KUMARAYYA J. - The Income-tax Appellate Tribunal, Hyderabad Bench, as required by this court, under section 66(2) of the Income-tax Act, stated the case and referred the following question for determination :
'Whether, on the facts and in the circumstances of the case, the petitioner is entitled to the allowance claimed by her for the assessment years 1953-54, 1954-55 and 1955-56 ?'
The assessee years under referred are 1953-54, 1954-55 and 1955-56, the relevant accounting period being the years ending September 30, 1952, September 30, 1953, and September 30, 1954, respectively. The assessee is an individual deriving income from investments in Government securities, shares of public limited companies and immovable properties. She has no money-lending business and is not a money-lender by profession or vocation. She was shareholder and a director in a private limited company known as Bharat Development Corporation (Private) Ltd., Katpadi, in which some of her relations were also shareholders. The said corporation required financial aid. She, for that purpose, borrowed a sum of Rs. 1,25,000 from the Mysore Bank on interest at the rate of 3 1/4% per annum up to November 30, 1951, and at 4% per annum from and after December 1, 1951, and advanced the same to the said corporation at a higher rate of interest of 5% per annum. As she maintained accounts on the method of accrued basis in the assessments year 1952-53, she furnished the return disclosing, inter alia, the income of Rs. 4,948 as interest received from the corporation and as against that, she deducted Rs. 3,646 as interest paid to the Mysore Bank on the amount she had borrowed to advance to the corporation. The Income-tax Officer brought that amount to tax in that year. But the truth was that no interest for that or for subsequent years was actually received at any time by the assessee from that concern. On the other hand, the assessee herself waived the interest due on that account from the concern first till December 12, 1951, and them up to December 31, 1956, in response to the directors resolution dated November 27, 1953, and a subsequent resolution. Her assent was communicated by the letters dated December 27, 1953, and November 25, 1957. During this period, she had, of course, to pay interest to the Mysore Bank. In fact, in regard to the assessment year 1953-54, she paid Rs. 4,886 and for the subsequent years she had paid at the rate of Rs. 5,000 per year.
The assessees case before the Income-tax Officer was that the borrowing from Mysore Bank was for the purpose of earning income or profit by advancing the same as a loan to the corporation at a higher rate and that therefore the sums paid were allowable deductions. This contention was negatived by the Income-tax Officer on the ground that the loan was not a business transaction, that the amounts in question were not expenses incurred to earn income which was the subject-matter of the present assessment and that besides the waiver of interest was voluntary. A further contention raised by her related to a sum of Rs. 4,948 which was treated as the income in the assessment year 1952-53. She claimed this amount in the assessment year 1955-56 as a loss. The Income-tax Officer refused to allow this claim also for, according to him, it was a loss not because it was irrecoverable but because she herself had waived the same. In vain did the assessee carry the matter to the Appellate Assistant Commissioner and then to the Tribunal. The Tribunal held that the advances were made by the assessee to help the said corporation in which she and her relations were vitally interested and the transition could not be held to be a business transaction. It was held that the interest on the amount borrowed is not a permissible deduction as an expenditure solely made for earning income. As regards the interest for the year 1952-53, the Tribunal observed that it was taxed because the assessee had declared the same under 'other sources' and it was undoubtedly income and since there is no income during the year of account under the head 'other sources' the assessee could not claim any deduction on account of such income. His contention being thus negative, the matter is now before us on reference.
The question is whether the allowances claimed are permissible allowances under the statute. The Income-tax Act, it may be remembered, under section 3, renders the total income of an assessee chargeable, subject of course to certain exemptions. The total income of an assessee, under section 4 includes income, profits and gains from whatever source derived, accrued or arisen or received within or without the taxable territories. The income, profits or gains of an assessee liable to be charged is brought under six heads under section 6, and sections 7 to 12B quantify the tax. Sections 7 to 9 deal with the first three kinds of income shown in section 6. We are not concerned now with these. Items 4 and 5 that section must, however, come up for our consideration and these are covered by sections 10 and 12 of the Income-tax Act. To be more precise, section 10(2)(iii) and (xv) and section 12(2) are the relevant provisions which require careful examination for the purpose of this case. It is necessary to extract them here :
'10.(1) The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vacation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely.......
(iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid :
Provided that no allowance shall be made under this clause in any case for any interest chargeable under this Act which is payable without the taxable territories, not being interest on a loan issued for public subscription before the 1st day of April, 1938, except interest on which tax has been paid or from which tax has been deducted under section 18 or in respect of which there is an agent in the taxable territories who may be assessed under section 43 or, in the case of a firm, for any interest paid to a partner of the firm;.......
