1. MUHAMMAD HALEEM, C.J.--Civil Appeals Nos. 77-K of 1979 to 80-K of 1979 arise from Civil Petitions Nos. 79-K of 1978 to 82-K of 1978 and are directed against the judgment of the High Court of Sind dated 22nd of February, 1978, while Civil Appeals Nos. 42-K of 1986 to 44-K of 1986 arise from Civil Petitions Nos. 31-K of 1985 to 33-K of 1985 and are directed against the judgment of the same High Court dated 23rd October, 1984. In the first set of appeals the appellant is the Commissioner of Income-tax, Karachi, and in the second set the appellant is Pakistan Progressive Cement Industries Limited. In both these sets, leave was granted to consider a common question of law namely whether the amount of interest paid by the purchaser of an industrial concern to the vendor on the unpaid price is 'capital' expenditure or an amount allowable under section 10(2)(xvi) of the Income-tax Act as an expenditure laid down or spent wholly or exclusively for the purpose of business.
2. The relevant facts relating to Civil Appeals Nos. 77-K of 1979 to 80-K of 1979 (The Commissioner of Income-tax, West Zone, Karachi v. Messrs Khairpur Textile Mills Limited) are: The Khairpur Textile Mills was owned by Khairpur State. The respondent-assessee was incorporated as a joint stock Company in the State of Khairpur under the Companies Act, 1913, with the object, amongst others, to purchase the said Mills from the State of Khairpur which it did as by a deed of sale dated 3rd of March, 1955, for a total consideration of Rs, 1,53,87,293 out of which Rs,1,00,00,000 was paid to Khairpur State and as for the balance of Rs,53,87,293, it was stipulated to be paid in instalments with 3% interest on the unpaid balance.
3. During the charge years 1956-57, 1957-58, 1958-59 and 1960-61, the respondent-assessee paid interest on the outstanding balance of the purchase price amounting to Rs,1,27,703, 1,50,844, 1,28,941 and 47,965 respectively, and claimed deduction of the amount paid during these charge years as an allowance under section 10(2)(iii) as being interest on capital borrowed for the purpose of the business of the Company and also under section 10(2)(xvi) as expenditure incurred wholly and exclusively for the purpose of its business. However, the claim under these provisions was rejected by the Income-tax Officer for each charge year holding that the outstanding balance of purchase price payable to the vendor could not be regarded as "capital borrowed" within the meaning of section 10(2)(iii) and so also the payment of interest on the outstanding unpaid balance was not admissible under section 10(2)(xvi) as it was paid on money spent for acquiring the business and in deciding so he relied on the decision of the Bombay High Court in the case of Metro Theatre Bombay Ltd. v. Commissioner of Income-tax, 14 I T R 638.
4. Against the assessm ent order of the Income-tax Officer, the respondent assessee for each year filed a direct appeal before the Income-tax Appellate Tribunal and pressed its claim for allowance of the whole amount of the interest for each of the four charge years under section 10(2)(xvi). In the alternative, the respondent-assessee also contended that as the consideration for the purchase of the Mills, related both to the purchase of fixed assets such as land, factory, building, plant and machinery and the floating assets such as raw material, finished products, stock-in-trade, book debts etcetera, therefore, the interest attributable to the portion of the purchase price of the floating assets should be allowed under section 10(2)(xvi) while the remaining part of the interest should be capitalised. The Income-tax Appellate Tribunal rejected both these submissions and dismissed the appeals by a consolidated order dated 24th of November, 1966, holding: "The outstanding payment, therefore, represented nothing but a part of this consideration. This consideration was admittedly of a capital nature. No part thereof could be bifurcated into capital or trading assets at the time of the acquisition and therefore, the payment of interest also cannot be co-related to two different types of assets. The subsequent payment of interest was therefore rightly treated as extra payment incurred for acquiring the business. Its disallowance as a revenue expenditure was, therefore, fully justified."
5. The respondent-assessee thereafter submitted applications under section 66(1) of the Act seeking reference to the High Court of certain common questions of law arising from the Tribunal's consolidated order dated 24th of November, 1966. But these applications were rejected on the ground that the questions proposed by the applicant were questions of fact. The respondent- assessee thereupon filed separate applications under section 66(2) of the Income-tax Act seeking the relief to require the Income-tax Appellate Tribunal to state certain common questions of law said to arise out of the consolidated order of the Tribunal dated 24th of November, 1966, relating to the charge years. But as the Act was amended subsequently, the High Court was empowered, if it was not satisfied with the correctness of the decision, to frame the question of law and to proceed to hear the case. It was, therefore, that the High Court reframed the question of law as under: "Whether the interest amount paid by the applicant on the unpaid purchase price is allowable under section 10(2)(xvi) of the Act as expenditure laid out or expended wholly and exclusively for the purpose of the business"; and answered the question in the affirmative by judgment dated 22nd of February, 1978.
6. Aggrieved by this order, the Commissioner of Income-tax, West Zone, Karachi, the appellant herein, sought a review of the finding by this Court.
