1. The assessee firm carried on the business of bleaching, dyeing and printing cloth in a factory at Tardeo. In the year of account, which corresponds to assessment year 1952-53, the assessee firm borrowed money in order to extend its business. It purchased a plot of land and erected additional plant and machinery and on this borrowed capital it paid interest and claimed this interest as a permissible deduction under section 10(2)(iii). The claim of the assessee was rejected on the ground that the plant and machinery were not used for the business in the year of account. The question that arises for our consideration is whether, in order to entitle an assessee to claim interest paid on borrowed capital, it is necessary that the asset which comes into existence by reasons of the use of the capital must be use in the year of account.
2. Before we look at the authorities, it would perhaps be best to turn to the section itself, and the deduction which is permissible under section 10(2)(iii) is 'in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid.' Now it will be noticed that the sub-section makes no distinction between capital borrowed in order to acquire a revenue asset and capital borrowed to acquire a capital asset. All that the section requires is that the assessee must borrow the capital and the purpose of the borrowing must be for the business which is carried on by the assessee in the year of account. The capital must be borrowed for the purpose of no other business except the business which is being assessed. Now, when we look at the other sub-clauses of section 10(2), it is clear that the underlying idea of these sub-clauses is that the particular deduction claimed must be in relation to the business which is referred to in sub-section (1) of section 10, that is, the business in respect of which tax is payable by an assessee. What is suggested by Mr. Joshi is that, in order that sub-clause (iii) should have any application, the particular asset which has come into existence by reason of the borrowed capital must be used in the year of account, and inasmuch as building, plant and machinery have not been used in the year of account, the interest paid on capital for erecting the plant and machinery cannot be a permissible deduction in the year of account. Mr. Joshi says that a businessman may borrow Rs. 10 lakhs in order to extend his business and the extended business may not start operating for five or ten years. In the opinion of Mr. Joshi, it would be impossible to contend that, although the capital is not being used for any profit-making activity of the business, still the assessee should be entitled to claim interest paid on that amount. Now, in putting forward this contention, Mr. Joshi is practically re-writing the section. Mr. Joshi wants us to read the section as if it was worded 'in respect of capital borrowed for the purpose of the business, profession or vocation, provided the asset which has come into existence as a result of the borrowed capital is used in the year of account'. In our opinion, there is no warrant for this suggestion. We are prepared to agree with Mr. Joshi that, looking to the whole scheme of sub-section (2), the capital which is borrowed must be used in the year of account. If the capital is used in the year of account and the use is for the purpose of the business, then it is immaterial whether the user of capital actually yields profit or not. What sub-clause (iii) emphasis is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. Mr. Mehta gave one or two illustrations which conclusively go to show that the construction placed by Mr. Joshi would be entirely unworkable. Assuming that an assessee wants to purchase stock-in-trade and he borrows capital, he purchases the stock-in-trade with the borrowed capital, but the stock-in-trade is not used for the purposes of his business in the year of account. Therefore, the assessee would never be able to claim interest paid by him on the capital as a permissible deduction because in the year of account he would pay interest and the stock-in-trade would be used but he had paid no interest which he can claim in that year. Now the answer which Mr. Joshi gives is rather ingenious. He suggests that, if the capital is used for the purpose of acquiring a stock-in-trade or a revenue asset, then interest paid on the capital may be a permissible deduction although the revenue asset may not be used in the year of account. But, according to him, the position is different if the capital is used for the purchase of a capital asset. In the case of a purchase of a capital asset, the capital asset must be used before interest can be allowed on the borrowed capital. Here again Mr. Joshi is adding words to the section which the section does not contain. Mr. Joshi draws a distinction between capital borrowed for the purpose of acquiring a capital asset and capital borrowed for acquiring a revenue asset. There is no warrant for drawing this distinction. Unlike section 10(2)(xv) which expressly excludes an expense of a capital nature, the Legislature has made no distinction in section 10(2)(iii) between capital borrowed for a revenue and a capital purpose. An assessee is entitled to claim interest paid on borrowed capital provided it is for the purpose of the business irrespective of what may be the result of using the capital which he has borrowed.
3. Some light is thrown on the meaning of the expression 'for the purposes of the business' by certain authorities which have construed section 10(2)(xv) because in section 10(2)(xv) the words used are identical : 'any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.' The courts in England and here have been concerned to construe what is the exact connotation of the expression 'for the purpose of such business'. We have a decision of the English court reported in Hughes (Inspector of Taxes) v. Bank of New Zealand. In that case the assessee bank spent monies in investing the funds of the bank in certain securities which yielded interest which was free from tax, and the contention of the Crown was that the bank was not entitled to deduct the expenses of investment because the securities which were purchased did not yield any profit which was subject to tax. This contention was rejected by the House of Lords and Lord Thankerton at pages 643-4 pointed out :
'It seems to me to be inconvertible that, in the present case, the investments in question were part of the business of the respondents' trade, and that the expense connected with them was wholly or exclusively laid out for the purpose of the trade. Expenditure in course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purpose of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense.'