(xv) 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 capita expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.
12.(1) The tax shall be payable by an assessee under the head income from other sources in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads).
(2) Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of mankind or earning such income, profits or gains, provided that no allowance shall be made on account of -
(a) any personal expenses of the assessee, or......'
Section 10 is concerned with tax on profits and gains of business, profession or vocation carried on by the assessee. Under section 10(2), the tax on such profits or gains shall be computed after making allowances, inter alia, for the amount of interest paid in respect of capital borrowed for the purpose of the said business, profession or vacation. Admittedly, the money-lending was neither the profession nor the vocation of the assessee. In fact, the advance in question is solitary instance and was mainly calculated to accommodate the corporation of which the assessee was one of the directors. Can then this transaction be a business and the amount borrowed is the capaital for the said and the gains therefrom the gains of the business carried on by the assessee so as to attract the provisions of section 10 The word 'business' as defined in section 2(4) includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Ex facie, it is of wider import than the word 'profession' though the vocation may be a word of still wider significance. What does not amount to profession may amount to business. But it is essential that should be in the nature of trade, commerce or manufacture as contemplated by the definition. Whether a particular activity amounts to any trade is indeed a difficult question to answer. The Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. has observed that 'the words used in the definition business are no doubt wide but underlying each of them is the fundamental idea of continuous exercise of an activity.' Thus, the term 'business' must cannot some real, substantial and systematic or organised course of activity or conduct with a set purpose. No doubt, even a single and isolated transaction may be capable of falling within the definition of 'business' but only if it is an adventure in the nature of trade. The transaction therefore should bear clear indicia of trade. It seems difficult to hold that the transaction in question, having regard to its nature and the course of conduct of the parties, is within the definition of 'business' or 'an adventure in the nature of trade'.
It is no doubt true that the moneys that she obtained from the Mysore Bank on the pledge of securities purport to have been subsequently advanced at a higher rate of interest by her to the corporation and it is also true in the account books of the assessee, yet it is obvious from the conduct of the assessee that she was not intent on taking any interest though she herself had to pay interest to the Mysore Bank on the amounts borrowed. The amount advanced thus does not appear to partake of the nature of trade.
As already noticed, allowance under section 10(2)(iii) is permissible only if the tax is in respect of the profits or gains of any business of the assessee. Such allowances will be the amount of interest paid in respect of capital borrowed for that business. The capital so borrowed must have also been used for the purpose. That is what was held by Coutts-Trotter C.J. in Commissioner of Income-tax v. Somasundaram on the construction of the phrase 'capital borrowed for purposes of the business' as meaning capital borrowed and used for the purpose of business. The learned Chief Justice further observed that the business there must mean only the business the profits of which were being assessed in the year under consideration. In that case the assessee, who carried on business at various places, had borrowed some money in Madras but used only part of the same for his business at Madras and sent the balance to Ipoh to be utilised as capital in the conduct of his business there. Allowance was claimed of the interest paid on the entire amount but deduction was disallowed in respect of interest paid on such amounts as were remitted for capital to the Ipoh branch. It is clear section 10(2)(iii) has no application to the present case.
Section 10(2)(xv) also which makes and allowance for an expenditure laid out or expended wholly or exclusively for the purpose of his business or profession has no application on the same parity of reasoning. But the learned counsel for the assessee, relying on Commissioner of Income-tax v. Chandulal Keshavlal & Co., argued that the mere fact that the assessee had waived her right to interest for the period in question would not take the matter away from the province of section 10(2)(xv); that it was necessary for the income-tax authorities and the Tribunal to inquire whether the amount was given up for reason of commercial expediency. But, as already noticed, section 10 is attracted only if there is a business carried on by the assessee. That is the prime requisite. In case that condition is fulfilled, section 10(2)(xv) would be attracted provided the alleged expenditure is laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The case cited has no application to the facts of the present case. There the managing agent had agreed to accept only a sum of Rs. 1,00,000 as his commissioner even though the amount which accrued as commission for the year was Rs. 3,09,114. It was found that in the past also the managing agent had in the interest of the managed company similarly waived a portion of the commission and that the waiver of a part of the commission and that the waiver of a part of the commission was for reasons of commercial expediency and though it may be in the interests of the managing agent also as in the interests of the managed company, it was nevertheless in the interests of both, as both were closely linked with each other. If the managed company was put in a sounder position, not only the shareholders of the company would benefit thereby but also the managing agent would get a large commission. The remission therefore was not by way of bounty or voluntary gift but was actuated by purely commercial expediency which was calculated to result in a considerable benefit to the managing agents business. Their Lordships of the Supreme Court observed :
'..... it is a question of fact in each case whether the amount which is claimed as a deductible allowance under section 10(2)(xv) of the Income-tax Act was laid out wholly and exclusively for the purpose of such business and if the fact-finding Tribunal comes to the conclusion on evidence which would justify that conclusion it being for them to find the evidence and to give the finding then it will become an admissible deduction. The decision of such questions is for the Income-tax Appellate Tribunal and the decision must be sustained if there is evidence upon which the Tribunal could have arrived at such at conclusion.'
