1. On a requisition made by this court under section 66(2) of the Indian Income-tax Act, 1922, the Tribunal has forwarded a statement of the case referring the following question of law of this court :
'Whether the sum of Rs. 1,17,500 claimed by the assessee-company as interest paid to Seth Gopaldas Mohta on the unpaid price of assets purchased can be allowed as an expenditure under section 10(2)(iii) or section 10(2)(xv) ?'
2. The facts relevant are : We are here concerned with the assessment year 1947-48, the relevant previous year being one ending with 30th June, 1946. Seth Gopaldas Mohta owned a spinning and weaving mill and a ginning and pressing factory at Akola. A public limited company styled as R. S. Rekchand Gopaldas Mohta Spinning and Weaving Mills Ltd. was incorporated under the Indian Companies Act on June 29, 1945. The main object of the new company was to take over the spinning and weaving mills and the ginning and pressing factory as a going concern. By a sale deed dated September 14, 1945, the said Gopaldas Mohta sold the buildings valued at Rs. 13,70,000 and machinery and plant valued at Rs. 33,30,000 to the company. It was not a cash sale, but shares of the value of Rs. 47,00,000 were to be issued to Gopaldas Mohta as a consideration for the assets transferred. Relevant terms of the contract on which the argument for the learned counsel turns is in the following terms :
'... for the price sum or Rs. 47,00,000 (Rupees forty-seven lakhs only), which shall be payable by the purchaser by allotment of 5,500 fully paid up preference shares of the value of Rs. 5,50,000 and 4,15,000 fully paid up ordinary shares of the value of Rs. 41,50,000 to be issued by the purchaser company after obtaining necessary consent from the Examiner of Capital Issues, Finance Department, Government of India, Delhi. Till such time of allotment of shares by the purchaser company to the vendors as hereinbefore mentioned, the said sum of Rs. 47,00,000 shall be a loan due to the vendor by the purchaser company. The loan amount shall carry interest at the rate of 3 per cent per annum....'
3. Now, the sanction from the Government for floatation of the company took some time and the shares were allotted by the assessee-company some time in April, 1946. Business however had been carried on throughout with effect from June 29, 1945. From the date of the commencement of the business to the date of the allotment of shares, interest was calculated at the rate of 3 per cent. per annum on the said amount of Rs. 47,00,000 and credited to the account of Gopaldas Mohta; corresponding debit was giving to the interest account. The amount thus paid by way of interest by the assessee-company to the said Gopaldas Mohta amounted to Rs. 1,17,500. The assessee claimed the said sum in computation of its income. The assessee claimed this amount as permissible allowance under section 10(2)(iii) of the Income-tax Act. The Income-tax Officer disallowed the claim of the assessee and refused to admit it as revenue expenditure. He, however, allowed the said amount to be capitalised and included it in the cost of the assets. The assessee took an appeal to the Appellate Assistant Commissioner of Income-tax and before him also the same stand was reiterated. The Appellate Assistant Commissioner dismissed the appeal of the assessee. The assessee took a second appeal before the Income-tax Tribunal and again before the Tribunal the assessee reiterated the same stand. The Tribunal took the view that it was a payment made for the delay in issuance of the shares, though it is styled as interest on loan. The payment was not a permissible allowance under section 10(2)(iii) of the Income-tax Act. Material part of the order of the Tribunal is in the following terms :
'It is a payment made for the delay in issue of the shares, though it is styled as interest on loan. Has the limited liability company borrowed any money for the purpose of the business and is the payment made as interest on moneys borrowed for the purpose of the business By this delay, Mohta does not suffer any loss whatsoever. The shares were issued to Mohta during the course of the year and if dividend was declared, Mohta would have got his dividend, as dividend is ordinarily not paid on the basis of the date of the issue of the shares. In any case, something paid for the delay in the issue of the shares, in our opinion, by no stretch of imagination, can be styled as a revenue item of expenditure which is incurred for the purpose of producing the profits. As a matter of fact, it has nothing to do with the carrying on of the business. Mohta would not have been in any better position if the shares were issued on the date the company received the commencement of business certificate. This item, in our opinion, has also not gone to increase the value of the asset and, therefore, is not an expenditure of a capital nature...'
