1. In T.Cs. Nos. 130 to 134 of 1978, the following common question has been referred to this court by the Income-tax Appellate Tribunal, at the instance of the Revenue.
'Whether, on the facts and in the circumstances of the case and on the materials on records, the finding of the Tribunal that no part of the interest paid by the assessee on borrowed funds could be disallowed in any of the years, viz., 1969-70 to 1973-74, is justified ?'
and in T.C. No. 408 of 1978, again at the instance of the Revenue, the following question has been referred :
'Whether, on the facts and in the circumstances of the case and on the materials on records, the finding of the Tribunal that no part of the interest paid by the assessee on borrowed funds could be disallowed is justified ?'
2. T. Cs. Nos. 130 to 134 of 1978 relate to the assessment years 1969-70 to 1973-74 and T. C. No. 408 of 1978 relates to the assessment year 1974-75. The assessee herein is a limited company in which the late G. N. Sam and his wife Savitri were directors. The company wanted to buy shares of another company M/s. Cambodia Mills Ltd., and for that purpose had borrowed funds from the public by inviting deposits. Certain sums were advanced to M/s. Dalal and Co., share brokers for the purchase of shares and in the calendar year 1959, advances had been made to the extent of Rs. 7.48 lakhs. Although the company has made these advances to purchase shares, shares were not actually purchased by it and it had transferred these advances made to the share brokers to its two directors, G. N. Sam and Savitri. These advances made to the share brokers were thus closed and to the said extent, the directors had been shown as debtors in the books of the company. G. N. Sam died on January 9, 1961. The amount standing to the debit of G. N. Sam as on January 1, 1961, was Rs. 4.73 lakhs and it remained as a debit balance due to the estate of late G. N. Sam. By the end of the accounting year 1967, the total debts due by the estate of G. N. Sam stood at Rs. 12.35 lakhs. The company has been charging interest at 9% on the debit balance of the estate of G. N. Sam up to December 31, 1967. However, the board of directors on January 1, 1968, decided by a resolution not to charge any further interest since that estate had more liabilities than assets and as such there was no point in charging further interest. Hence, no interest was charged on the amounts due by the estate from January 1, 1968.
3. For the assessment year 1969-70 to 1974-75, the company claimed deduction in respect of interest paid on the amounts borrowed. The ITO for the assessment years 1969-70 and 1970-71, relying on s. 40(c) of the I.T. Act, 1961 (for short 'the Act'), disallowed the interest paid on the amounts borrowed. As regards the assessment years 1971-72 to 1974-75 the ITO, without reference to s. 40(c) of the Act, held that the assessee was not entitled to claim allowances under s. 36(1)(iii) of the Act as the amount had not been borrowed for the purpose of the business which it is carrying on, but the borrowing is for the purpose of investment in shares. When the matter reached the Tribunal, after going through the facts in considerable detail and also the assessments made on the company from the original date of borrowing, it found that the amount borrowed had been used for 'non-business purposes', i.e., for investment in shares and, therefore, the borrowing cannot be said to be for the purpose of the business of the company. However, the Tribunal, after observing that the interest on the borrowed funds, even if not allowable under 'business', had to be allowed against 'receipt under other heads', proceeded to give two reasons for holding that the assessee is entitled to the allowance claimed. One reason is that the company had a subscribed capital of Rs. 2,02,000 which has not become frozen and that was available for the advances to be made to the directors and while free cash was available with the company for making advances to the directors, it is not possible to say that the advances made to the directors came from the borrowed funds alone. While giving this reason, the Tribunal has proceeded on the basis that the onus of showing from what funds the advances were made to the directors by the company is on the Revenue and, since the Revenue had not discharged that onus, it is possible to presume that the advances made to the directors were from the free cash available with the company. The other reason given by the Tribunal for upholding the allowance claimed by the assessee regarding the interest payment on the amount borrowed is that the provisions of s. 40(c) of the Act would not apply, since the estate of late G. N. Sam was not a person with substantial interest in the company. Dissatisfied with the decision of the Tribunal, the Revenue has sought and obtained the above references, all of which raise a common question as to whether the findings of the Tribunal that no part of the interest paid by the assessee on borrowings could be disallowed is justified.
