication Ltd. v. Commissioner of Income-tax, Bombay, 1937 I. T R. 270 and Tata Hydro-Electric Agencies Ltd. v. The Commissioner of Income-tax, Bombay, 19371. T. R. 202;(b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned :John.Moore v. Stewart and Lloyds Ltd., (1906) 6 Tax cas501 and UsherWittshire Brewery Ltd. v. Bruce, 1915 A. O.433;(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 :"BritishInsulated and Helsby Cables Ltd. v. Atherton, 1926 A. C. 205 at pp. 221 and235; and(d) beyond that no hard and fast rule can be laid, down to explain what is meant by the word "solely."11. A case somewhat similar to the present is Farmerv. Scottish North American Trust Ltd., 1912 A. C.118 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.On a full review of the facts, it is clear that this transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the Co. and was made on the ground of commercial expediency. It therefore falls within the purview of S. 12 (2), Income-tax Act, 1922 before its amendment in 1939.This being an investment Co. if it borrowed money and utilised the same for its investments on which it earned income, the interest paid by it on the loans will clearly be a permissible deduction u/s. 12(2), Income-taxthe 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 Co. 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 Co. and the Administrator and which has been sanctioned by the Ct. 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 difference, if instead of paying in cash the payment of the price is in the shape of giving over shares of the Co. when the transaction is not challenged on the ground of fraud and is approved by the Ct. in the re-organisation of the capital of the Co. In our opinion, therefore, the ground on which the Income-tax Appellate Tribunal and the R. C. disallowed the claim of the assessee is not sound.20. In our opinion, the H. C. has failed to appreciate the true position and the question submitted for its opinion should be answered in the affirmative.