4. In this view of the matter, the Tribunal dismissed the appeal. The application made by the assessee under section 66(1) of the Income-tax Act was dismissed by the Tribunal. The assessee then moved this court by an application under section 66(2) and on a requisition made by this court the aforesaid question of law is referred to us.
5. Before dealing with the merits of the case, it will be necessary to deal with the preliminary objection raised by Mr. Joshi, learned counsel for revenue. The preliminary objections are two-fold. In the first instance, Mr. Joshi contends that the question framed postulates that the amount of Rs. 1,17,500 paid by the assessee to the said Gopaldas Mohta was interest paid on unpaid price of assets purchased by the assessee-company. In our opinion, the construction sought to be put on the question framed by Mr. Joshi is not warranted. All that has been stated in the question is that the assessee claimed payment as interest paid by it to Gopaldas Mohta on the unpaid price of assets purchased by it. In our opinion, therefore, the question does not require any reframing in this respect.
6. It was next contended by Mr. Joshi that the assessee is not entitled to claim a deduction of the said amount under the provisions of section 10(2)(xv) of the Income-tax Act and, therefore, from the question the words 'or section 10(2)(xv)' should be deleted. It is the argument of Mr. Joshi that the assessee-company had never claimed before any of the income-tax authorities or the Tribunal that the said expenditure was a permissible allowance under section 10(2)(xv). It is only for the first time that the assessee in the application under section 66(1) of the Income-tax Act claimed a deduction of expenditure under section 10(2)(xv) and asked the Tribunal to make a reference to this court on the basis of section 10(2)(xv). That being the position, according to Mr. Joshi, the question does not arise out of the Tribunal's appellate order and, therefore, it is not open to the assessee to raise such a question before this court under section 66(2) of the Income-tax Act and claim a deduction therein.
7. Material part of section 66 provides :
'(1)... the assessee or the Commissioner may, by application... require the Appellate Tribunal to refer to the High Court any question of law arising out of such order (order under sub-section (4) of section 33, i.e., an order made by the Tribunal in appeal), and the Appellate Tribunal shall... draw up a statement of the case and refer it to High Court...
(2) If on any application being made under sub-section (1) the Appellate Tribunal refuses to state the case on the ground that no question of law arises, the assessee or the Commissioner, as the case may be,... apply to the High Court, and the High Court may, if it is not satisfied of the correctness of the decision of the Appellate Tribunal, require the Appellate Tribunal to state the case and to refer it, and on receipt of any such requisition the Appellate Tribunal shall state the case and refer it accordingly.'
8. It would be seen that the question which the assessee can ask the Tribunal to refer to the High Court must be one of law and it must arise out of the appellate order of the Appellate Tribunal. The power of the High Court under section 66(2) is exercisable on its coming to the conclusion that the refusal of the Tribunal to state the case was not correct. In other words, the power under section 66(2) is exercisable by a High Court if in the opinion of the High Court the question of law which the assessee or the Commissioner wants to raise is one arising out of the appellate order of the Tribunal and the Tribunal has erroneously refused to refer it to the High Court. It is not in dispute that the question whether the claim of the assessee that the said amount is a permissible allowance under section 10(2)(xv) is a question of law. The question, however, is, is it a question arising out of the order of the Tribunal
9. Now, it is an admitted position that the assessee had till the reference stage not argued or put forward a case that the said expenditure was a permissible allowance under section 10(2)(xv). In the statement of the case, the Tribunal has so stated :
'At the reference stage, the assessee raised an alternative contention that the amount be allowed under section 10(2)(xv) of the Income-tax Act. This was never the assessee's case before the Tribunal. Now that their Lordship have directed that this aspect of the case may also be considered, we proceed to deal with it. Under section 10(2)(xv) only such expenditure is allowed which is laid out or expended wholly and exclusively for the purposes of the business. In the present case, as we have explained hereinabove, the amount in question is no way concerned or even remotely connected with the carrying on of the assessee's business. Even if the shares had been allotted earlier, no benefit whatsoever could have accrued to the shareholders.'
