T.D. Sugla, J.
1. The tribunal has referred one question to this court for opinion at the instance of the Department. The question reads thus:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest of Rs. 15,237 for delayed payment of income-tax is a deductible expenditure in computing the profits and gains within the meaning of sections 28 and 37 of the Income-tax Act, 1961 ?'
2. The assessee is a private limited company. The proceedings relate to the assessment year 1972-73. The business of the assessee is in real estate and money-lending. Both the business are carried on with common funds, during the previous year, the assessee earned a sum of Rs. 43,867 by way of interest in its money-lending business. It paid a sum of Rs. 15,852.67 by way of interest in the said business. The payment included a sum of Rs. 15,237 being interest paid to the Income-tax Department for allowing the assessee to make payment of its taxes in installments. The claim for deduction of this amount, i.e., Rs. 15,237, was rejected by the Income-tax Officer observing:
'Interest on income-tax paid being penal in nature not admissible.'
3. The Appellate Assistant Commissioner rejected that assessee's appeal on the ground that interest paid to the Department for late payment of tax was not an expenditure incurred wholly and exclusively for the purposes of the business. According to him, the issue was covered by this court's decision in the case of Bai Bhuriben Lallubhai v. CIT : 29ITR543(Bom) , and the Calcutta High Court decision in Mann alal Ratanlal v. CIT : 58ITR84(Cal) . The Tribunal accepted the assessee's claim that it was carrying on money-lending business and that the interest paid to the Income-tax Department was not of a penal nature. According to the Tribunal, the assessee's claim that the expenditure required to be considered in the background that the assessee was carrying on money-lending business and that if instead of making payment of tax by installments, the assessee had decided to make payment of taxes once for all and on time, it would have to withdraw monies utilised in the course of its money-lending business which, in turn, would have meant loss of income. Referring to the principles laid down in the Supreme Court decisions referred to in its order, the Tribunal was of the view that it was necessary in those matters to apply tests of commercial practice and accountancy principle and if those were applied, the assessee would be entitled to the deduction under section 28 and if not, under section 37 of the Income-tax Act, 1961. The Tribunal also held that the two decisions relied upon by the Appellate Assistant Commissioner, viz., Bai Bhuriben Lallubhai v. CIT : 29ITR543(Bom) and Mannalal Ratanlal v. CIT : 58ITR84(Cal) were distinguishable inasmuch as the assessee's in those cases were not carrying on money-lending business whereas, in the present case, the assessee was carrying on money-lending business.
4. Shri Jetley, learned counsel for the Department, submitted that the Tribunal was not justified in distinguishing this court's decision in Bai Bhuriben Lallubhai v. CIT : 29ITR543(Bom) and the Calcutta High Court decision in Mannalal Ratanlal v. CIT : 58ITR84(Cal) . He invited our attention to a recent decision of this court in the case of CIT v. Shree Changdeo Sugar Mills Ltd. : 143ITR469(Bom) , where, according to him, the same principles as laid down in Bai Bhuriben Lallubhai v. CIT : 29ITR543(Bom) and Mannalal Ratanlal v. CIT : 58ITR84(Cal) were applied. In particular, he emphasised that the payment of income-tax was always a personal liability. The payment itself was not an allowable deduction and. Therefore, interest paid for a personal liability which was not allowable as deduction could not be allowed as deduction. In response to a query from the Bench, Shri Jetley stated that it would make little difference whether the assessee borrowed money for payment of taxes or requested the Department itself to allow it to pay the taxes in installments and pay interest to the Department for allowing it to do so. Having regard to the hardship sometimes caused to assessees in this regard, he pointed out that section 80V was introduced in the Income-tax Act in the year 1976, providing for allowance of interest on sums borrowed for the purpose of making payment of income-tax. However, this provision remained on the statute book only for a period of ten years and was deleted with effect from April 1, 1986.
5. Shri Zaveri, learned counsel for the assessee, on the other hand, strongly relied on the order of the Tribunal. He laid great emphasis on the fact that the assessee was carrying on money-lending business and that the monies at his disposal were invested in that business. Inviting our attention to this court's decision in the case of CIT v. H H Maharani Shri Vijaykuverba Saheb of Morvi : 100ITR67(Bom) , learned counsel submitted that this court had, in the above decision, relying on this court's earlier decision reported in Bai Bhuriben Lallubhai v. CIT : 29ITR543(Bom) , held that payment of interest on borrowings for the purpose of discharging the estate duty liability was an allowable deduction. In particular, he took us through the observations of this court in that case in the first paragraph on page 76 which read:
'Now, applying this ratio to the facts of the instant case before us, it seems to us clear that the assessee in this case also had no other option except to incur expenditure in order to make the earning of an income possible and that the exercise of the option, in the circumstances of the case, was compulsory.'
6. He also placed reliance on this court's decision in the case of CIT v. Kishinchand Chellaram : 109ITR569(Bom) , where also the court, according to him. Took the same view following its earlier decision in CIT v. Bombay Samachar Ltd. : 74ITR723(Bom) . In sum, Shri Zaveri stated that when an assessee was carrying on business, what was required to be seen was whether the expenditure was incurred for the purpose of earning profit as commercially prudent and whether there was a direct nexus between the expenditure and the income earned. That the interest paid to the Income-tax Department was not a penalty, according to Shri Zaveri, needed no argument. It was obviously recompense for the money not available to the Department.
