Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, the question referred to this court is as follows:
'Whether, on the facts and in the circumstances of the case, liquidated damages of Rs. 1 lakh and interest payment of Rs. 1,85,123 are allowable deductions under the Income-tax Act, 1961 ?'
2. The assessee is a company. The assessment year is 1968-69 and the relevant accounting year is the financial year which ended on 31st March, 1968. On the 2nd of June, 1967, the assessee entered into an agreement with M/s. Ashoka Marketing Ltd. for the sale of about 29 acres of lands at Ghusury for a consideration of Rs. 45 lakhs. M/s. Ashoka Marketing Ltd. paid Rs. 40 lakhs to the assessee for the purchase of the aforesaid land by way of part payment. The aforesaid land had been pledged with the Govt. of Uttar Pradesh against a loan granted by the Uttar Pradesh Govt. for the Soda Ash-cum-Ammonium Chloride factory of the assessee at Varanasi. In the aforesaid agreement, the assessee had undertaken to get the release of the land from the Govt. of Uttar Pradesh by the 15th of August, 1967. Further, it was agreed between the parties that the assessee would be liable to pay by way of liquidated damages Rs. 1 lakh in addition to the refund of Rs. 40 lakhs paid by M/s. Ashoka Marketing Ltd. by way of part payment to the assessee, in the event the assessee failed to get the release of the aforesaid land from the Govt. of Uttar Pradesh. The assessee was required to pay interest @ 12% per annum on Rs. 40 lakhs until the same was refunded to M/s. Ashoka Marketing Ltd.
3. The assessee failed to get the release of the aforesaid land from the Govt. of Uttar Pradesh by 15th August, 1967, as agreed between the parties. M/s. Ashoka Marketing Ltd. by the letter, 31st May (sic), 1967, asked the assessee to refund Rs. 40 lakhs which was paid by it, along with Rs. 1 lakh by way of liquidated damages as per the terms of the aforesaid agreement. The assessee in its letter dated 1st August, 1967, requested M/s. Ashoka Marketing Ltd. to grant it time up to 30th November, 1967, as negotiation was still going on with the Govt. of Uttar Pradesh about the release of the aforesaid land. M/s. Ashoka Marketing Ltd. in its letter dated 29th September, 1967, informed the assessee that it would grant the assessee time up to 30th November, 1967, provided the assessee agreed to pay interest at the rate of 12% per 'annum for the period 15th August, 1967, to 30th November, 1967, in addition to the payment of liquidated damages of Rs. 1 lakh as provided in Clause 5 of the aforesaid agreement. The assessee along with its letter dated 28th November, 1967, sent cheques for Rs. 10,00,000 and Rs. 1,00,000 representing part payment of Rs. 40 lakhs and liquidated damages as per Clause 5 of the aforesaid agreement respectively. As regards the balance of Rs. 30 lakhs the assessee requested M/s. Ashoka Marketing Ltd. that it should be allowed to pay the same on instalment basis, viz., Rs. 3 lakhs by 10th December, 1967, Rs. 12 lakhs by 15th December, 1967, and Rs. 15 lakhs by 31st January, 1968. The assessee further agreed in the said letter to pay interest on the aforesaid loan. Under these circumstances, the assessee paid Rs, 2,93,125, Rs. 1 lakh by way of liquidated damages and Rs. 1,85,125 by way of interest, to M/s. Ashoka Marketing Ltd. and claimed the same as deductible items. The ITO disallowed the claim holding that the transaction was clearly in the nature of a capital transaction and was not in the normal course of the assessee's business. Consequently, he held that the claim on account of liquidated damages and interest following the non-fulfilment of the agreement could not be considered as admissible revenue expenditure. There was an appeal from the said decision to the AAC. The AAC disallowed the claim so far as liquidated damages were concerned because he held that it was not business expenditure and any claim of deduction was rightly rejected. So far as the claim for deduction of interest on the loan was concerned under Section 36(1)(iii), the AAC held that the payment of interest was not in respect of moneys borrowed for the purpose of business, nor was the payment in question an expenditure incurred for the purpose of carrying on the business. It was only compensation for the delay according to the AAC under Section 36(i) or(iii).
