Govinda Bhat, J.
1. This is a reference under section 256(1) of the Income-tax Act, 1961, hereinafter called 'the Act' and it relates to the assessment years 1962-63 to 1965-66.
2. The question of law referred for the opinion of this court is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that part out of the interest paid by the assesses company on capital borrowed by it, as is attributable to advances given by it to its two subsidiaries free of interest, is admissible as deduction under section 36(1)(iii) of the Income-tax Act, 1961, for the assessment years 1962-63, 1963-64, 1964-65and 1965-66 ?'
3. The assessee, United Breweries Ltd., Bangalore, is a public limited company which carries on the business of manufacture and sale of beer. It had several subsidiaries. The two subsidiaries with which we are concerned and : (1) Ruttonjee & Co. Ltd Calcutta, and (2) Darlco Cannings Ltd., Bangalore. The business of Ruttonjee & CO. Ltd was the same as that of the assessee company. Darlco Cannings Ltd was carrying on the business of fruit processing and canning. The said subsidiaries had running accounts with assesses company. The balances-sheets of the assesses company for the relevant years showed funds due by the subsidiary companies to the assesses company. The assesses company neither charged interest to subsidiaries on the funds due to it nor paid any interest on the funds due by it. The assesses company had borrowed funds from outsiders on which it has paid interest from year to year. The Income-tax Officer took the view that since interest was not charged by the assesses company on the advances made to its subsidiaries but interest was paid by the assesses company on its borrowings, part of the interest paid on its borrowings was for non-business purposes and interest attributable for non-business purpose to the subsidiaries for the first two years, the average monthly balances of advances for the third year and the daily balance for the last year. He also found that the average of interest of the assesses company's borrowings was about 7 per cent. for the first three years and 8 per cent. for the last year. On the said basis, he disallowed the interest of Rs. 4,427, Rs. 4,599, Rs 30,577 and Rs. 1,70,059, for the assessment years 1962-63, 1963-64,1964-65 and 1965-66 respectively. The above amounts disallowed were held to be attributable to advances made by the assesses company to the aforesaid two subsidiaries and other subsidiaries of the assesses company.
4. The appellate Assistant Commissioner, on appeal preferred by the assesses company, held that in regard to the subsidiaries other than Ruttonjee & Co. Ltd. and Darlco Cannings Ltd., the advances were given to them by the assesses company out of its own funds and, therefore, deleted the disallowances pertaining them. With respect to the advances made to Ruttonjee & Co. Ltd. and Darlco Cannings Ltd., the Appellate Assistant Commissioner sustained the disallowances but directed that the quantum of disallowances must be calculated on the daily product system at 7 per cent. for the first three years and at 8 per cent. for the last year.
5. Before the Income-tax Appellate Tribunal, Madras Bench 'A', a number of ground were urged by the assesses company but the Tribunal, without expressing any opinion on the several grounds urged, allowed the appeals on the ground that the assesses company carries on its business through the agency of its subsidiaries and that in the instant case, the veil of corporate activities carried on by the lifted inasmuch as there is no distinction between the activities carried on by the holding company and its subsidiaries. In that view of the matter, the Tribunal held that when the assesses company borrows capital and puts it into the activities carried on by it through its subsidiaries, it must be said that the capital is borrowed for the purpose of the business of the assesses company and the interest paid for such borrowings falls within the claim permitted under section 36(1)(iii) of the Act.
6. It is well-settled that the mere fact that a man holds all the shares in a company does not make the business carried on by that company his business, nor does it make the company his agents for the carrying on of the business. That proposition is just as true if the shareholder is itself a limited company. It is also well-settled that there may be such an arrangement between the shareholders and a company as will constitute the company the shareholders' agent for the purpose of carrying on the business and make the business the business of the shareholders. It is, therefore, a question of fact in each case to be decided whether the subsidiary was carrying on the business as the company's business or as its own. The business of a subsidiary company can be regarded as the business of parent-company if in addition to the capitalist control, it has functional control' over its subsidiary.
