FAKHRUDDIN H. SHAIKH, J.-The above six references have been made by the Income-tax Appellate Tribunal at the instance of Commissioner of Income-tax under section 66 (1) of the Income-tax Act, 1922. The parties in all the six cases are the same. The points of law and facts involved in the above cases are also the same, hence the six references are being decided by this judgment.
2. The respondent in all the cases is Messrs Futehally and Company which is a private company which derives income from dealings in cotton, sundry imported goods, indenting, as well as manufacture and sale of insecticides and chemicals. One of its departments namely Messrs Futehally Chemicals was converted into a limited concern on 30th June, 1960, and the assets and liabilities of this department were transferred to the concern. The liabilities included certain overdrafts obtained from the banks. The company had to pay interest on these overdrafts in respect of the amounts which were borrowed by the directors for investing in this depart--ment, that is Messrs Futehally Chemicals. The interest paid by the assessee---company was claimed as deductible allowance under section 10 (2) (iii) of the Income-tax Act for the various assessment years. For the assessm ent year 1962-63 the assesses-company had claimed allowance in respect of interest of Rs. 32,075. The Income-tax Officer disallowed interest to the extent of Rs. 22,478 on the ground that it was paid as loan advanced to the directors of the assesses-company. Similarly for the years 1963-64 amount of interest claimed was Rs. 24,812 out of which the I.-T. O. Disallowed Rs.
15,490. For the assessm ent year 1964-65 the amount of interest claimed was Rs. 66,252 out of which the I. T. O. Disallowed Rs. 31,812. Aggrieved by the orders of the I. T. O. In respect of the disallowances of interest amounts for the above three assessment years, the assesses-company filed appeals before the Assistant Appellate Commissioner who partly allowed the appeals holding that the interest paid by the company was on capital borrowed for the purpose of business of the company and as such was deductible from the income of the company under section 10 (1) (iii).
3. The Commissioner of Income-tax challenged the above order of the Assistant Appellate Commissioner before the Income-tax Appellate Tribunal who decided the three appeals in respect of three assessm ent years by a common order whereby the order of the Assistant Appellate Commissioner was upheld and the entire interest paid by the assesses-company was held to be deductible under the above provisions of the Act. This order is subject-matter of I. T. R. No. 600/72 in which following questions have been referred by the Tribunal to this Court :- "(1) Whether on the facts and in the circumstances of the case Tribunal was right in holding that the assessee has fulfilled the conditions under section 10 (2) (iii) of the Income-tax Act, and as such the interest claimed should be allowed?
(2) Whether on the facts and in the circumstances of the case the Tribunal was justified to treat the claims of interest under section 10 (2) (iii) of the Income-tax Act, wholly and exclusively for the business purposes ?"
4. Similarly for the assessm ent year 1965-66 the amount of interest disallowed by the I. T. O. Was Rs.
25,342 which was allowed by the Tribunal. This allowance is subject-matter of I. T. R. No. 514;72. For the assessm ent years 1966-67 the disallowance of interest was to the extent of Rs. 25,068 which the Tribunal had allowed and which is subject-matter of I. T. R. No. 515/72. For the assessment year 1967-78 the disallowance of interest by the I.-T. O. Was to the extent of Rs. 38,303 which was allowed by the Tribunal and which is subject-matter of I. T. R. No. 473/72. For the assessment year of 1968- 69 the amount of interest disallowed by the I. T. O. Was of Rs. 41,979 but it was allowed by the Tribunal. It is subject---matter of I. T. R. No. 517,"72. For the assessment year 1969-70 the interest disallowed was Rs. 27,673 which was allowed by the Tribunal and which is subject-matter of 1. T. R.
No. 516/72. In all these cases the same two questions as stated in para. No. 3 above, were referred by the Tribunal to this Court.
5. From the statement of the facts submitted by the Tribunal it transpires that Messrs Futehally Chemicals was department of the assesses-company namely Messrs Futehally and Company.
This department was converted into a limited concern on 30-6-1960. The plea of the department was that the assesses-company and Messrs Futehally Chemicals Limited were two separate legal entities and that the funds transferred by the assessee-company and utilised by its directors and their family members for invest--ment in an entity separate from the assessee, were not utilised by the assess" itself for the purpose of its own business. It was further urged on behalf of the department before the Tribunal that the directors and their family members were the owners of the shares which were acquired in their own names, hence the assesses company could not be said to hold the shares, nor the interest paid on the funds borrowed by the assessee from banks and eventually transferred to the directors and their family members could be claimed as allowance under section 10 (2)(iii) of the Act.
