Case: Messrs East India Pharmaceutical Works Limited Vs. Commissioner of Income Tax. West Bengal

This appeal by grant of certificate under Section 261 ofthe Income Tax Act, 1961 (hereinafter referred to as the Ac t) by the High Court of Calcutta is directed against the judgment and order of the Calcutta High Court dated 21.4.1978 in Tax Reference No. 404/75. On an application being filed before the Income Tax Appellate Tribunal Section 256(1) of the Act the Tribunal referred the following question for being answered by the Highon the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of interest of Rs. 28, 488/- on money borrowed for payment of income-tax was not an expenditure laid out wholly and exclusively for the purpose of business as contemplated by sub- section (1) of Section 37 of the Income-tax Act, 1961?"assessee is a company having an over draft account with a Bank. During the assessment year 1972-73 the assessee claimed a sum of rupees 28.488/- as an allowable expenditure under Section 37(1) of the Act, the said amount rep resenting the interest which the assessee had to pay on the over-draft amount, the said over-draft having been made for the payment of income tax. The Income Tax Officer dis-allowed the aforesaid deduction claimed by the assessee as he was of the opinion that the payment of income tax cannot be held to be the payment for the purpose assessee preferred an appeal and the Appellate Authority agreeing with the assessing officer came to hold that the over-draft utilised for payment of tax cannot he said to be for the business purposes of the company. In coming to the aforesaid conclusion the Appellate Authority relied upon the decision of the Calcutta High Court in the case of Mannalal Ratanlal Vs. Commissioner of Income-Tax, 1965 (58) ITR 182 . The assessee the carried the matter in second appeal before the Tribunal. Before the Tribunal it was contended by the assessee that the tax liability being to the tune of couple of lakhs. If the said liability would not have been discharged then the entire business of the assessee would have been crippled and, therefore, discharge of such liability from the over-draft account would be held to be an expense for business purpose. The Tribunal, however, relying upon the decisions of the Calcutta High Court in Mannalal Ratanlal Vs. Commissioner of Income Tax, 1965 (58) ITR 182 and commissioner of Income-Tax Vs. Calcutta Landing &Shipping co. Ltd. come to hold that the interest on money borrowed for payment of tax cannot be considered to be an allowable deduction in computing business profits. Having dismissed the assessees second appeal the Tribunal on an application being made referred the question for being answered by the High court, as already stated. The High Court of Calcutta by the impugned of tax cannot be said to be for the business purpose of the company. In coming to the aforesaid conclusion the Appellate Authority relied upon the decision of the Calcutta High Court in the case of Mannalal Ratanlal Vs. Commissioner of Income-Tax, 1965 (58) ITR 182. The assesses then carried the matter in second appeal before the Tribunal. Before the Tribunal it was contended by the assessee that the tax liability being to the tune of couple of lakhs, if the said liability would not have been discharged then the entire business of the assessee would have been crippled and, therefore, discharge of such liability form the over-draft account would be he ld to be an expense for business purpose. The Tribunal, however, relying upon the decisions of the Calcutta High Court in Mannalal Ratanlal Vs. Commissioner of Income Tax. 1965 (58) ITR 182 and Commissioner of Income Tax Vs. Calcutta Landing &Shipping Co. Ltd., came to hold that the interest on money borrowed for payment of tax cannot be considered to be an allowable deduction in computing business profits. having dismissed the assessees second appeal the Tribunal on an application being made referred the question for being answered by the High Court, as already stated. The High Court of Calcutta by the impugned judgment came to the conclusion that an expenditure cannot be allowed as a business expenditure under Section 37(1) of the Act unless it was incurred or laid out directly or indirectly by an assessee wholly and exclusively for the purpose of his business. It also came to the conclusion that the payment of Income-tax will not fall within the scope of expression "for the purpose of business". Relying upon the judgment of this Court in Birla cotton Spinning &Weaving Mills Ltd. it came to hold that the amount paid as income-tax is not an expenditure, not even a business expenditure and, therefore, the interest paid by a treader on the money borrowed for the payment of income-tax cannot be held to be a business expenditure on any commercial principle, not even on the ground of commercial expediency. It also further held that the payment of income-tax or the interest on the borrowed money for the payment of income-tax is not at all related with the purpose and object of the business and no element of trade in its commercial sense is involved in it. With this conclusion the High Court answered the question posed in the affirmative and in favour of the Revenue and against the assessee and thus this appeal.

Court's reasoning:
Having considered the rival submissions at the bar though we find considerable force in the arguments advanced by the learned counsel appearing for the appellant but in the facts and circumstances of the present case, on going through the order of the Tribunal as well as the question referred to by the Tribunal for being answered by the High Court and the arguments advanced before the Tribunal as well as in the High Court by the counsel appearing for the assessee, it is not possible for us to hold that any such contention, as was advanced before this court by the assessee had in fact been advanced either before the Tribunal or before the High Court. The question whether the presumption can be drawn that the taxes were paid out of the profits of the relevant year and not out of the over-draft account for the running of the business as was drawn in Woolcomberss case (supra) by the Calcutta High Court and was followed in 3 other cases of the same High Court, would essentially depend upon the fact as to whether the entire profits had been pumped into the over-draft account, whether such profits were more than the tax amount paid for the relevant year and all other germane factors. But when the assessee never advanced the contention either before the Tribunal or before the High Court does not bring within its seep the contention as is advanced by Mr.the aforesaid case the overdraft in question has been made by the assessee to discharge her personal obligation in pursuance to a promise made by her to donate a sum of Rs.10 lakhs for starting an Engineering College and the question of payment of income-tax liability did not arise in that case. The case, therefore, is not of any direct assistance to the present case. But the principle laid down therein, namely, if capital is borrowed to meet the personal obligation of the business then the expenditure cannot be regarded as a business expenditure cannot be regarded as a business expenditure would apply. As has been already noticed in Padmawatis case (supra) this Court has affirmatively held that meeting the liability for income tax was a personal liability and such expenditure can never be held to be wholly and exclusively for the purpose of earningthe aforesaid premises and in view of the question that arose out of the order of the Tribunal and which was referred by the Tribunal to the High Court for being answered given by the High Court. It may further be stated that even before the High Court the assessee has not taken any step to get the question referred in the light of the contention which were advanced in this Court by filing an application under Section 256(2) of the Act.