7. The other set of three appeals namely Civil Appeal Nos. 42-K of 1986 to 44-K of 1986 relates to the charge years 1965-66, 1966-67 and 1967-68 respectively. The appellant, it is averred, is an association of persons, their number being two, who are promoters of Pakistan Progressive Cement Industries Limited, which was incorporated on 18th of April 1964, under the Companies Act, 1913.
8. However, before its incorporation Eruch Maneckji one of the two members of the association of persons entered into an agreement with the Dalmia Cement Limited on 24th of July, 1962, which was subsequently supplemented by another agreement dated 20th November, 1962, for the purchase of two cement factories situated at Karachi and at Dandot in Pakistan. The Dalmia Cement Limited is a subsidiary of an Indian Company known as Dalmia (Bharat) Limited. It was stipulated in the agreements that till the sale-deed was finally executed, the profits would be appropriated by Eruch Maneckji or his nominee, and the purchase price was to be paid in instalments by way of export of cement to India. There was the further stipulation that the unpaid portion of the purchase price would carry 6 per cent interest with effect from 1st of October, 1962, and payable in the same manner as the purchase price itself. The sale-deed was executed on 30th September, 1964, in favour of the appellant assessee.
9. The appellant-assessee claimed that the sum of Rs,12,79,356 paid as interest on the unpaid balance of the purchase price to Dalmia Cement Limited should be regarded as revenue expenditure as it was incurred wholly and exclusively for the purpose of business under section 10(2)(xvi) and in the alternative allowable under section 10(2)(iii). The Income-tax Officer, however, disallowed this claim.
10. Aggrieved by this order, the appellant-assessee filed separate appeals for each charge year before the Income-tax Appellate Tribunal which were allowed by order dated 27th of October, 1972, and on the request of the respondent the Income-tax Appellate Tribunal referred the following two questions in all these appeals for decision to the High Court: "(1) Whether on the facts and in the circumstances of the case the sum of Rs,12,79,356 being interest payable to Dalmia Cement Limited on purchase price could be deemed to have been incurred wholly and exclusively for the purpose of business under Section 10(2)(xvi) and could be allowed as such?
(2) Whether on the facts and in the circumstances of the case the sum of Rs,12,79,356 being interest payable to Dalmia Cement Limited on purchase price could be deemed to be allowable under section 10(2)(iii) in the absence of any deduction of payment at source."
11. The High Court held that the second question did not arise but as to the first, it answered the question in the negative in favour of the respondent by judgment dated 23rd of October, 1984. The appellant-assessee now seeks a review of this finding.
12. It is evident that the judgment in the first set of appeals was not brought to the notice of the Bench which heard the reference from which the second set of appeals arises; and had it been so, the question could have been referred to the Full Bench, if it was of a different view. Be that as it may, as both these judgments are in conflict on the same question of law, the controversy needs resolution.
13. The main reliance of the counsel for the appellant in the first set of appeals in the High Court was on the case of Metro Theatre Bombay Ltd., but the High Court held it to be distinguishable on facts and further that it was no authority for the proposition that interest paid on unpaid instalments of purchase price is not allowable as revenue expenditure, as on the same point the Supreme Court of India in Bombay Steam Navigation Co. (1953) Private Ltd. v. Commissioner of Income-tax, (1965)
14. ITR 52 (Vol. 56), laid down a contrary dictum that the interest paid on unpaid purchase price was allowable as a deduction.
15. The reasoning in this judgment proceeded on the criterion that: "If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business; 'the expenditure may be regarded as revenue expenditure." In the Law and Practice of Income-tax by Kanga and Palkhiwala, 7th Edition, Vol. I, the footnote at page 474, mentions that the Metro Theatre Bombay Ltd. v.
16. Commissioner of Income-tax (14 ITR 638), must be treated as overruled on this point.
17. In Commissioner of Income-tax v. M/s. Rohtas Industries Ltd. (AIR 1966 Pat. 338), the law laid down in Bombay Steam Navigation Co. (1953) Private Ltd. Was followed and it was held that the interest paid by the assesseecompany for the land acquired for it by the Government under the Land Acquisition Act would come within clause (xv) of subsection (2) of section 10, which corresponds to section 10(2)(xvi) of the Income-tax Act. In the State of Madras v. G.J. Coelho, AIR 1965 SC 321, the assessee purchased Silver Cloud Estate in 1950 in Gudlur, Nilgiris, Madras State for Rs,3,10,000. Out of the sale price he borrowed Rs,2,90,000 on interest varying from seven to eight per cent per annum.
18. In the charge year 1955-56, he claimed to deduct interest on the sum amounting to Rs,22,628/9/8, but the Agricultural Income-tax Officer disallowed Rs, 21,057/15/1 under section 5(k) of the Madras Plantations Agricultural Income-tax Act, 1955; and the question arose as to whether interest paid on amount borrowed for the purchase of the plantation is expenditure laid out or expended wholly and exclusively for the purpose of the plantation within the meaning of section 5(e) of the Act. It was held: "The payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation."