10. It is clear that the assessee had been before the income-tax authorities and the Tribunal claiming that the aforesaid expenditure made by it was a permissible allowance. The claim no doubt was founded by assessee on the provisions of section 10(2)(iii) and at no time the assessee had called in aid the provisions of section 10(2)(xv). The question is whether in these circumstances the assessee could call in aid the provision of section 10(2)(xv) by asking this court to direct the Tribunal to state the case on this aspect.
11. Expression 'any question of low arising out of such order' (appellate order of the Tribunal) occurring in section 66(1) has been considered by their lordship of the supreme court in Commissioner of Income-tax v. Scindia steam Navigation Co. Ltd. After discussing the question, at page 611, their lordship have summarised their conclusions. The principles have been states in the placitum in the following terms :
'(1) When a question is raised before the Tribunal and is dealt with by it, is clearly one arising out of its order.
(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising of the order
(3) When a question is not raised before the tribunal deals with it, that will also be question arising out of is order.
(4) When a question of low is not low is neither raised before the Tribunal nor considered by it, it will not be a question arising out his order notwithstanding that it may arise on the finding given by it.'
12. A question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more then one aspect, requiring to be tackled from different standpoints. All that section 66(1) requires is that the question of low which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a questions itself a distinct question for the purpose of section 66(1) of the Act.'
13. It is argument of Mr. Joshi that the present case falls under category (4) of the four categories laid down by their Lordship. The question as to whether to said amount is a permissible allowance under section 10(2)(xv) was neither raised before the tribunal nor consider by it. It is therefore, not a question arising out of the order of the Tribunal. Mr. Mehta, learned counsel for the assessee, on the other hand, contends that the present case is one which falls under the concluding remarks of their Lordship. In our the contention raised by Mr., Mehta on behalf of the assessee is well-founded. In each case it has to be seen what was the question raised. Now the question raised in the instant case by the assessee was that the said expenditure of Rs. 1,17,500 incurred by the assessee in the accounting year was a permissible allowance. The contention undoubtedly was sought to be supported by calling in aid the provision of section 10(2)(iii) and not of section 10(2)(xv). But that by itself does not come in the way of the assessee in asking the Tribunal to refer the question of law to this court, as to whether the said expenditure was a permissible allowance under section 10(2)(iii) or section 10(2)(xv). As their Lordships have pointed out limiting the expression 'any question of law arising out the order of the Tribunal to the legal argument advanced before the Tribunal on the said question would be an 'over-refinement of the position' It has been pointed out their lordship that each aspect of the principal question raised before the Tribunal is not a distinct or separate question. The question that arises on the order of the Tribunal is the principal contention raised by the party. In other words the point at issue between the department and the Tribunal is the question rising out of the Appellate Tribunal. Here, the assessee on the one hand and the department on the other were at issue as to whether the said amount of Rs. 1,17,500 was permissible deduction or not. According to the assessee, it was a permissible deduction; according to the department, it was not. The contention of the assessee was tried to be supported on the basis of the provisions of section 10(2)(iii) of the Act. Now he want to seek support not only from section 10(2)(iii) but also from section 10(2)(xv). In our opinion, the provisions of section 66(1) and 66(2) do not come in the way of assessee in asking the Tribunal to raise such question and refer to it this court or in asking this court to make requisition directing the Tribunal to the state the case and refer it to this court. The following observation of their Lordship at pages 612 and of the report lend support to the view taken by us :
'In this view, we have next to consider whether the question which was raised before the High Court was one which arose out of the order of the Tribunal, as interpreted above. Now the only question on which the parties were at issue before the Income-tax authorities was whether the sum of Rs. 9,26,532 was assessable to tax as income received during the year of account, 1945-46. That having been decided against the respondents,, the Tribunal referred in their application under section 66(1), the question, whether the sum of Rs. 9,26,532 was properly included in the assessee company's total income for the assessment for the assessment year 1946-47, and that was the very question which was argued and decided by the High Court. Thus it cannot be said that the respondents had raised any new question before the court. But the appellant contended that while before the income-tax authorities the respondents disputed their liability on the ground that the amount in question had been received in the year previous to the year of account, the contention urged by them before the court was that even on the footing that the income had been received in the year of account, the proviso to section 10(2)(vii) had no application, and that it was a new question which they were not entitled to raise. We do not agree with this contention. Section 66(1) speaks of a question of low that arises out of the Tribunal.'
