CHAKRAVARTTI C. J.-We are grateful to Mr. Sanyal that in arguing this reference he has not taken the time of the court in pressing for the contention on behalf of his client before the authorities below which is untenable on the face of it.
The question arises out of a reference made under Section 66 (I) of the Income-tax Act, made by the Calcutta Bench of the Appellate Tribunal in respect of the assessments for the year 1945-46 and 1946-47 of the Indian Steamship Company Limited, Calcutta which is the assessee. It appears that this company was floated in 1928, but existed in moribund condition up to the accounting year 1943-44. Indeed, although purported to be a Steamship Company, its subscribed share capital did not exceed Rs. 3,000 during that period. In the accounting year 1944-45, the company appears to have thought of launching upon real business and wanted to issue shares of the value of the RS. 75,00,000 and debentures of the value of Rs. 25,00,000 in order to procure the necessary money for the purchase of ships. Under the Defence of India Rules, as then obtaining, it was necessary to obtain the permission of the Controller of Capital Issues for the issue of both the shares and the debentures as contemplated by the assessee company. That permission was applied for and obtained, but the Controller imposed a condition that any sum in excess of Rs. 22,50,000 would have to be invested in the new Government of India Loans and sums up to Rs. 22.5 lakhs would have to be kept in deposit in a bank, pending actual expenditure and purchase of ships. The statement made by the Tribunal in the statement of the case, that the Controller required entire amount of Rs. 75,00,000 to be invested in Government securities does not appear to be correct. Be that as it may, the assessee company invested a large sum in Government securities which brought it on interest income of Rs. 1,24,986 in the assessment year 1945-46 and an income of Rs. 2,80,238 in the second year, viz., 1946-47.
The question in the present reference arises out of a client made by the assessee that against the amounts of the interest income, which I have already mentioned, it was entitled to credit for the interest which it would itself have to pay on the debentures. It appears that in the first of the two assessment years concerned, the debenture interest amounted to Rs. 1,06,666 and in the second year to Rs. 1,43,473. The claim was made under the first proviso to Section 8 of the Income-tax Act and the contention appears to have been that whether the ultimate purpose issuing the debentures might have been, since the money raised had perforce to be invested in Government securities by reason of the condition imposed by the Controller of Capital Issues, it ought to be taken as money borrowed for the purpose of investment in securities. The authorities below repelled that claim on the ground that the object of issuing the debentures was certainly not to invest the money, coming there from in Government securities but to employ it in the assessees business and that the condition imposed by the Controller of Capital Issues made no difference.
The assessee thereupon required Tribunal to refer the matter to this Court and a question has been framed and referred in the following forms :-
'Whether on the above facts and circumstances of this case, the sum of Rs. 1,06,666 in the year 1945-46 and Rs 1,43,473 in the year 1946-47 paid as interest on the money borrowed by the issue of debentures are liable to be deducted out of interest earned in the respective years under the head Interest on Securities and if so, whether the deduction should be from, and limited to, the amounts of Interest earned in the respective years only on securities purchased with money borrowed by the issue of debentures mainly Rs. 25,00,000 or should the deduction be from interest earned in the respective years on the entire block of investment in securities.'
Mr. Sanyal appearing on behalf of the assessee frankly conceded that the construction put by this client upon his debentures before the authorities below and claim of deduction made upon that construction was extremely far-fetched and he was not prepared to support it before us. Instead he submitted that he would place the claim on another ground altogether and the ground stated by him was that one of the objects mentioned in the memorandum of association of the assessee company was to invest money in securities. If borrowing money and investing the same was among the authorities objects of the assessee company, the present borrowing and the present investment might be regarded as having been made in exercise of that power and if it was so regarded, there would be more difficulty in allowing the assessees claim even under the strict language of Section 8. It is, however, not open to Mr. Sanyals client to make a new case at this stage. It was never then hinted before the authorities below that the debentures had been issued for the purpose of exercising the authority of borrowing and investing, conferred by the memorandum of association. The assessee made one case and one case only and that case was that since the condition imposed by the Controller of Capital Issues necessitated the investment in securities, the borrowing must be regarded as having been made for the purpose of the investment. If that case fails or is given up, there is no other case upon which the claim can be supported at the present stage. As a matter of fact also the assessee did not issue the debentures or raise the share capital for the purpose of the investing the money in Government securities, for, as the authorities below have been pointed out, the debenture interest was far higher than the interest that payable on the securities and that was paid by the Government. The argument of Mr. Sanyal was an argument of despair which, I suspect, he himself realised.
For the reasons given above, the answer to the first part of the question should be in the negative and with regard to the second part the answer should be that it does not arise.
The Commissioner of Income-tax will have his costs of this reference.
LAHIRI, J.-I agree.
Reference answered accordingly.