1. This is a reference under s. 256(1) of the I.T. Act, 1961, (referred to hereinafter as 'the said Act'), in which one question has been referred at the instance of the Commissioner and the order at the instance of the assessee. The question referred to us at the instance of the Commissioner, which we have numbered as question No. 1, runs as follows :
'(1) Whether, on the facts and in the circumstances of the case, the payment of interest by the assessee on the moneys borrowed for the payment of dividend is an allowance deduction under the Income-tax Act, 1961 ?'
2. The question referred to us at the instance of the assessee, which we have numbered as question No. 2, runs as follows :
'(2) Whether, on the facts and in the circumstances of the case, payment of interest by the assessee on the moneys borrowed for the payment of taxes is an allowable deduction under the Income-tax Act, 1961 ?'
3. The facts giving rise to this reference are as follows :
The assessee is a company incorporated under the Companies Act. It manufactures and sells sugar. In owns agricultural lands where sugarcane is grown and the cane grown is utilised in the manufacture of sugar in the factory of the company. The relevant assessment year is the assessment year 1964-65, for which the relevant assessment year is the one ended September 30, 1963. In the course of the assessment proceedings the ITO noticed that the assessee had an overdraft account with a bank, and that account was utilised primarily for making tax payments of about Rs. 12,500,000 and the payment of a dividend amount of Rs. 4,00,000 to Rs. 5,00,000. Interest paid by the assessee on this overdraft account to the bank in respect of the borrowing from it was claimed by the assessee as a deduction. The ITO disallowed the claim of the assessee regarding payment of interest on the overdraft account, amounting to Rs. 8,614. The AAC, on an appeal preferred by the assessee, upheld the order of the ITO. The assessee then preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal took the view that the I.T. authorities were not justified in disallowing the interest payable to the bank on the amount of the overdraft utilised for the payment of dividend to the shareholders for the respective year but that they were entitled to disallow the deduction of the interest payable in respect of moneys borrowed from the overdraft account for the payment of taxes. It is from this decision of the Tribunal that the aforesaid questions have been referred to us.
4. As far as question No. 1 is concerned, the deduction is claimed by the assessee under s. 36(1)(iii) of the said Act. The said provision runs as follows :
'36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-...
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession...'
5. There is an Explanation to this clause, but we are not concerned here with that Explanation. It is not disputed before us that the amount borrowed by the assessee for the payment of dividend must be regarded as a 'capital borrowing' within the meaning of cl. (iii) of sub-s (1) of s. 36 of the said Act, and, in fact, the generally accepted position is that the amounts borrowed by a company must be looked upon as a capital borrowing. The question to be considered really is whether the payment of dividend can be looked upon as being 'for the purposes of the business or profession' within the meaning of that phrase in the said cl. (iii). The submission of Mr. Joshi, learned counsel fro the Revenue, is that the dividends are disbursements of profits and that they cannot be looked upon as having been declared for the purposes of the business or profession. In this regard, we find that the Calcutta High Court in CIT v. Tingri Tea Company Ltd. : 79ITR294(Cal) , has distinctly taken the view that the payment of dividend must be regarded as included in the connotation of the expression 'purposes of the business' in s. 10(2)(iii) of the Indian I.T. Act, 1922. In that case the assessee, a sterling company, owned tea gardens in India. As a non-resident company, it had remitted profits from time to time to the United Kingdom for the purpose of declaration of dividend to its shareholders, and the surplus balance, after paying dividend, was kept with a bank in the United Kingdom as deposits. During the relevant accounting years the assessee-company paid interest accruing on its overdrafts to the banks in India, and the assessee claimed deduction of the amounts paid as interest paid on money borrowed for the purpose of its business. The ITO rejected the claim for each of the aforesaid years on the ground that the overdrafts from the banks were not incurred wholly and exclusively for the assessee's business. The AAC found that the assessee-company made remittances to the United Kingdom by taking overdrafts from the banks in India and the borrowings from the banks in India were partly invested in earning interest income in the United Kingdom. He sustained a disallowance of Rs. 18,920 for the assessment year 1958-59 and also maintained in full the disallowance by the ITO of the claims for interest for the other years. The Tribunal took the view that the correct way to interpret the transaction would be that the remittances to the United Kingdom were out of the profits earned in India and that the bank overdrafts in India had in fact been utilised in carrying on the assessee's business and the I.T. authorities were not justified in disallowing any part of the bank interest paid by the assessee in India on its bank overdrafts. On a reference to the High Court upheld the decision of the Tribunal. In the course of the judgment the learned judges of the High Court considered the scope of the expression 'for the purpose of business' used in s. 10(2)(iii) of the Indian I.T. Act, 1922, and in that connection they held that the payment of dividend is a part of the business of the company and one of its purposes. This is clear from the observations of the Division Bench set out at p. 298 of the aforesaid report. The Division Bench held that the purpose for which money was sent to the United Kingdom, namely, to pay dividend, was a purpose of the business within the meaning of s. 10(2)(iii) of the Indian I.T. Act, 1922, and that being so, the interest was properly claimed as a deduction by the assessee. Although this decision is on the construction of s. 10(2)(iii) of the Indian I.T. Act, 1922, it is common ground that this provision is in pari materia with cl. (iii) of sub-s. (1) of s. 36 of the Act (of 1961). It may be mentioned here that the aforesaid decision of the Calcutta High court has been cited with approval by a Division Bench of this court in Kishinchand Chellaram v. CIT : 114ITR654(Bom) . We cannot also lose sight of the fact that, as held by the Supreme Court in CIT v. Malayalam Plantations, Ltd. : 53ITR140(SC) , this expression is wider and it may take into account not only the day to day running of a business but several other matters. In view of this, we see no reason to take a view different from the one taken by the Calcutta High Court in the aforesaid case.
6. In the result, question No. 1 referred to above is answered in the affirmative and in favour of the assessee.
7. As far as question No. 2 is concerned, it is the accepted position that, as far as this court is concerned, this question is concluded against the assessee by the decision of this court in Kishinchand Chellaram v. CIT : 114ITR654(Bom) . In view of the aforesaid, the said question is answered in the negative and against the assessee.
8. Looking to the divided success achieved by the parties, there will be no order as to costs.