7. We have considered the rival contentions carefully. This court's decision in CIT v. Maharani Shri Vijaykuverba Saheb of Morvi (H. H.) : 100ITR67(Bom) was rendered in the context of the facts that the expenditure by way of interest on borrowings was incurred by the trustees for the purpose of discharging the estate duty liability, it was in fact not so as it was a charge on the immovable property. Therefore, the decision is to be read in the context of its peculiar facts. The two reasons have to be read together and this is clear from the following observations at page 77:
'The test for allowing a deduction under section 12(2) of the Act would not be whether the liability that was to be discharged was personal liability or not but whether the expenditure in the shape of interest that was incurred had any direct or indirect connection with the earning of the income. Which expression would include maintaining the income or preserving the income at the old rate. Since, on the facts of this case, it is clear that the borrowings were made by the trustees avowedly for the purpose of meeting the estate duty liability which attached to the property which was the subject-matter of the trust and that too for the purpose of maintaining or preserving the erstwhile income that was being received from the corpus of the said trust, in our view, the nexus between the expenditure incurred and the earning of the income could be said to be easily established. Therefore, in our view, the expenditure, in the instant case, will be a permissible deduction under section 12(2) of the Act since the test indicated in Bai Bhuriben Lallubhai v. CIT : 29ITR543(Bom) has been satisfied.'
8. Facts in the other decision of this court in CIT v. Kishinchand Chellaram : 109ITR569(Bom) , as found by the Tribunal, were that there were no fresh withdrawals during the years. The business was that of banking. There were no borrowals as such but only deposits were made by the clients and that during the years 1946-47 to 1951-52, the assessee was required by the Income-tax Department to pay large sums by way of income-tax and excess profits tax not against specific demands but on lump sum basis and it was only after considerable delay that an amount of Rs. 30 lakhs was refunded by the Revenue to the assessee and it was due to this fact that the assessee had to pay a huge amount of interest. Here again the facts are different and, therefore, the observations from here or there taken out of context would not really support the assessee's claim.
9. As it was vehemently argued by counsel for the assessee before the Tribunal and before us that the assessee's claim should be considered under section 28 itself if not under section 37, it is necessary to observe that section 28 merely provides that certain types of income referred to in that section shall be chargeable under the head 'Profits and gains of business or profession'. No doubt one such type of income is the profits and gains of business which was carried on by the assessee during the provide for deductions in respect of certain types of expenses some of which in reality are or may be taken into account by a businessman at the stage of arriving at the figure of profits and gains himself, it is difficult to accept, as a bald proposition of law, that all expenses which a businessman takes care of at the time of arriving at the figure of profits and gains should be treated as allowed under section 28 irrespective of whether sections 30 to 37 regulate the allowance in a particular manner, in this case, the assessee has admittedly not borrowed any amount and paid interest thereon. What has been done is that interest has been paid to the Department for allowing the assessee to make payment of income-tax already levied with reference to the income earned. Considered from this point of view. It will not be quite correct to say that this payment of interest to a person from whom money has been borrowed was to earn income as the tax is levied after the income is earned and not before it. In the premises, the claim cannot be considered at the stage of arriving at the figure of profits and gains under section 28. As regards section 37, the provisions appear to us to be clear. The section starts with negative conditions, after the negative conditions are satisfied, the section lays down a positive condition. It is only when both the negative and positive conditions are satisfied that an expenditure can be considered and allowed under section 37. The negative conditions are:
(i) The expenditure should not be of the nature described -
(a) under sections 30 to 36,
(b) under section 80VV, and
(c) in the nature of capital and personal expenses of the assessee.
10. If the expenditure satisfies these tests, it has to satisfy the positive test, namely, that it is laid out wholly and exclusively for the purpose of the business. As held by this court as far back as in Bai Bhuriben Lallubhai v. CIT : 29ITR543(Bom) , income-tax is a personal liability. The interest paid thereon or in connection therewith will be a personal liability except in exceptional cases like CIT v. Maharani Shri Vijaykuverba Saheb of Morvi (H. H) : 100ITR67(Bom) and CIT v. Kishinchand Chellaram : 109ITR569(Bom) . Therefore, assuming that the liability to interest in dispute was incurred wholly and exclusively for the purpose of the money-lending business, the expenditure being of personal nature, it cannot be allowed as deduction.
11. The fact that section 80V was introduced for this purpose and the provisions were later on deleted are not material for the purpose of considering the issue before us. The latest decision of this court on the issue is the decision in CIT v. Shree Changdeo Sugar Mills Ltd. : 143ITR469(Bom) . It was a case of interest paid on money borrowed which was utilised for payment of dividend to the shareholders of the company. The nature of payment of dividend is admittedly different from the nature of payment of tax. It was for that reason that the interest paid was allowed as deduction. We do not see how this case supports the claim of the assessee.
12. In view of the above discussion, the question of law referred to us is answered in the negative and against the assessee. No order as to costs.