19. Therefore, the deduction claimed was allowed. The case of Metro Theatre Ltd. Was also distinguished as the interest claimed to be deducted as in respect of the amount borrowed for acquiring land on 99 years' lease on which a cinema was subsequently built and it was found that there was no immediate connection between the interest paid and the cinema business. It was further stated that if the interest was not paid the result would not necessarily be the stoppage of showing films but the assessee would not acquire the lease of this property. This consideration, therefore, is elemental in deciding whether it is a revenue expenditure or not. Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd. (1926) 10 Tax Cas 155, stated that the expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. Thus: "If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether". This dictum was followed in Benarsi Das v. Commissioner of Income- tax, AIR 1947 Lah.
20. 162.
21. In Commissioner of Income-tax, East Pakistan v. The Engineers Ltd., Dacca, PLD 1%7 SC 524, the assessee claimed the deduction of Rs,7,700 spent on training abroad of two engineer directors of the assessee as deductable under clause (xvi) of section 10(2) of the Income-tax Act as a sum wholly and exclusively laid out in the interest of the assessee's business. The Income-tax Officer disallowed the expense as in its opinion it had resulted in an enduring benefit to the assessee. The counsel for the Revenue did not dispute that the expenditure incurred on the training of the two engineer directors was wholly and exclusively for the purpose of assessee's business yet maintained that the expenditure incurred was in the nature of capital expenditure and not allowable under clause (xvi) of section 10(2) of the Act. In support of his assertion he relied on M/s. Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, East Pakistan, PLD 1962 SC 295. This Court distinguished it holding: "Keeping in view the distinction observed in Messrs Assam Bengal Co. Ltd. v. Commissioner of Income-tax, East Pakistan and Golden Horse Shoe (New Co.) v. Thurgood between expenditure of capital nature and revenue expense it could not be disputed that the sum laid out by the assessee on the training abroad of two of its engineer directors was a revenue expense, such as, is covered by clause (xvi) of section 10(2)."
22. Reference may also be made in this connection to the Commissioner of Income-tax v. M. Bahar Ahmad & Sons, 1981 SCM R 1029.
23. What is now to be seen is whether the requisite conditions as provided in section 10(2)(xvi) of the Income-tax Act are satisfied in this case to permit the deduction claimed by the respondent assessee. The expenditure claimed as a deduction under this provision was incurred after the commencement of the business. It is also beyond doubt that it was not for any private or domestic purpose of the respondent-assessee. Further there were stipulations in para. 4 of the sale-deed as under: "The Company hereby covenants with the vendors as follows:
(a) That the Company shall pay the remainder of the said price within the period and with terms and conditions as shown above in clause 1 of this deed.
(b) That the Company recognizes the vendors' lien over the property under sale until the stipulated remainder of the said price with interest is paid by the Company."
24. It was, accordingly, urged that the payment of interest on unpaid instalments was revenue expenditure for the purposes of the business because in the event of the failure to pay interest falling due the vendors would enforce the lien and the business of the assessee's company would come to an end.
25. According to the sale-deed the acquisition had already taken place on payment of Rs,1,00,00,000 upon the execution of the sale-deed as per para. 2 of the sale-deed and the vendors' covenants incorporated therein. The expenditure was not for acquisition of an asset or a right of a permanent character, but it was an integral part of the profit earning process as it was related to the carrying or conduct of the business. It thus satisfied the test laid down for bringing the case within the fold of section 10(2)(xvi) of the Income-tax Act. Assuming for argument's sake that the business was closed then according to the sale deed interest would nonetheless be payable on unpaid instalments but it cannot be deducted as an allowance under the above clause in that event as it would not satisfy the requirement. This contingency is wholly irrelevant in the context of the facts stated.
26. Accordingly, we find no substance in these appeals and we dismiss them, but with no order as to costs.
27. In the second set of appeals, the position is no different as there was also the stipulation in the agreements that the unpaid portion of the sale price would carry six per cent interest with effect from 1st of October, 1962, and payable in the same manner as the sale price itself. It is not denied that the sale-deed executed subsequently on 30th of September, 1964, did not have the stipulation to this effect, and the expenditure claimed as an allowance is for the subsequent charge years 1965-66, 1966-67 and 1967-68.
28. The High Court relied on Metro Theatre Bombay Ltd. v. Commissioner of Income-tax, 14 I T R 638, which is distinguishable on facts as in that case allowance was claimed in respect of the amount borrowed for acquiring land on which a cinema was built subsequently. It was, therefore, that it could not be an integral part of the cinema business. Here even before the execution of the sale- deed the appellant-assessee was operating the business and entitled to appropriate the profits and bear the losses which operation continued after the execution of the sale-deed, and the interest on the unpaid balance was claimed as revenue expenditure for the subsequent charge years. Such expenditure was not for the acquisition of any property but was so closely related to the business that it could be viewed as an integral part of the conduct of the business. It thus satisfied the test to bring it within the four corners of section 10(2)(xvi) as revenue expenditure laid out wholly and exclusively for the purpose of business.
29. In this view of the matter, the facts in this case are at par with those in the first set of appeals, and, therefore, we would not uphold the judgment in these appeals as the High Court has not correctly applied the law. We would answer the question in the affirmative in favour of the appellant- assessee.
30. The appeals are, accordingly, allowed but with no order as to costs.