B.K. Mehta, J.
1. At the instance of the assessee, the following question is referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of commission of Rs. 36,215 paid to Dena Bank, Bombay ?'
2. A few facts need be set out in order to appreciate the contentions urged in support of this reference and those which were urged for repelling the said contentions on behalf of the Revenue.
3. The assessment year under reference is 1966-67, the corresponding previous year being S.Y. 2021, which ended on October 24, 1965. The assessee, which is a registered partnership firm, carried on business in tobacco and bidi leaves and also of manufacturing bidis. The firm had its Held office at Nadiad with branches at various places in India, namely, Calcutta, Gondia, Tirora, Sihora, Saugar, etc. The assessee-firm had on March 31, 1965, made a voluntary disclosure of income to the tune of Rs. 41.50 lakhs on which it had to pay income-tax of Rs. 24.09 lakhs within six months. The assessee had approached the Dena Bank of Bombay for furnishing the guarantee for the payment of tax within such time. The assessee claimed that it had to pay commission of Rs. 36,215 to the said bank for guaranteeing the payment of tax. The assessee-firm claimed deduction of this commission amount as business expenditure in the computation of its profit for the assessment year 1966-67.
4. The Income-tax Officer, however, disallowed this claim. On appeal to the Appellate Assistant Commissioner, this disallowance was confirmed. On further appeal to the Income-tax Appellate Tribunal, the disallowance was confirmed following the decision of the Punjab and Haryana High Court in CIT v. Oriental Carpet Mfg. (India) P. Ltd. . The assessee prayed for a reference which was granted and the question set out above has been referred to us.
5. On behalf of the assessee, the claim has been sought to be supported on three grounds. In the first place, the expenses incurred by way of commission charges paid to the bank for obtaining the bank guarantee were for the purpose of protecting and preserving the property in the business of the firm since the assessee was under an obligation, on making a disclosure under the Finance Act, 1965 (No. 10 of 1965), to make payment within a period not exceeding six months. Secondly, it was entailed out of commercial expediency and, thirdly, the effect of furnishing the bank guarantee for a period of six months, which was the period granted by the authorities for the payment of tax, enabled the assessee to retain the amount of tax which was to the tune of Rs. 24,09,000 in the business and, therefore, it must be considered to have been entailed wholly and exclusively for the business.
6. The claim was sought to be resisted on behalf of the Revenue by urging that in effect and substance, the assessee was claiming some indulgence in the matter of time for making the payment of tax under the Act which is a statutory liability and, therefore, any expenses incurred either by raising the funds in specie or by obtaining the bank guarantee for securing the maximum period of six months prescribed under the said Act would not make any difference, and such expenses could not qualify for being treated as admissible expenses since the dominant purpose of obtaining the bank guarantee is to get some time for payment of the tax.
7. The question as to whether a particular item of expense qualifies itself to be admissible for purposes of computation of profit under section 37 depends on whether the expenses have been wholly and exclusively laid out for the purposes of business. It should be recalled that the words 'wholly' and 'exclusively' have been borrowed from Schedule 'D', clauses 1 and 2 of rule 3 of the U.K. Income Tax Act, 1918. The said rule prohibited all deductions in respect of disbursements or expenses not wholly and exclusively laid out, inter alia, for the purposes of trade or business. The adverb 'wholly' in the phrase 'laid out or expended... for business' refers to the quantum of expenditure. The adverb 'exclusively' has reference to the object or motive of the act behind the expenditure. Unless such motive is solely for promoting the business, the expenditure will not qualify for deduction. It is no doubt true that equitable considerations are irrelevant in determining whether a particular item of expense qualifies itself for deduction [see CIT v. Maharashtra Sugar Mills Ltd. : 82ITR452(SC) . All that has to be considered by the court when such a question arises as to whether a particular item of expense is admissible or not is to see as to whether it is permissible under the Act, in the sense that it is not specifically prohibited and has been wholly and exclusively laid out for the business. It is also well established on authority that the expenses need not have been incurred necessarily. In Sassoon J. David & Co. P. Ltd. v. CIT : 118ITR261(SC) , the Supreme Court ruled in the context of section 10(2)(xv) of the Indian Income-tax Act, 1922, that the expression 'wholly and exclusively' used in the said sub-section does not mean 'necessarily', and ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. It is ruled that such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act, been though there was no compelling necessity to incur such expenditure, and the fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under this section if it satisfies otherwise the tests laid down by law.