4. There was an appeal and the Tribunal referred to the order of the AAC and summarised the order as under :
'According to the agreement dated 2nd June, 1967, the appellant was to execute the conveyance deed of the lands by 15th August, 1967, failing which damages were to be paid to Ashoka Marketing Co. Ltd. In the instant case, the admitted position is that the agreement was in respect of a fixed asset of the company and was in no way connected with the business carried on by the appellant or the stock-in-trade of the appellant. Therefore, the liquidated damages of Rs. 1,00,000 paid was not a business expenditure and the claim for deduction was rightly rejected.
So far as the claim for interest deduction, Section 36(1)(iii) provides for an allowance for the amount of interest paid in respect of capital borrowed for the purpose of business or profession. It is not for every item of interest which an assessee pays forwhich deduction is admissible. The payment of interest should have a nexus with the borrowals made for the purpose of business. In the instant case, the payment of Rs. 1,83,123 was not in respect of moneys borrowed for the purpose of business ; nor the payment in question was an expenditure incurred for the purpose of carrying on the business. It was only compensation for the delay and it was not allowable either under Section 36(1)(iii) or under Section 37(1). Please see Rekhchand Gopaldas Mohta Spg. & Wvg. Mills v. CIT : 60ITR699(Bom) .'
5. Before the Tribunal it was urged that since the assessee had utilised the sum of Rs. 40 lakhs in the business and was running its business on borrowed capital, the interest of Rs. 1,85,123 paid to M/s. Ashoka Marketing Ltd. should be allowed as revenue expenditure. The Income-tax Tribunal was unable to accept this contention.
6. So far as the first aspect of the matter is concerned, that is to say, the sum of Rs. 10 (sic) lakhs as liquidated damages is concerned it appears to us that in view of the finding made that the agreement was in respect of the fixed assets of the company, that is to say, for disposal of the land by the company it was a capital asset and the damage was required to be paid in respect of the failure of the assessee to dispose of the land in terms of the agreement, and the assessee had to pay this amount, this amount, in our opinion, is interconnected with the capital asset of the company. Therefore, in the facts and circumstances of the case, the Tribunal was right in not allowing the same as revenue expenditure.
7. So far as the second aspect is concerned, that is to say, the payment of Rs. 1,85,123 as interest paid, it will have to be looked into from a different point of view. The assessee's contention is that this sum, paid as interest, permitted the user of the sum of Rs, 40 lakhs which was advanced as part of the consideration by M/s. Ashoka Marketing Ltd, for sale of land -and the assessee had utilised this sum of Rs. 40 lakhs in its business. If any amount so obtained for whatever purpose was actually utilised in the business of the company and if any interest or incidental payment had to be made for securing the. user of the money in the business of the company then such an agreement has to be considered as for the purpose of facilitating the running of the business by a retention of the money in the business and thereby incidental to the purpose of carrying on the business. But the whole question will depend on whether this sum of Rs. 40 lakhs, which was retained and in respect of which delayed repayment was secured by payment of interest of Rs. 1,85,123, was in fact utilised for the running of the business. The Tribunal does not seem to have given its attention to this aspect of the matter. Therefore, we remand the matter to the Tribunal to decide whether the sura of Rs. 40 lakhs or any part thereof which was retained by the assessee and in respect of which interest was paid, was utilised in the business of the assessee. If it was so, then-the interest should be considered as an allowable deduction being an expenditure incurred for facilitating the carrying on of the business. If not, then, of course, it cannot be allowed. We dispose of the matter as follows :
In that view of the matter, the matter is remanded to the Tribunal.
So far as the sum of Rs, 1 lakh is concerned it is not allowable as held by the Tribunal for the reasons mentioned hereinbefore and so far as payment of interest of Rs. 1,85,123 is concerned, the same should be allowable after the Tribunal has examined the facts and if it finds that it was utilised in business.
8. In the facts and circumstances of the case, the parties will pay and bear their own costs.
Suhas Chandra Sen, J.