6. The Tribunal rejected the contentions of the department representa--tive with following observations:- "The present case concerns itself with the allowance of an expenditure under section 10 (2) (iii) of the Income-tax Act. A bare reading of this section makes it clear that the conditions necessary for the allowance of the claim under this sub-clause are (1) that the interest should be in respect of borrowed capital, (2) that the borrowing should be for the purposes of the assessee's business, and
(3) that the amount of the interest claimed for allowance should have been paid. It appears to us that all these three conditions have been fulfilled in the instant case. The assessee has claimed the allowance of interest paid in respect of certain loans taken from banks for the purposes of its own business. As we have seen earlier, the loans from the banks, were obtained prior to the passing of the company's resolution of 25-12-1960 for the acquisition of 4,087 shares in the subsidiary company in the names of its directors and share--holders. The factual position, therefore, is that the advances of money in respect of which the interest claims have been disallowed were out of the company's general consolidated funds and that no specific loan or overdraft was taken by the company for allowing any advance or loan to its directors and share-holders. The assessee--- company secured the bank loans as and when found necessary for the carrying on of its own business and its advance to its directors were made in the usual course of business. It is nobody's case that the assesses-company obtained any specific loan for advancing the same to any one else. In the facts and circumstances of the case, we must hold that there is no justification for disallowing any part of the interest claimed by the assesses on account of its own business. The claims are accordingly admissible in terms of section 10 (2) (iii) of the Income-tax Act."
7. It may be stated that the directors of the assesses-company (Messrs Futehally & Co.) had passed a resolution on 25-12-1960 as follows:- "Resolved that the company acquire 4,087 shares and that these shares be held in the names of the following Directors and, shareholders to the extent shown against their names :- Serial No.Name No. of SharesAmount Rs.
(1) Mr. M. A. Futehally 962 96,200.00
(2) Mrs. A.M. Futehally 721 72,100.00
(3) Mr. Mahmood A. Futehally962 96,200.00
(4) Mis. Atiya M. Futehally 721 72,100.00
(5) Master Ahmed M. Futehally721 72,100.00 4087 4,08,700.00 The Tribunal had, with reference to the above resolution, held that the factual position was that advances of money in respect of which the inter. Claims have been disallowed, were out of the company's general consolidate funds and that no specific loan or overdraft was taken by the company fu allowing any advance or loan to its directors or share-holders. It was ale held that the assessee-company had secured the bank loans as and wheel found necessary for the carrying on its own business and its advances to it directors were made in the usual course of business. These are findings of facts of the Tribunal which cannot be assailed before us nor they have bee challenged by the department. We ate, therefore, of the view that interest paid by the assessee- company on borrowings for the purpose of investment in Futehally Chemicals was paid on capital borrowed for the purpose o business of the company.
8. Learned counsel for the assessee has relied on Commissioner of Income-tax v. Gammon (Pak)
Limited, Karachi1966 Taxation 394. The facts of this case were that assessee, a limited company, was carrying on Engineering works in both the wings of the country until the 15th August, 1954, when its East Pakistan Branch was converted into a full-fledged subsidiary company. The assessee- company made the entire investment of the capital of the subsidiary and owned 100 percent of its investment. The subsidiary company was doing the same business as the assessee-company. At the assessm ent stage the assessee company claimed as an admissible deduction under sec-- tion 10 (2) (iii) of the Income-tax Act the amounts representing interest paid on overdrafts and loans taken by it for the purpose of investment in the subsidiary-company. The Income-tax Officer disallowed the claim on the ground that they were of capital nature and were not covered by the pro--visions of section 10 (2) (iii). The Income-tax Officer took the view that the subsidiary- company was quite a separate legal entity and the investment made in that concern was distinct from the main business activity of the assessee. The Appellate Tribunal allowed the interest as revenue expenditure holding that the investment made by the assessee in the subsidiary- company was in the normal course of its business and the borrowings from the banks were in the same connection. The above order of the Tribunal was affirmed by this Court in the above case holding that that the interest paid by the parent company on overdrafts and loans taken by it for the purpose of investment in the subsidiary-company were admissible expenditure under section 10 (2) (iii) of the Income-tax Act.
9. Another case relied upon by the learned counsel for the assessee is Commissioner of Income- tax, Andhra Pradesh v. Gopikrishna Muralidhar (1963) 47 I T R 469. The facts of this case were that the assessee, a Hindu undivided family, which carried on business on an extensive scale with a capital of about Rs. 20 lakhs, made large borrowing during the relevant year for the purpose of the business and paid interest amounting to Rs. 93,611. In the course of the near monies amounting to Rs1,77,984 were withdrawn from time to time for household expenses. The question was whether a part of the interest paid on borrowed capital could be disallowed. The High Curt held in the above case that, as the amounts were borrowed for the purpose of the business of the family and as no particular sum purporting to be borrowed on behalf of the business, was spent for household expenses and the family was entitled to withdraw from the capital supplied by it thereby depleting the capital, the fact that part of the amounts borrowed was later on used for personal expenses did not deprive the assessee of the benefit of deduction of the entire interest paid on borrowed capital under section 10 (2) (iii) of the Indian Income-tax Act, 1922, and a part of the interest could not, therefore, be disallowed.
