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

1. This is an assessees appeal from a judgment of the H. C. at Calcutta delivered on a reference made to it u/s. 66 (1), Income-tax Act.The question submitted for the H. C.s opinion was as followsin 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-s. 1 of S. 12.The assessee is a private limited co. which was incorporated onIt is an investment co. known as the Eastern Investments Ltd. The objects set out in the Memo. of Assocn. are to buy. sell and otherwise deal with shares, securities, bonds and so forth generally. The co. was originally formed for acquiring, holding and otherwise dealing with shares and Government securities which had previously belonged to one Lord Cable. The share capital of the Co. 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 the 50,000 ordinary shares of the face value of Rs. 50,00,000 with which we are here concerned. The rest of the share capital was held by the nominees of the late LordLord Cable died on 28-3-1937 leaving an estate in Great Britain as well as in India. One Geoffrey Lacy Scott was appointed Administrator of his estate in India and held these 50,000 shares in question in that capacity.According to the statement of the case drawn up by the Income-tax Appellate Tribunal in its reference to the H. C., "Money was needed by the executors of Lord Cable," and accordingly the Administrator of the Estate in India reached an agreement with the co. on 9-2-1937 the terms of which were as followsThe Co. agreed to reduce its share capital by Rs. 50 lacs and to do it by taking over from Scott the 50,000 shares mentioned above which stood in Lord Cables name at the rate of Rs. 100 a share. Scott on his part agreed to forego cash payment and agreed instead to receive debentures of the face value of Rs. 50 lacs carrying interest at 5 per cent. per annum "redeemable at the option of the registered holder at any time." The sanction of the Calcutta H. C. 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 Ct. The Co. claims to deduct this from its income as part of its working expenses u/s. 12 (2), Income tax Act, that is to say, to use the words of the section,(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 H. C. It was agreed all through that the expenditure was not in the nature of capital expenditure, but the view of the Income-tax Comr. is that (a) it is not expenditure incurred for the purpose of earning the income, profits and gains of the Co. 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 H. C. both took that view.9. The grounds on which these conclusions were based may be summarised as follows:(1) the purpose of the agreement was to effect the conversion without in any way disturbing the holding of the investments of the Co. or interfering with the earning of its income;(2) by this transaction the taxable income of the Co, was diminished;(3) There was complete identity of the person who-(a) brought about this transaction without disturbing the affairs of the Co.,(b) to whom the share money was repaid, and(c) who took up the debentures;and (4) that the transaction was more in the interest of the shareholder Scott than that of the Co.The decision of this appeal rests on the true construction of S. 19 (2).

Reasoning: 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.