8. The classical passage in the decision of the House of Lords in British Insulated and Helsby Cables Ltd. v. Atherton  AC 205, 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' has been quoted with approval by the Supreme Court in Eastern Investments Ltd. v. CIT : 20ITR1(SC) . In CIT v. Malayalam Plantations Ltd. : 53ITR140(SC) , the Supreme Court was concerned with the question of admissibility of certain amounts claimed to have been paid by way of estate duty under section 84 of the Estate Duty Act, 1953, by a resident company incorporated outside India on the death of certain shareholders not domiciled in India, in computing the assessee's business income for the assessment years in question. In that context, the Supreme Court, speaking through Subba Rao J., ruled that the amounts paid were not allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922, as business expenditure because they were not payments for the purpose of the business, nor had they anything to do with the conduct of the business and the fact that on its default, if any, in the payment of the dues, the Revenue might realise the amounts from the business assets was the consequence of the default of the company in not discharging its statutory liability, but that would not make the expenditure any the more expenditure incurred in the conduct of the business. The obligation to pay estate duty under section 84 of the Estate Duty Act, 1953, was a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. The Supreme Court in that case explained as to what-would be the import of the words 'for the purposes of business'. Subba Rao J. surveyed the English as well as Indian decisions in that behalf and drew pointed attention to two English decisions, namely, southern v. Borax Consolidated Ll. : 10ITR1(Mad) , which, according to the learned judge, gives a more liberal meaning to the expression 'for the purpose of the trade' so as to include the purpose of protecting the assets of the company carrying on the trade, and also to the opinion of Lord Davey in Strong and Co. of Romsay Ltd. v. Woodifield  5 TC 215, where, over and above another accepted meaning of the words, 'wholly and exclusively laid out for business' to mean that the disbursement must be made for purposes of earning profits, the test has been expanded to meet diverse situations, namely, whether the expenditure was incurred for removing the obstacles and impediments in the conduct of the business, and whether the amount has been paid in his capacity as a businessman or in his personal capacity. A reference was also made to the decision in Inland Revenue Commissioner v. Anglo-Brewing Co. Ltd.  12 TC 803, as to the meaning of 'for the purpose of such business' which includes for the purpose of keeping the trade going and of making it pay. Subba Rao J. thereafter summed up the position as under (p. 150 of 53 ITR) :
'The aforesaid discussion leads to the following result : The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business...'
9. In CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. : 82ITR166(SC) , the assessee-company spent some amounts towards expenses in engaging lawyers and conducting appropriate proceedings before the Investigation Commission for its case relating to the assessment years in question before the court and also in courts where the vires of the statute under which the Commission was constituted were challenged. The question arose as to whether the charges so incurred in connection with the proceedings before the Investigation Commission could be deducted in computing the profits of the business of the assessee. The Supreme Court ruled that the charges were in the nature of expenses incurred for the preservation and protection of the assessee's business from any process or proceedings which might have resulted in reduction of its income and profits. In any case, the expenditure was incidental to the business and was necessitated or justified by commercial expediency since it was incurred by the assessee in apposing a coercive Government action with the object of saving tax and safeguarding the business and, therefore, allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Supreme Court observed that the earning of profits and the payment of taxes are not isolated and independent activities of a business since these activities are continuous and take place from year to year during the whole period for which the business continues, and if the assessee takes any steps for reducing its liability to tax which resulted in more funds being left for the purpose of carrying on the business, there is always the possibility of higher profits.
