1. During the financial year 1947-48 the assesses was called upon to pay in advance a sum of Rs. 11,00,494/- as tax payable in respect of the assessment year 1948-49 under Section 18A(1) of the Indian Income Tax Act. The assessee submitted under Section 18A(6) its own estimate of the tax and on the basis of such estimate paid a sum of Rs. 4,47, 125/-. The assessment for the assessment year 1948-49 was made on 29-4-1950 and as the tax paid by the assessee on the basis of its own estimate was less than eighty per cent of the tax determined on such assessment, the assessee was charged with interest amounting to Rs. 92,301-12-0 under Section 18A(6). The assessee paid this amount on 7-7-1950, i.e. in the previous year corresponding to the assessment year 1951-52. During the assessment proceedings for the assessment year 1951-52 the assessee claimed that the sum of Rs. 92,501-12-0 was an allowable deduction in arriving at its taxable profits. The Income-tax Officer disallowed the claim without assigning any reason. On Appeal the Appellate Assistant Commissioner confirmed the disallowance and held that the deduction was not permissible under Sections 10(2) (iii) and 10(2) (xv). The order of the Appellate Assistant Commissioner was confirmed by the Appellate Tribunal on second appeal. On the application of the assessee the Tribunal has referred the following question to this Court:
'Whether Rs. 92,308/- paid by the assessee as interest under Section 18A(6) during the previous year relevant to the assessment for 1951-52 was allowable as a deduction while computing the profits from the business?'
2. Before us Mr. Mitra on behalf of the assessee argues that the deduction claimed was allowable on three grounds.
3. Mr. Mitra contends; firstly that the deduction is allowable under Section 10(2) (iii). I am unable, to accept this contention. Interest under Section 18A (6) was paid on the amount by which the tax paid fell short of eighty per cent of the tax determined on regular assessment. The interest so paid was not in respect of any capital borrowed by the assessee. Instead of paying the full amount of the advance tax claimed under Section 18A(1) the assessee paid a lesser amount of tax on the basis of its own estimate. By paying the lesser amount, the assessee retained its own capital. The capital so retained was not capital borrowed by the assessee.
4. Secondly, Mr. Mitra contends that the deduction is allowable under Section 10(2) (xv). I am again unable to accept this contention. The demand for advance payment of tax was made on the basis of the statutory estimate of the tax payable by the assessee for the next assessment year in respect of the part of its income to which Section 18A(1) applied. The assessee was not bound to accept this statutory estimate. It was open to the assessee to make its own estimate of the tax and to pay the tax on the basis of such estimate. The assessee elected to make its own estimate and to pay the tax on that basis. The tax so paid was less than eighty per cent of the tax determined on regular assessment. In view of Section 18A(6) the assessee was under a statutory obligation to pay interest upon the amount by which the tax paid by it fell short of eighty per cent of the tax so determined. This statutory obligation of the assessee was incidental to its character as taxpayer. The assessee as taxpayer was liable to make the advance payment of tax. The tax to be paid in advance was in respect of all income of the assessee to which) Section 18A(1) applies and not merely in respect of the profits and gains of its business assessable under Section 10. The assessee as a taxpayer gave its own estimate of the tax payable by it and paid a lesser amount of tax on the basis of such estimate. In course of thus conducting its affairs as a taxpayer the assessee incurred the statutory obligation to pay the interest. The statutory interest was by Section 18A(8) added to the tax and by Section 47 was recoverable in the manner provided for the recovery of arrears of tax. The interest was a sum of money payable under the Act and the assessee was liable to pay it as an 'assessee' within the meaning of Section 2(2). The assessee did not incur the statutory obligation to pay the interest for the purposes of its business. The liability in copse of its business was in no sense incidental to the business. The money spent for discharging the liability was not an expenditure laid out or expended wholly or exclusively for the purposes of the business.
5. Thirdly, Mr. Mitra contends that the deduction is allowable under Section 10(1) as a trading loss. I am unable to accept this contention also Assuming that the expenditure was a loss, it is not possible to say that the loss was a trading loss. The loss did not spring directly from the carrying on of the business and was not incidental to the business. The liability for the interest was not incurred in the running of the business, but was one to which all assessees are exposed whether they do business or not. On this part of the argument Mr. Mitra strongly relied upon the decision of Badridas Daga v. Commissioner of Income-tax, : 34ITR10(SC) . Having regard to the principles enunciated by Venkatarama Aiyar, J., at p. 696 (of SCR) : (at p. 786 of AIR) of the report of that case, I am satisfied that the loss cannot be said to be a trading loss or a loss which is deductible under Section 10(1) for the purpose of computing and ascertaining net profits and gains of the business.
6. In my opinion the expenditure is not allowable as a deduction while computing the profits of the business.
7. I, therefore, propose that the question be answered in the negative.
8. The Commissioner of Income-tax is entitled to the costs of the Reference.
9. I agree.