4. The question is whether, on the facts established in this case, the view taken by the Tribunal could legally be supported. The learned counsel for the Revenue contends that the Tribunal having given a finding that the borrowing by the company was not for the purpose of the business and that the borrowed funds had been utilised for non-business purposes of the company, i.e., for investment in shares, has gone back on that finding, when it states that there is no evidence in this case to show whether the advances made to the directors for the purchase of shares were from the free cash available with the company or from the borrowed funds and that even on merits the view taken by the Tribunal that as there is no evidence as to from which source, i.e., whether from the free cash resources or from the borrowed funds, the amount was advanced to the directors, the allowance claimed by the assessee should be allowed could not be sustained. According to the Revenue, the onus is always on the assessee to show that the borrowed funds has actually been used for the business of the assessee and if he fails to establish the same, the assessee automatically loses the benefit of the allowance under s. 36(1)(iii) of the Act and there is no question of the Revenue establishing that the amounts lent to the directors by the company came actually from the borrowed funds. The learned counsel contends that the Tribunal has wrongly thrown the onus on the Revenue, when it said that as it has not been shown by the Revenue that the amounts advanced came from the borrowed funds, the assessee must succeed in getting the relief under s. 36(1)(iii) of the Act.
5. On the question of onus, the learned counsel for the Revenue refers to the decision in Mir Mohd. Ali v. CIT  38 ITR 413 . In that case, this court has observed that in order to deduct interest paid by the assessee on loans taken by him it is for him to prove that each of the loans on which he paid interest in the accounting year was utilised for his business and where the assessee produces no books or the books produced by him are rejected, the Tribunal has necessarily to estimate how much of the payment represented interest on loans borrowed and utilised for his business.
6. The next case relied on by the learned counsel for the Revenue is Milapchand R. Shah v. CIT : 58ITR525(Mad) , which related to the allowances claimed by the assessee under s. 10(2)(iii) of the Indian I.T. Act, 1922, in respect of interest paid on borrowed capital. In that case, the firm had borrowed moneys for interest from certain money-lending firms and advanced the same to its partners without charging any interest. The question arose whether the interest paid by the firm on the borrowings could be claimed as an allowance under s. 10(2)(iii) of the 1922 Act. This court held on the facts of the case that it could not be said that the firm had advanced money for the purpose of the business of the firm and the interest paid by the firm on the borrowings cannot be allowed as a deduction under s. 10(2)(iii) of the 1922 Act from the income of the firm. In the course of its judgment, the court said that the test is not whether the money borrowed continued to be available for the purpose of the business during the year of assessment, but whether it was in its origin money borrowed as capital for the assessee's business and whether interest was paid on that borrowed capital, existing or lost, during the year of assessment and that it does not mean that whatever might have been done with the sum borrowed, the interest paid on it was allowable as a deduction. The learned judges after referring to the decision in A.L.A.R. Brothers v. CIT  3 ITC 209 observed that the real ratio of that decision is that when money was borrowed for the purpose of the business or the needs of the business required such borrowal and that it was in fact utilised for the purpose of the business, the interest paid on the borrowed capital was liable to be deducted under s. 10(2)(iii) of the 1922 Act, that whether the money was borrowed for the purpose of the business or not could only be ascertained by the use to which the money was put, and that the fact that the partners made use of the moneys of the firm for their individual purposes and purchased properties or made investment of those moneys or the income from the investments had been assessed to tax is not sufficient to bring the transaction within the scope of the expression 'capital borrowed for the purpose of the business'. The decision, in this case, seems to apply on all fours to the facts of the case before us.
7. In Roopchand Chabildass and Sons v. CIT : 63ITR166(Mad) , this court again dealt with somewhat a similar situation as the one before us. In that case, the assessee-firm consisted of two partners and it carried on business in the manufacture and sale of wheat and gram products and also in money-lending. The firm transferred its flour mill business to a limited company floated by the partners themselves, in consideration of an allotment of shares in the company to the partners. The firm claimed allowance for the interest paid on borrowed capital for the years 1958-59 and 1959-60 and a major portion of which was disallowed by the Tribunal on the ground that the money borrowed by the firm was not diverted to any other business activity of the firm after the transfer of the flour mill business, that the amounts were diverted from the borrowed capital to the partners' accounts and for the use of the partners, and that it had made advances to partners to enable them to purchase the shares allotted to them in the company floated by themselves. On these facts, when the matter came to this court, on a reference, this court held that the amounts borrowed were not utilised for the purpose of the business of the assessee and as such the interest paid on it was not allowable under s. 10(2)(iii) of the 1922 Act in the assessment of the firm and that the shares purchased by the partners have been purchased in their individual capacity and there was no contract between the partners and the firm to bring the dividends on share into the firm's account and, therefore, the interest paid on the amount borrowed by the firm to purchase the shares for the partners cannot be regarded as expenditure incurred solely for the purpose of earning dividends and as such was not deductible even under s. 12(2) of the 1922 Act. The decisions in Milapchand R. Shah v. CIT  58 ITR 525 and Roopchand Chabildass and Sons v. CIT : 63ITR166(Mad) , support the Revenue and on the basis of these decisions, the allowance of interest paid on capital borrowed upheld by the Tribunal cannot legally be sustained.