10. In the light of the above legal position, we have to answer the question referred to us for our opinion. It cannot be gainsaid that the purpose of obtaining the bank guarantee is to obtain the maximum time for the payment of tax as prescribed under section 68(1)(ii) of the Finance Act, 1965. Since 68(1)(i) requires a person making a disclosure to pay the amount of income-tax as computed at the rate prescribed along with his disclosure proposal or to furnish adequate security for the payment thereof in accordance with sub-section (2) and undertakes to pay such income-tax within a period not exceeding six months from the date of declaration as may be specified by him thereon. Sub-section (4) says that a person shall not be considered to have furnished adequate security for the payment of tax for purposes of sub-section (1) unless the payment is guaranteed by a scheduled bank or the person makes an assignment in favour of the President of India of any security of the Central or State Government. It should also be recalled that this disclosure scheme as available under the Finance Act, 1965 (No. 10 of 1965), was available for a period of three months only, that is, after the 28th day of February, 1965, and before the 1st day of June, 1965. If, therefore in order to obtain maximum time as permissible under the said Act, the assessee had obtained the bank guarantee and consequently paid the commission to the bank furnishing such guarantee, the purpose is apparent, namely, it was not merely for the protection and preservation of the property in the business but also to keep the business running so that it may earn profit. The failure on the part of the assessee to furnish bank guarantee as required under the Act would have exposed him to the payment of tax immediately, or the coercive measure that might follow as a result of non-payment of the tax. It may as well result in the disclosure proposal being not accepted by the Department. In other words, in order to avail himself of the benefit of the disclosure of the income accruing or arising from the business of the firm, he had to furnish the bank guarantee for obtaining some time as permissible under the Act. We do not think that it can be disputed that the purpose of obtaining the bank guarantee is clearly for running the business. The purpose of the business includes the purpose of protecting the assets of the firm carrying on the business as well as for keeping the trading going and making it pay [see Malayalam Plantations Ltd.'s case : 53ITR140(SC) where these principles have been extracted from Southern v. Borax Consolidated Ltd.'s case : 10ITR1(Mad) .
11. On behalf of the Revenue, however, a strenuous attempt was made to impress upon us that the arrangement of the bank guarantee in effect and substance was a device for obtaining some time for payment of the tax, and it cannot be differentiated from the transaction where a given assessee may try to arise funds for the payment of tax, or for that matter pays interest on such borrowings. Such expense, in the submission of the learned counsel for the Revenue, cannot qualify as admissible expenses since, in the ultimate analysis, it is for the purpose of payment of tax. In support of this contention, the learned counsel relied on a number of decisions of different High Courts. The basic decision on which strong reliance has been placed is that of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. CIT : 42ITR774(Patna) , where a Division Bench of the Patna High Court held that amount of income-tax paid by an assessee could not be deducted as a business expenditure for the obvious reason that the income-tax is not a deduction before an assessee can arrive at his net profit, and that it is not an expenditure for the purpose of earning profits, and, on the contrary, it is a case of application of profits after they have been earned and not expenditure necessary to earn such profits and, therefore, interest on money borrowed for payment of tax is not a legitimate deduction in computing the business profits. This principle has been approvingly reiterated by the Calcutta High Court in Mannalal Ratanlal v. CIT : 58ITR84(Cal) . The Calcutta High Court ruled that income-tax is not a part of the expenditure of the assessee and, therefore, interest that is paid by the assessee on any sum borrowed by him for payment of income-tax is not deductible from his net income. The Calcutta High Court relied on the decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh's case : 42ITR774(Patna) . The Calcutta High Court has again emphasised the same principle in East India Pharmaceutical Works Ltd. v. CIT : 114ITR591(Cal) , where the Division Bench of the Calcutta High Court ruled that in view of the statutory mandate in section 40(a)(ii) of the 1961 Act that notwithstanding anything to the contrary in sections 30 to 39, in computing the income chargeable under the head 'Profits and gains of business or profession', any sum paid on account of tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits and gains shall not be deducted, no commercial principle whatsoever can make it a deductible expenditure under section 37(1) of the Act. The Calcutta High Court was concerned with the question of a claim made by an assessee for deduction of the interest paid on the moneys borrowed for payment of income-tax in the course of the accounting year ended on December 31, 1971, corresponding to the assessment year 1972-73, when the benefit of such a deduction which was granted with the insertion of section 80V in the statute book with effect from April 1, 1975, was not available. The court, therefore, ruled that having regard to the mandatory provision contained in section 40(a)(ii), such a deduction is not permissible. The Division Bench, however, in the course of its judgment. observed that earning of profit and the payment of taxes are not isolated and independent activities of the business.
12. The Bombay High Court has also in Kishinchand Chellaram v. CIT : 114ITR654(Bom) adopted the same view that having regard to the statutory provision contained in section 10(4) of the 1922 Act which did not permit the deduction of the amount paid as tax for purposes of computation of profit, the deduction of interest on money borrowed for payment of tax is also inadmissible as a necessary corollary.