14. The preliminary contention raised by Mr. Joshi, in our opinion, therefore should fail.
15. Proceeding to the merits Mr. Mehta frankly concedes that is view of the decision of their Lordship in Bombay Steam Navigation Co. v. Commissioner of Income tax the expenditure would not be a permissible allowance under section 10(2)(iii) of the Income-tax Act.
16. The question to be considered is whether the amount expended could be claimed by the assessee as a permissible allowance under section 10(2)(xv). Section 10(2)(xv) is in the following terms :
'Any expenditure (not being an allowance of the neither described in any of the clauses (i) to (xiv) inclusive and not being in the nature capital expenditure or personal expenses of the assessee) laid out or wholly and exclusively for the purposes of such business, profession or vocation.'
17. It is the argument of Mr. Mehta that the expenditure of Rs. 1,17,000 is wholly and exclusively laid out for the purpose of business. The acquisition of the assets of Gopaldas Mohta was exclusively for the purpose of business. The payment of interest is an intergrated transaction closely connected with the running of the business. The assessee-company was gaining advantage. It had not to be find cash to pay the price. It was paying the price in the shape of share. For the issue of shares permissions of controller was required. That was bound to take time. For the period the company was not to allot to the vendor, the company had agreed to pay interest. It was closely connected with the running of the business and, therefore, the expenditure was wholly and exclusively laid out for the purpose of the business. In support of his arguments Mr. Mehta has placed reliance on the decision of their Lordship in Bombay Steam Navigation Co. v. Commissioner of the Income-tax and the certain observation of the lordship in State of Madras v. G. J. Coelho. Mr. Joshi, on the other hand, contends that the said two decisions have no application at all. Interest paid in the instant paid on the amount borrowed for purchasing assets. The price for the purchase of assets is allotment of shares. On the terms of the contract the interest paid is referable only to the delay that was bound to be caused in the allotment of shares inasmuch as previous sanction of the Controller was required. The parties fully well knew the position and the interest so paid has no connection whatsoever with the running of the business. In our opinion, the contention raised on behalf of the revenue is well-founded.
18. We have already referred to the relevant terms of the contract relating to the payment of interest. The agreement provides 'till such time of allotment of shares by the purchaser company to the vendor as hereinbefore mentioned the said sum of Rs. 47,00,000 shall be a loan due to the vendor by the purchaser company. The loan amount shall carry interest at the rate of 3 per cent per annum.' The parties have chosen to call the value of the assets as a loan and the interest that is paid is interest on loan. It is clear that the parties have not chosen to say that what was being paid was interest on unpaid purchase price. In fact, it could not be so said. The parties have agreed to pay the price in a definite manner and that was in the form of allotment of certain shares, viz., 5,500 fully paid up preference shares and 4,15,000 fully paid up ordinary shares, after obtaining necessary permission. Thus, under the agreement the price was agreed to be paid at later date. The substances of the transaction in brief is that Gopaldas Mohta who was running a mill as his proprietary concern was converting it into a limited liability concern. He full well knew, as the agreement itself discloses, that for converting the concern into a public limited company it was bound to take time, because previous sanction of the Controller of Capital Issues would be required. Running of the business was throughout carried on as it was. The statement of the case shows that the business commenced and was conducted right from the commencement of the incorporation of the company, i.e., from June 29, 1945. In fact, the business of the company appears to have commenced even before the asset had been transferred under the sale deed of September 14, 1945, i.e., nearly three months before the assets had been transferred. The statement of the case itself shoes that interest had been paid not from the deal of agreement viz, September 14, 1945, to the date the issue of shares but it had been paid from the date of the incorporation of the company to the date of the issue of share, that is interest had been paid by the company to the Gopaldas Mohta for a period even prior to the acquisition of the assets themselves. In our opinion, these being the facts and circumstances of the case, it is difficult to hold that the payment of interest has only concern whatsoever with the running of the business or the payment of the interest had been for the purpose of the business. The two decision on which reliance has been placed by Mehta, in our opinion, are distinguishable on facts and have on application.