8. The learned counsel for the assessee refers to the following decisions in CIT v. Rajendra Prasad Mody : 115ITR519(SC) and CIT v. Motor Credit Co. P. Ltd. : 127ITR572(Mad) , in support of his claim that even if the finding of the Tribunal that the interest payments cannot be taken to be on the amounts borrowed for the purpose of the business is accepted, still the assessee could claim deduction under s. 57(iii) of the Act on the basis that the interest payments are expenses incurred by the assessee for the purpose of the earning the income. CIT v. Rajendra Prasad Mody : 115ITR519(SC) is a decision of the Supreme Court, wherein the Supreme Court upheld a deduction claimed by the assessee under s. 57(iii) of the Act as admissible in computing the assessee's income from dividend under the head 'Income from other sources'. In that case, the assessee had borrowed moneys for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year, but did not receive any dividend on the shares purchased with those moneys. The assessee claimed the interest payments as deduction under s. 57(iii) of the Act on the ground that the interest payment should be taken to be an expenditure incurred for the purpose of making or earning the income and, therefore, the said expenditure has to be allowed as deduction under s. 57(iii) of the Act. The Revenue, on the other hand, contended that since there is actually no income earned during the relevant accounting year, the allowance cannot be claimed under s. 57(iii) of the Act. The Supreme Court, rejecting the contention of the Revenue and upholding the contention of the assessee, held that the language used in s. 57(iii) of the Act leads to the irresistible conclusion that to bring a case earned as a result of the expenditure, that what s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making for earning income, and that the section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. In this view, the Supreme Court held that the interest on moneys borrowed for investment in shares which had not yielded any dividend in the accounting year was admissible as deduction under s. 57(iii) of the Act. The expenditure incurred for the purpose of earning income might or might not have actually resulted in any income during the accounting year for the expenditure may be incurred in one year and the income would have been earned in the succeeding year. Section 57(iii), as has been pointed out by the Supreme Court, does not stipulate that the expenditure should have resulted in the actual earning of income during the relevant accounting year. What the section stipulates in that the expenditure should have been incurred wholly or exclusively for the purpose of making or earning income, which means that the expenditure should have been incurred with a view to earn income.
9. In CIT v. Motor Credit Co. P. Ltd. : 127ITR572(Mad) , a private company carrying on business as financiers for the purchase of motor vehicles on hire purchase agreements advanced moneys to two firms which were plying buses. Some of the routes of these two firms had been taken over by the State Transport Corporation. The firms defaulted in making repayments towards hire purchase instalments. Consequently, the buses were seized by the company. Since there was no prospect of receiving even the principal amount, the company did not credit the interest on the outstanding from the two firms, even though it was adopting the mercantile system of accounting. The ITO, however, included a sum of Rs. 56,173 by way of accrued interest on the amounts outstanding from these two firms. The AAC deleted the said addition. The Tribunal, when the matter came before it, held that the assessee could not have expected to get any interest income on the outstanding found due from the two firms and it would be wholly unrealistic on the part of the assessee to take credit for the interest income which is not realisable and, consequently, confirmed the order of the AAC. On a reference, this court held that the Tribunal was correct in its conclusion that though the assessee had adopted the mercantile system of accounting, no interest income could be assessed in its hands on accrual basis as it would be very unrealistic on the part of the assessee to take credit for a highly illusory interest. We do not see how this decision is of any help to the assessees in this case, on the question involved. Of course, that decision can be taken as the basis for the assessee-company giving up interest on the amount due by the estate of one of the deceased directors to whom the amounts had been advanced by the company for the purchase of shares as it has been found that the estate was not in a position to discharge even the principal amount advanced and, therefore, there is no question of the assessee getting any interest from the said estate. But that will throw no light on the question as to whether the assessee in this case can claim the benefit of s. 57(iii) of the Act.