4. Therefore, in order to determine whether capital has been used for the purpose of the business, it is not open to the Taxing Department to reject the claim of the assessee in respect of interest paid on that capital merely because the use of the capital is unremunerative. That really, in short, is the contention of the Department. The Department says that the assessee has borrowed capital, it has used the capital in putting up plant and machinery, the plant and machinery is not working, and, therefore, no profit is received from the plant and machinery.
5. The second English case is also instructive and that is Vallambrosa Rubber Co. Ltd. v. Farmer. There a rubber company had an estate one-seventh of which only produced rubber in the year of account and the other six-sevenths was in process of cultivation. The company claimed expenditure for superintendence of the whole estate as a permissible deduction, and the Court of Session, Scotland, considered this question and the Lord President (who ultimately became Lord Justice) in a forceful judgment points out at page 534 that the argument advanced by counsel for the Crown that nothing ever could be deducted as an expense unless that expense was purely and solely referable to a profit which was reaped within the year was a startling proposition and that proposition was only to be stated to be defeated by its own absurdity; and the learned Lord President rightly poses the question in all these cases of deductions that 'the rules framed in England', and the sections in our Act, 'are only guides because the real point is what are the profits and gains of the business'. Therefore, if a businessman borrows money to consolidate or improve his business and pays interest on it, can it ever be said from the commercial point of view that his profits can be ascertained without deducting the interest paid by him on borrowed capital
6. There is also a judgment of the Supreme Court which throws some light on this question and that is in Eastern Investments Ltd. v. Commissioner of Income-tax. The Supreme Court was considering section 12(2) of the Income-tax Act and the deduction permissible under that sub-section is in respect of 'expenditure incurred solely for the purpose of making or earning such income, profits or gains' and Mr. Justice Bose, at page 4, lays down various principles for deciding whether an expenditure comes within the ambit of section 12(2). One of the principles to which he draws attention is that it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned; and the second is that 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'. Therefore, just as in section 12(2) all that is necessary to be shown is that the expenditure was actually incurred for a purpose which is connected with the business, similarly under section 10(2)(iii) all that the assessee has got to show is that the capital which was borrowed was used for the purpose of the business.
7. Mr. Joshi lays strong reliance on the judgment of this court in Machinery Manufactures Corporation v. Commissioner of Income-tax. In that case we were construing an entirely different sub-clause of section 10(2) and that was sub-clause (vi); and what he held there was that the depreciation referred to in that sub-clause was allowable only in respect of buildings, machinery or plant used for the purpose of the business, i.e., used in the year of account. Now when we look at that sub-clause, it is clear that no other view was possible because the language used in that sub-clause is in the light of sub-clause (iv) 'buildings used for the purposes of the business'. So, as far as sub-clause (vi) is concerned, the Legislature has in terms laid down that the assessee cannot claim depreciation in respect of buildings, etc., which were not actually used for the business in the year of account. Now it is true that in this case we did consider the scheme of section 10(2), and this is what we say at page 211 : 'Therefore, the scheme of section 10(1) and (2) is clear. To start with there must be a business which is being carried on for the purpose of earning profits and those profits are being assessed to tax. It is in respect of that business that the assessee claims various allowances under section 10(2) and one of the allowance is depreciation, whether normal or initial.'
8. Therefore, all that we emphasized was that every allowance which can be permitted to the assessee must be in relation to a business which is being carried on for the purpose of earning profits and those profits are being assessed to tax. Now the assessee in this case is not claiming any allowance in respect of any other business than the business which is being assessed to tax. Mr. Joshi put forward a contention which it is extremely difficult to accept, that the extension which was intended and for which the plant and machinery were erected could not be considered as the same business which was carried on and which was being subjected to tax. It is not suggested by anyone, nor is there any finding of fact by the Tribunal, that the machinery and plant which were erected by the assessee were intended for any other business than the business which was being assessed to tax. The reason for disallowing the assessee's claim was that in the year of account the machinery and plant were not actually used for that business. That they were erected for the business is not disputed. Mr. Mehta wanted us to restrict the construction of section 10(2)(iii) to the actual words used by the Legislature, namely, 'capital borrowed', and his contention is that if the capital is borrowed in the year of account, then it is unnecessary that the capital should as a matter of fact be spent in the year of account. It is rather difficult to accept that contention, because if the capital was borrowed and was not utilised, it could not be said that the capital was borrowed for the purpose of the business. In other words, it could not be said that the capital served any purpose of the business in the year of account. We find that the learned Chief Justice of Madras, in a Full Bench sitting with Mr. Justice Wallace and Mr. Justice Beasley, interpreting this very section in Commissioner of Income-tax v. Somasundaram, takes the view that 'if necessary, I should be prepared to hold that the only reasonable construction of the section is to construe 'capital borrowed for the purposes of the business' as meaning capital borrowed and used for the purposes of the business.' But it should be noted that what the learned Chief Justice is emphazising is the user of the capital, not what Mr. Joshi is emphazising-the user of the asset which has come into existence as a result of the borrowed capital. But it is true that on the facts of this question would not strictly arise because the interest which is claimed by the assessee is in respect of capital which was actually used in the year of account.
9. The result, therefore, is that we must answer the question raised in the affirmative.
10. Commissioner to pay the costs.
11. Question answered in the affirmative.