13. The Delhi High Court has also in CIT v. Dalmia Dadri Cement Ltd. : 125ITR510(Delhi) , disallowed a claim made on account of the payment of interest on arrears of tax to the Government as well as commission paid on shares borrowed for pledging them as security against the income-tax demands for purposes of computation of profits.
14. This court in CIT v. Indumati Ratanlal : 70ITR353(Guj) , was concerned with a claim made by the assessee that a certain amount of interest paid on moneys borrowed for payment of estate duty was deductible under section 57(iii) of the Income-tax Act, 1961, from the dividends derived from the shares and securities. The Division Bench consisting of Bhagwati C.J. and Diwan J. (as they then were) held that there was no difference between interest paid on money borrowed to pay income-tax and interest on money borrowed to pay estate duty since the former was not paid for the purpose of making or earning the income, the latter was not made for the purpose of making or earning the assets, and whether interest paid is allowable under section 57(iii) of the Act or not depends upon the facts of each case. If, therefore, the property is received by a person subject to a charge for payment of a liability and moneys are borrowed for clearing that liability, the interest paid on such borrowed moneys will be an allowable expenditure.
15. In Gopaldas v. CIT : 108ITR531(Guj) , the Division Bench consisting of Divan and T. U. Mehta JJ. held that the interest paid by a partner on the amounts borrowed from the firm for payment of his personal taxes cannot be claimed as a deduction under section 37 of the Income-tax Act.
16. The learned counsel for the Revenue relying on the above decisions urged that on a parity of reasoning, if any expenses, inter alia, such as commission on bank guarantee, have been entailed for purposes of obtaining some time for the payment of tax, it cannot be said that the expenses have been laid out wholly and exclusively for purposes of business for the E obvious reason that the expenses have been incurred for purposes, or at least for the mixed purposes, of satisfying the statutory liability which the partners of the firm are personally liable to satisfy in case the firm makes a default in satisfying it. We are afraid that this is too specious a contention to which we can adhere to. Our reasons for this disagreement are as under : The crucial test, as we have said, is as to what is the purpose of obtaining the bank guarantee. If the purpose is to protect the property from the consequences which may ensue for not complying with the provisions of the Finance Act, 1965 (No. 10 of 1965) which impose an obligation to pay tax immediately, we do not think that an exception can be taken by urging that this is not for business purposes and at least the mixed purpose is to save oneself from the personal liability. As we have said, this is to broad a contention. What we have to look to, as we have pointed out above, is that it is not a case of necessity which has a bearing on the question. If for the purposes of keeping the business going and making it pay, the assessee obtains a bank guarantee so that during the period for which the enforcement of the tax liability is stayed, the assessee seeks to achieve the dual purpose of not only protecting the assets of his business but retaining the tax amount in business so as to employ such amount profitably. We are afraid that the learned counsel for the Revenue was trying to enlarge the principles which have been laid down and enunciated by different courts as stemming from the statutory provision like section 40(a)(ii) of the 1961 Act, or section 10(4) of the 1922 Act, and we do not think that the attempt is well founded. The two situations are materially different. The situation where the courts have held that the expenses incurred for the payment of tax either in the nature of payment of interest to the Government on delayed payment of taxes, or in payment of the interest on moneys borrowed from third parties are inadmissible does not stand at par when an assessee entails expenses for obtaining bank guarantee for securing adequately for the payment of tax as required under the Finance Act, 1965. The situation in the latter case is for staying the enforcement and giving time for satisfying the statutory requirement which otherwise would result in the assessee exposing himself to the liquidation of his assets or facing coercive processes. In the ultimate analysis, it is for the assessee to decide as to how best he can keep his trade going on and protect the business assets. We are, therefore, of the opinion that the income-tax authorities. and for that matter, the Tribunal, were clearly in error of law in holding that these expenses are not admissible expenses since, in our opinion, the authorities below have, with respect, not properly appreciated the full import and width of the words 'for the purpose of business'. In that view of the matter, we must accept this reference and answer the question referred to us in the negative, that is, in favour of the assessee and against the Revenue. The Commissioner shall pay the costs of this reference to the assessee.