10. The learned counsel for the Revenue submits that the question referred to this court is only as regards the allowability of the interest paid on borrowed funds under s. 36(1)(iii) of the Act and that question cannot comprehend a claim by the assessee for allowance of the same as expenditure under s. 57(iii) of the Act. According to the learned counsel for the Revenue, the purport of the question referred should be gathered from the statement of the case and if the statement of the case does not cover the question relating to s. 57(iii), then this court cannot go into the question of allowability of a claim under s. 57(iii), even if such a question arose out of the order of the Tribunal. In support of this submission, the learned counsel refers to the decision in CIT v. Scindia Steam Navigation Co. Ltd. : 42ITR589(SC) . In that case, the Supreme Court observed thus (p. 612) :
'Now a question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that section 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Act.'
11. The learned counsel for the Revenue appears to be right in his submission that the question as framed and referred to us cannot be understood to be wide enough to comprehend the question as to whether the claim of the assessee, though not allowable under s. 36(1)(iii) of the Act, could be allowed as a deduction under s. 57(iii) of the Act. As a matter of fact, before the Tribunal the claim that the interest payments should be allowed as expenditure under s. 57(iii) had not been put forth, and there is no discussion on that question by the Tribunal in its order, though the Tribunal in a passing observation has stated that even if the interest on the borrowed funds is not allowable under 'business', it could be allowed against 'receipts under other heads'. Thus, the scope and ambit of s. 57(iii) and its applicability to the facts in this case have not been specifically considered by the Tribunal in its order. Therefore, that question which has not been specifically considered by the Tribunal cannot be taken to arise out of the question referred to us. Therefore, the assessee is not entitled to put forth an alternative claim that even if he is not entitled to get allowance under s. 36(1)(iii) for the interest payments, he is entitled to an allowance of the same as an expenditure under s. 57(iii).
12. Even assuming that the assessee can put forth that claim as one facet of the question referred, we are of the view that the assessee cannot have the benefit of s. 57(iii) on the facts and circumstances of the case. We have already seen, while referring to the facts that after January 1, 1968, the assessee-company itself has resolved not to collect any interest on the amounts advanced to the director. That means, the assessee cannot have any claim for interest on the director or his estate who had taken the advance on and from January 1, 1968. It is no doubt true that earlier to January 1, 1968, the company had been charging interest on the amount lent to the director. However, after January 1, 1968, the amount advanced to the director is not earning any interest. Therefore, on and after January 1, 1968, the amount advanced cannot be said to be an investment. It merely stands as a debt due by the director to the company without interest. When the assessee himself has resolved not to collect any interest, it should be taken that the assessee has no intention of earning income from the advances made to the directors. On these facts and in view of the language used in s. 57(ii), the assessee cannot be taken to have expended solely and exclusively for the purpose of earning income. On and after January 1, 1968, the intention of the assessee is not to earn any income from the advances made to the directors. If there was an intention to earn income, but the expenditure has not actually resulted in any income, it will be a different matter. But where the assessee himself has intended not to earn any income on the lending of amounts to the director, then any expenditure incurred towards that lending cannot be an expenditure incurred for the purpose of earning income. In this view, even if the assessee's claim based on s. 57(iii) could be entertained, we are of the view that the assessee is not entitled to claim the benefit of s. 57(iii) on the special facts of this case. Thus, we are of the view that in this case, in view of the finding given by the Tribunal that the borrowing was for 'non-business purposes' and that the borrowing was only for the purpose of investment, the application of s. 36(1)(iii) of the Act stands excluded. Section 36(1)(iii) of the Act contemplates an amount of interest paid in respect of the capital borrowed for the purpose of the business or profession. Once the Tribunal finds that the amount borrowed has not been used for the purpose of the business of the assessee, then the application of the section is ruled out. In any view of the matter, we are not inclined to uphold the order of the Tribunal in this case.
13. The questions referred to us are, therefore, answered in the negative and in favour of the Revenue. The Revenue will gets costs from the assessee. Counsel's fee is fixed at Rs. 500. One set.