7. The leading case on this question is Odhams Press Ltd. v. cook The facts were these : Odhams Press Ltd. was a company which carried on the business of printing and publishing a number of papers and periodicals; it had a number of wholly controlled subsidiaries and one of those subsidiary companies was a company called Coming Fashions Ltd. The holding company was doing printing work for its subsidiary company and charged ordinary trade prices for that work. During the year 1933-34, Coming Fashions Ltd suffered a loss on its trading operations amounting to 2,927 British Pounds. The amount charged by Odhams Press Ltd. to Coming Fashions Ltd. for the work done was 10,118 British Pounds. In the accounts of Odhams Press Ltd., the amount of the loss of Coming Fashions Ltd., viz., 2,927 British pound, was written off. The question was whether that sum was admissible as a deduction from the profits of Odhams Press Ltd. for income-tax purpose. The matter went up in appeal to the House of Lords. Viscount Maugham, in his speech, said thus :
'My Lords, there can be no doubt that limited companies who carry on business are separate taxable persons, and the profits and gains of their several businesses are separate profits and gains for the purposes of the Income-tax Acts. This is nonetheless true if one of the companies should be the parent-company, and the other or others may be its subsidiaries of which the shares are held or owned by the parent-company.'
8. Viscount Caldecote L. C. said thus :
'Now these facts seem to me to be evidence upon which the Special Commissioner might reasonably arrive at the conclusion that the sum written off was not so written off wholly and exclusively for the trade or business of the appellants. No doubt it was better for the appellants that their subsidiary companies, and this one amongst them, should prosper, and not be weighed down with debts. The same would be equally true of any company holding shares in another company and having trading relations with it. It is tempting to treat what I have called the subsidiary company as if it was part and parcel of the appellants, but, as the Master of the Rolls pointed out, the two companies are separate taxable persons. The trade or business of one company, even though it may affect very closely the trade or business of another, is not the same as that other's trade or business.'
9. Smith, Stone and Knight Ltd. v. Lord Mayor, Aldermen and Citizens of the City of Birmingham is a case where the court held that the business of the subsidiary company can be regarded as the business of the parent company. The parent-company which was a paper manufactured owned or controlled all the share capital of a subsidiary company carrying on the business of waste paper merchants, the directors of both companies being the same and getting their remuneration exclusively from the parent. The subsidiary had no staff of its own except a manager who had no access to the books which were kept by the parent. No dividend was ever declared by the subsidiary, its profits were simply treated as those of the parent. The premises on which the subsidiary company's business was carried on was owned by the parent and let at a nominal rent to the subsidiary on a yearly tenancy. The Corporation of Birmingham intended to purchase these premises under their compulsory powers, and the question arose whether the parent or the subsidiary was the proper party to claim compensation for disturbance of the business. In the latter case the Corporation of Birmingham would have escaped payment altogether because by section 121 of the Lands Clauses Consolidation Act, 1845, no compensation is payable to an occupier whose tenancy does not exceed one year. The parent-company argued : (1) that their business 'embodies their subsidiary company and that the subsidiary 'carried on its trade as a separate department of' the parent so that the rent was 'an inter-departmental charge and merely a book-keeping entry' -in other words, they said that the business belonged to the parent which carried it on in the name of the subsidiary. They also tried to establish (2) that the subsidiary was acting as agents for the parent, and that (3) any loss suffered as a consequence of the exercise by the Corporation of its compulsory powers would be suffered by the parent directly and not in its capacity as shareholder of the subsidiary.