19. It is indeed true that the expression 'for the purpose of the business' has a very wide import and has been so construed by their Lordships in Commissioner of Income-tax v. Malayalam Plantations Ltd. Relevant portion has been reproduced by their Lordship in State of Madras v. G. J. Coelho thus :
'The aforesaid discussion leads to the following result : The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits.' Its range is wide : it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.'
20. We fail to see how interest paid by the assessee-company to Gopaldas Mohta because shares could not be allotted on account of the necessity of obtaining the sanction of the Controller has any relevance to the carrying on or running of the business. As we have already pointed out, interest had been paid even for a period before the assets had been acquired under the sale deed.
21. In State of Madras v. G. J. Coelho the facts were : The assessee purchased an estate consisting of tea, coffee and rubber plantations. Out of the sale price he borrowed a certain amount agreeing to pay interest thereon. Interest paid by the assessee under the said agreement was claimed as a deduction under section 5(e) of the Madras Plantations Agricultural Income-tax Act, 1955. It may be stated that the provisions of section 5(e) of the Madras Act are in pari material with the provisions of section 10(2)(xv) of the Indian Income-tax Act. It was the contention of the revenue that the the expenditure incurred by paying interest was capital in nature; the contention raised on behalf of the assessee was that it was of revenue nature. Their Lordships held that it was impossible to dissociate the character of the respondent as the owner of the plantations and as a person working them. He had bought the plantations for working them as plantations. The payment of interest on the amount borrowed for the purchase of the plantations when the whole transaction of purchase and the working of the plantations was viewed as an integrated whole was so closely related to the plantations that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations. It would be seen that it was the interest paid on the amount borrowed to acquire business so that the assessee may be in a position to run it and to earn profit by running it. We have already pointed out that the interest paid here is on any amount which the assessee had borrowed; but, on the other, the substance of the transaction disclosed that the person was his private business into a limited company business. There was no acquisition. It was merely changing the nature and character of his own business. In the agreement the parties no doubt have chosen to describe the transaction as a loan, but the description given by the parties of the nature of the transaction has no effect of altering the true character of the transaction.
22. The facts in Bombay Steam Navigation Co. v. Commissioner of Income-tax Pursuant to a scheme of amalgamation between two shipping companies the assessee-company was incorporated to take over certain passenger and ferry services carried on by one of the former. Purchase price was agreed to be paid partly in the form of allotment of shares and partly in cash. Entire cash consideration agreed to be paid was not paid by the assessee and a part thereof remained unpaid. It was agreed between the parties to pay interest on the balance of unpaid price. The assessee-company claimed the expenditure incurred for payment of interest as an allowable expenditure under section 10(2)(iii) or section 10(2)(xv) or section 10(1). On behalf of the revenue, on the other hand, it was contended that the expenditure was capital in nature. The claim of the assessee under section 10(2)(xv) was upheld by their Lordships. In discussing the matter, their Lordships at page 59 of the report pointed out :
'Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.'
23. We have already pointed out that, on the facts and circumstances of the case, in our opinion, the expenditure has no relation whatsoever to the carrying on of the business. In fact, part of the claim refers to a period even prior to the acquisition of the assets. For the reasons stated above, in our opinion, the assessee is not entitled to claim the expenditure as a permissible allowance under section 10(2)(xv) of the Income-tax Act.
24. The question referred to us, therefore, is answered by us in the negative. The assessee shall pay the costs of the Commissioner.
25. Question answered in the negative.