Their Lordships further observed :
'..... if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions so commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred of the purpose of the trade of the assessee it does not matter that the payment may enure to the benefit of a third party. (Ushers Wiltshire Brewery Ltd. v. Bruce). Another test is whether the transaction is properly entered into as a part of the assessees legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby...... But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee.'
It is manifest, therefore, that in order to justify deduction, that sum must be given up for reasons of commercial expediency. It may be voluntary but so long as it is incurred for the assessees benefit, the deduction would be climbable. The facts of the present case as found do not bring it within the dictum of their Lordship. Waiver by the assessee was not for reasons of commercial expediency which is likely to enure for the benefit of the assessees business, trade or avocation. The assessee was not carrying on any business in advancing the loan nor the waiver of interest was actuated by any considerations of eventual benefit in the transaction of loan that she made. This was obvious from the circumstances brought to light before the income-tax authorities. No further probe was necessary for the purpose. Nor did the assessee alleged any other circumstance before the authorities concerned which, if permitted to be proved, would affect the decision otherwise. Indubitably, section 10(2)(xv) has no application to the present case.
Then the question is whether the case falls under section 12. That section applied to cases where the income is from 'other sources'. It is wide enough to cover every kind of other income which may be included in the total income. The essential requisites for the application to section 12(2) are that (i) the expenditure should not be in the nature of capital expenditure; (ii) it should not be in the nature of personal expenses of the assessee; (iii) it should be incurred solely for the purpose of making or earning the income, profits or gains; and (iv) it must be incurred in the accounting year and not in any prior or subsequent year. So then if the amount borrowed by the assessee from the Mysore Bank is to be taken as an expenditure of the kind, it is essential that it should be incurred solely for the purpose of making or earning income. But the income-tax authorities have, on the circumstances of the case and the conduct of the parties, come to the conclusion that neither the advance not the waiver in question was a business transaction. Though the advance purported to bear higher interest, no interest was in fact recovered but, on the contrary, waived. In these circumstances, it appears the income-tax authorities and the Tribunal were rightly inclined to the view that the amount borrowed or expenditure incurred was not for the purpose of making or earning as income or profits.
It is argued by Mr. Krishna Reddi that to attract section 12(2) expenditure of the kind need not result in profit for that sub-section is concerned with the purpose of expenditure which must essentially be earning income and that once that purpose is established the case by reason of waiver of interest by the assessee would not fall out of the purview of the provision and therefore the interest paid on the capital was a permissible deduction. In support of his contention, he relied on Eastern Investments Ltd. v. Commissioner of Income-tax. There, no the facts, the case was indisputably within the ambit of section 12(2) but a question had been raised in view of the particular position of the party who took debentures. The assessee was an investment company. It was originally formed for acquiring, holding and otherwise dealing in shares and Government securities which belonged to Lord Cable. The majority of the shares of the company was held by Lord Cable and the balance was held by the nominees of the said person. After the death of Lord Cable, one of the executors, Geoffrey Lacy Scott, who was appointed administrator of his estate in India, needed some money. An agreement was reached with the company whereby the company agreed to reduce its share capital. Consequently, it took over the shares that stood in the name of Lord Cable. The executor on his part agreed to forgo each payment and to receive debentures of the face value of Rs. 50 lakhs carrying interest at 5 per cent. per annum redeemable at the portion of the registered holder at any time. The 5 per cent. interest was paid to Scott on these debentures. The company claimed to deduct this from its income as part of its working expenses under section 12(2). It was not disputed there that if the debentures were held by a third party, the interest payable on the same would be an allowable deduction in calculating the total income of the assessee company. The objection however was taken mainly on the ground that the person who took the debentures was the party who sold the ordinary shares. Their Lordships held that it made no difference for the applicability of section 12(2) whether the debentures were held by a shareholder or by an outsider. On merits their Lordships observed that, being an investment company, if it borrowed money and utilised the same for its investments on which it earned income, the interest paid by it on the loans is clearly a permissible deduction under section 12(2), that it was not necessary to show that the expenditure was a profitable one or in fact any profit was earned and further the fact that the transaction resulted in considerable benefit to the person who took the