10. In deciding in favour of the parent-company Atkinson J. made use of the ample material on this question contained in a large number of revenue decisions. He reviewed all the authorities and concluded that it was a question of fact in each case whether the subsidiary company was carrying on the parent-company's business or its own. He considered that six points were relevant for determining that question :
(1) Were the profits treated as those of the parent-company
(2) Were the persons conducting the business appointed by the parent-company
(3) Was the parent-company the head and brain of the trading venture
(4) Did the parent-company govern the adventure and decide what should be done and what capital should be embarked on it
(5) Were the profits made by its skill and direction and
(6) Was the parent-company in effectual and constant control
11. The learned judge answered all these questions in the affirmative in the case before him, and accordingly held that the parent-company was entitled to compensation for removal and disturbance on the compulsory acquisition of the land of its subsidiary.
12. The question as to when a subsidiary company can be said to be the agent of its parent-company has been dealt with by Govern in his Principles of Modern Company Law, 3rd edition, at pages 203 to 205. Where there is an rare occurrence. The agency can be implied from the relationship between the parent-company and its subsidiary. The true test appears to be whether there is, in addition to capitalist control, what one may call as 'functional control' by the parent over its subsidiary. If the parent-company did exercise functional control over its subsidiary, the existence of a subsidiary as a separate legal entity could not prevent the business of the subsidiary being treated as that of the parent.
13. In the instant case, the Tribunal found the following facts :
(1) that the business of the assesses company is to run a brewery and manufacture beer, as specified in clause 3(b) of its memorandum of association;
(2) that the objects-clause 3(c-2) as amended in December, 1957, also refers to processing and canning of fruits and other culinary products;
(3) that its memorandum of association authorises the assesses company to promote any other company for any purpose which may seem directly or indirectly calculated to benefit the assesses company;
(4) that clause 3(t) authorises the assesses company to lend money to any person;
(5) that pursuant to the above mentioned objects, the assesses company has acquired the controlling interest in its subsidiaries, the business of one of which, viz., Ruttonjee & Co Ltd., is the same as that of the assesses company; and
(6) that the purpose of the other subsidiary, viz., Darlco Cannings Ltd., is also one specified in the assessee's memorandum of association.
14. From the above facts, the Tribunal concluded that the assesses company carried on its business through the agency or medium of subsidiaries and expanding its activities through subsidiaries was only one of the modes of carrying on its business as brewers, processors and canners of fruits. There is no material for the Tribunal to come to the conclusion, as it did, that the assesses company carried on its business through the agency of its subsidiaries and that business carried on by the subsidiaries was not their own but of the assesses company. It was conceded before us by the learned counsel for the assessee that the assesses company and its subsidiaries were separate legal entities and that the latter are not mere emanations of the former. If the theory of agency cannot be supported, the Tribunal was clearly in error in the view it has taken that capital borrowed by the assesses company and advanced by it to its subsidiary free of interest was borrowed for the purpose of its own business and as such the claim for its reduction of interest is admissible under section 36(1)(iii) of the Act for the assessment years 1962-63 to 1965-66.
15. Accordingly, we answer the question referred in the negative and against the assessee.
16. By recording the above answer against the assessee on the question referred, it is not to be implied that the order of the Appellate Assistant Commissioner is confirmed,. It will be the duty of the Tribunal, conformably with the judgment of this court, to dispose of the appeals after hearing the assesses company and the Commissioner in the light of the evidence and according to law. It has to be noted for the assessment years 1962-63 and 1963-64, the assessment proceeding originally completed were reopened under section 147 of the Act with a view to bring to tax the interest expenditure disallowed. The assesses company had urged in its appeals T.A. No. 10831/65-66 and T.A. No. 111482/65-66 that all the relevant facts were available at the time of the original assessment for 1962-63 and 1963-64 and that no new facts had since come to light justifying the re-opening of the original proceedings. The Tribunal did not consider it necessary to go into the said ground since they were allowing the appeals and deleting the additions on the merits of the case(vide paragraph 12 of the order of the Tribunal, annexure 'D-1').
17. The assessee will pay the costs of this reference. Advocate's fee Rs. 250.