1. JUDGMENT [The judgment of the court was delivered by Ranganathan JJ.-The following question has been referred to this court by the Income Tax Appellate Tribunal under Section 66(2) of the Indian I.T. Act, 1922: "Whether, on the facts and in the circumstances of the case, the entire interest of Rs. 6,000 was not assessable as income of the assessee- company."
2. The question arises out of the proceedings of assessment, for the assessment year 1961-62, of the Punjab Electrics Ltd. The relevant previous year ended on December 31, 1960. The assessee had advanced a sum of Rs. 1.46,614 to All India Finance and Commerce Ltd. (hereinafter referred to as the "debtor company"). It is common ground that the amounts advanced were bearing interest at 12% per annum. For the assessm ent year 1961-62, the assessee-company included in its income- tax return interest in respect of outstandings due from the debtor company only in respect of a period of 6 months, i.e.., a period up to August 31, 1960. No interest for the rest of the accounting year was taken into consideration. It appears that in the course of the previous year the debtor company had acquired 4,799 shares out of the total of 4,950 shares in the assessee-company, with the result that the assessee-company became a subsidiary of the debtor company w. E.f, that date.
3. The 1TO was of opinion that the entire interest on the outstandings up to December 31, I960, was taxable as the income of the assessee and he thus added a sum of Rs. 6,000 referable also for the period September 1, 1960, to December 31, 1960. This was confirmed by the AAC. But, on further appeal, the Tribunal held as follows: "In our opinion, there is justifiable reason for making some addition as and for interest since the All India Finance and Commerce Ltd. had become the parent company with the assessee as a subsidiary. Certainly the relationship of a debtor and creditor had ceased to exist to the extent to which the parent company held the shares in the assessee-company, but with reference to the balance of shares, the relationship of debtor and creditor sub sited. Hence in respect of the portion of the debt that could be attributed to the shares acquired by the All India Finance and Commerce Ltd. if any interest is paid it could be a case of payment of interest by the All Indian Finance and Commerce Ltd. to itself. But with reference to the proportionate amount which pertains to the balance of shares, the All India Finance and Commerce Ltd. was bound to pay interest. With reference to the question of agreement or no agreement to pay interest our finding is that there was implied contract to pay interest taking into account the conduct of parties prior to the assessee-company becoming a subsidiary of All India Finance and Commerce Ltd.
4. In that view of the matter, in our opinion, interest was certainly payable on the proportionate f 1,46,614x151 T value of the debt viz. ------------------------- > by the All India 4950 finance and commerce Ltd. to the assessee. The Income Tax Officer will calculate that proportionate interest and bring to tax only that amount instead of Rs. 6,000 in question."
5. It is at the instance of the Commissioner that the question already set out has been referred to this court for decision.
6. The view taken by the Tribunal is clearly untenable. Though the assessee might have become the subsidiary of the debtor company they are separate corporate entities. There is no legal warrant for the apportionment which the Tribunal has done, after coming to the conclusion that an addition was called for. The view that the relationship of debtor and creditor between the two companies would cease to exist to the extent to; which the parent company held the shares in the assessee- company is penalty incorrect. We are, therefore, clearly of opinion that the Tribunal was; in error in directing that only proportionate interest in respect of the 151 j shares in the assessee-company not held by the debtor company could be: brought to tax in the hand of the present assessee.
7. Mr. P.N. Monga, learned counsel appearing for the assessee, did not seek to support the line of reasoning of the Tribunal. But taking advantage of the wide frame of the question referred to us, he sought to contend that the question should be answered in the negative and that no part of the interest of Rs. 6,000 would be at all assessable in the hands of the assessee-company. His contention is that though the assessee had previously advanced loans on interest it had decided not to charge any interest w. E.f. August 31, 1960, because on that date the debtor company had practically become the owner of the shares in the assessee-company and no real purpose would be served by the assessee charging the debtor company the interest thereafter. He contended, therefore, that w. E.f. August 31, 1960, a variation in the terms of agreement between the two companies should be inferred. Thereafter, no interest at all accrued to the assessee-company. Mr. P.N. Monga characterised income by way of interest subsequent to August 31, 1960, as a purely notional income and he relied upon several decisions to support a contention that such notional income should not be assessed.
8. The arguments addressed by the learned counsel are, no doubt, interesting but we are afraid that they travel far beyond the scope of the reference in the present case. The Tribunal has decided the appeal before it on a very short ground. The conclusion of the Tribunal is that a portion of the assessable income is taxable. It means that the plea put forward on behalf of the assessee that the agreement to pay interest had come to an end on August 31, 1960, and that there was no accrual of interest thereafter, has been rejected. The assessee has not taken out any reference from the order of the Tribunal. But apart from this technicality the question whether the original agreement between the parties had undergone any modification is a question of fact. If it is the case of the assessee that the two parties had agreed that subsequent to August 31, 1960, the advances should carry no interest, it is for the assessee to plead such an agreement and to prove it. There is no correspondence between the parties and no resolution of the companies produced to support any such theory of modification of the original agreement. Mr. P. N. Monga was us to infer all this from the mere fact that in the books of account no interest has been taken into consideration; we also find ourselves unable to accept h is contention that in the circumstances it should be held that no interest had at all accrued to the assessee after August 31, 1960.
9. For the reasons above mentioned we answer the question referred to us by saying that the entire interest of Rs. 6,000 was assessable as the income of the assessee-company. There will be no order as to costs.