debentures is not a matter which will stand in the way, for, most commercial transactions are entered for the mutual benefit of both sides or at any rate, each side hopes to gain something for itself. The test thus would be not whether the other party was benefited nor indeed whether it was a prudent transaction which resulted in ultimate gain to the assessee but whether it was properly entered into us a part of the assessees legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business. The law as stated by their Lordships makes it abundantly clear that considerations such as whether it resulted in any profit to the assessee at all or that benefit had accrued to both the parties are out of place for the purpose of section 12(2). So then the expenditure, not being a capital expenditure, though unremunerative, is nevertheless is permissible allowance under section 12(2) if it is incurred solely for the purpose of earning an income or gain. The word 'purpose' came up for consideration before the Bombay High Court in Ormerods (India) Private Ltd. v. Commissioner of Income-tax. Whether that is the purpose or not depends upon the facts of each case. If the assessee was engaged in an trade or transaction was a commercial undertaking, there must ordinarily be a presumption that it is for the purpose of profit or gain. But the transaction in question is, as already observed, not of that kind. It must further be noted that the expenditure should be incurred solely for purposes of gain. That it was not solely for that purpose is evident from the waiver of interest. Her sole purpose seems to be to accommodate the corporation. While dealing with the expression 'purpose', the learned judges observed thus :
'Purpose may, in some context, suggest object; and purpose may sometimes suggest motive for a transaction. But under section 12, we have to read the word purpose in its legal sense to be gathered from the context in which it appears. We have to find out the meaning as far as possible from the language of the section itself and without attributing to the legislature a precise appreciation of the technical appropriateness of its own. But in whatever way we read the word purpose it cannot certainly mean a motive for a transaction. Much less can it mean the ulterior motive or the ultimate object of purchasing the shares by the company.'
There the assessee company had purchased certain shares to the tune of several lakhs of rupees and to pay for the purchase money took loan in a large measure. In the subsequent accounting years, which were relevant to the assessment years, it paid interest on the capital borrowed for the purchase of the shares but there was no income at all from those shares. The assessee claimed to set off this payment of interest against its other income in those years. The learned judges held that there was no other finding by the Tribunal that those shares were not purchased solely for the purpose of making or earning income, profits or gains and that the Tribunal had found that those purchases were investments of the assessee company. On the facts of the case and the finding so recorded by the Tribunal, the only possible conclusion that could be reached was that those investments were made for the purpose of earning income. This conclusion was obvious even from the fact that the Tribunal took the view that the assessee was entitled in respect of the three subsequent years to set off the payment of interest on the loans against the dividend income. The learned judges observed therefore that the purpose for the purchase was to earn profits though the motive for the purchase of the shares may be to benefit two of the persons. In the instant case having regard to the nature of the transaction and the fact and circumstances of the case, the Tribunal reached the conclusion that neither the advance not the waiver was a business transaction. The expenditure is said to have been incurred not for earning any income or gain but in order to accommodate the company in which her relatives are vitally interested. that is the reason why though higher interest was purported to be charged, it was never sought to be realised at all, but, on the contrary, waived. The waiver cannot be deemed to be a benefit to the corporation. The waiver thus was gratuitous. The course of dealings between the parties therefore shows that the assessee did not wish to make the advance a source of income. Whereas in order to bring the case within the ambit of section 12(2) it is necessary that the expenditure should be solely for the purpose of income or profit, it is implicit in the conduct of the parties that the assessee did not advance the money for the purpose of income or profits at all. When the purpose of the transaction is so obvious, the argument that the assessee should have been called upon to lead evidence as to the financial circumstances of the corporation as at the time of waiver must fall flat. It is clear that the case was not within section 12(2).
Now, when we consider the agreement as to the assessment year 1955-56 relating to the allowance of tax paid on the interest in 1952-53 it is shown as accrued due. This allowance seems to have been claimed on the basis that it was a bad debt. The Tribunal had held that it could not be considered as a debt much less a bad debt in the circumstances of the case. We do not think that this Tribunal was wrong in holding so.
On the above discussion, it follows that the question referred must be answered in the negative. We answer accordingly. The assessee will pay the costs of the department. The advocates fee is fixed at Rs. 200.
Reference answered in the negative.