10. Reliance has also been placed on the case of Amna Bai Hajee Issa v. Commissioner of Income- tax Madras (1964) 51 I T R 835. The facts of this case were that on 1-4-1956 the assessee (Amna Bai) had an overdraft of Rs. 96,626 in a firm which acted as her bankers. On March 31, 1957, " She received a sum of Rs. 1,01,000 and paid it to this firm. Sire also borrowed Rs. 90,000 from the firm and invested it as capital in another firm, and after setting off this sum of Rs. 90,000 and other withdrawals made by her the debit balance remained at Rs. 53,182 on March 31, 1957. In the accounting year ended March 31, 1958, she had to pay Rs. 2,965 as interest on this sum of Rs. 53,182 and claimed it as an allowance from her profits from the 14m-- in which she had invested Rs.
90,000. This claim was disallowed by the Tribunal on the ground that Rs. 90,000 could not be treated as borrowed capital as it could have come out of Rs. 1,01,000 she had received on 31st March, 1957, and that "for lack of identity the assessee's contention must fail. The High Court held that as the assessee's directions to the bank showed that this particular sum of Rs. 90,000 was debited against her for the purpose of being invested as capital in the firm, the interest claimed was allowable; and the fact that the assessee had, according to the accounts, some funds at her disposal which she could have utilised for investment as capital was irrelevant.
11. According to the order of the Tribunal the factual position was that the advances of money in respect of which the interest allowance has been claimed, were out of the companies funds and no specific loan or overdraft was taken by the company for allowing any advance or loan to its directors or stare-holders. The Tribunal also concluded that the assessee company secured the bank loans as and when found necessary for carrying on of its own business, and that its advances to its directors were made in the usual course of business. It was further held by the Tribunal that it was not proved the assessee-company had obtained any specific loan, for advancing the same to any one else. All these conclusions of the Tribunal amount to finding of fact which can be challenge before us. On the basis of these findings the Tribunal had in our view, rightly decided the question of interest as deductible expenditure under section 10 (2) (iii) of~ the Act.
12. Learned counsel for the department has relied on the case of Bombay Steam Navigation Co.
1963 Private Limited v. Commissioner of Income-tax, Bombay (1963) 48 I T R 476. The facts of this case were that two shipping com--panies were merged into one (known as Scindia Steam Navigation Company Limited) and floated another company named Bombay Steam Navigation Co. 1953 Private Limited (Assessee). The assessee-company took over certain assets of Scindias of the value of Rs. 80 lakhs. This price was to be paid by the assessee-company to the Scindias partly by allotment of 29,990 shares of Rs. 100 each and the balance was to be treated as a loan and secured by a promissory note and hypothecation of all the movable pro--perties of the assessee- company. Until payment of the balance the assessee company was to pay simple interest at 6 per cent per annum. Some time later a supplemental agreement was entered into between the merged companies (Scindia Steam Co.) and the assessee-company in which it was stated that the intention was not to treat the balance as a loan and, accord--ingly; the original agreement was modified to the effect that the balance shall be paid by the assessee-company and until the amount was paid in full the assessee-company shall pay simple interest at 6 per cent per annum on so much of the balance as remained due: The balance was also to tic secured by hypothecation of all the movable properties of the assessee-company. In accordance with these agreements the assessee paid interest on the balance outstanding in the relevant accounting years. The assessee claimed exemp--tion in respect of the interest paid on the balance but the same was disallow--ed by the Income-tax Officer. The Tribunal was also of the same view and dismissed the appeal of the assessee in respect of disallowance of the interest which was claimed, inter alia, under section 10 (2) (iii). The High Court upheld view of the Tribunal with the following observation:- "Under section 10 (2)(d) the amount of interest paid in respect of the capital borrowed for the purpose of the business is allowed as a deduction. In the present case, there has clearly been no case of borrowing in view of the position clarified by the supplemental agree--ment between the parties. Interest in the present case has been paid by the assessee-company on the unpaid balance of the purchase price of the asset which it had purchased from the Scindia Steam Naviga--tion Co. Ltd. It has been held by this Court in Metro Theatre, Bombay Ltd. v. Commissioner of Income-tax that the mere purchase of a capital asset on a long term credit with a stipulation to pay interest on the reduced balance does not amount to the borrowing of capital within the meaning of section 10 (2) (iii). In view of the said decision the claim for the deduction under section 10 (2) (iii) cannot, .In our opinion, be sustained."
The case is distinguishable from the facts of the present case. The assessee in the above case had not borrowed any amount from the Scindia Steam Co. Nor the interest alleged to have been paid on the balance of the sale consider--ation was interest on any loan advanced to the assessee. On the contrary the amended agreement between the assessee and Scindia Steam Co. Speci--fically provided that the balance of the sale consideration of the asset transferred to the assessee shall not be treated as a loan but the balance shall be payable by the assessee on interest at a particular rate. Thus the interest was paid by the assessee on the unpaid balance of the purchase price of the assets. It would, therefore, be clear that the ratio of the above decision is not attracted to the facts of the present cases.
Consequently both the questions are answered in affirmative.