I. MAHMUD, J.-These four applications, namely, I. T. C. Nos. 5/69, 6/69, 7/69 and 8/69 relate to the charge years 1956-57, 1957-58, 1958-59 and 1960-61, respectively. They have been filed by the applicant-assessee under section 66(2) of the Income-tax Act, 1922 (hereinafter referred to as "the Act") praying the High Court 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 24-11-1964 relating to the said four charge years, which the said Tribunal refused to refer on the ground that they raised questions of fact. These applications were made by the assessee under the law as it then stood but it is conceded that after the amendment of section 66(2) of the said Act the High Court if it is not satisfied with the correctness of the decision, may frame the questions of law and proceed to hear the case.
2. The mills known as the Khairpur, Textile Mills situate at Khairpur, were owned by the Khairpur State. The applicant, Khairpur Textile Mills Ltd., was incorporated in the State of Khairpur as a joint stock Company under the Companies Act, 1913, with the object, inter alia, of purchasing the said Mills from the Government of Khairpur. Accordingly, pursuant to a Deed of Sale dated 3-3-1955, the applicant purchased the said Mills comprising the freehold and leasehold immovable properties, plant, machinery, furniture, stock-in-trade, book debts and other paraphernalia, for a total price of Rs. 1,53,87,293 out of which Rupees one crore was paid to the said Vendor, leaving the balance of Rs. 53,87,293 which was payable in stipulated instal--ments @ 3 --% simple interest on the unpaid balance. In each account year relating to the corresponding charge year, the applicant paid interest on the outstanding balance of the purchase price, amounting to Rs. 1,25,703, Rs. 1,50,844, Rs.
1,28,941 and Rs. 47,965 respectively and claimed deduction of the amount paid, as an allowance under section 10(2)(ii ), 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 exclu--sively for the purpose of its business. The Income-tax Officer disallowed the claim while making the assessm ent for each of the four charge years under both subsections, on the ground that the outstanding balance of purchase price payable to the Vendor could not be termed as "capital borrowed" within the meaning of section 10(2) (iii). He also held that the payment of this interest was also not admissible under section 10(2) (xvi), because the interest was paid on money spent for acquiring the business, relying on the decision of the Bombay High Court in the case of Metro Theatre Bombay Ltd. v. Commissioner of Income-tax (14 T R 638
3. Being aggrieved by the order of the Income-tax Officer, the applicant filed four direct appeals for each of four charge years, to the Income-tax Appellate Tribunal. Before the Appellate Tribunal, the applicant pressed its claim for allowance of the whole amount of the interest paid for each of the four charge years, under section 10(2) (xvi). In the alternative, the applicant contended that the consideration for the purchase of the Mills comprised of two parts ; a part of it attributable to the purchase of the fixed assets, such as land, factory building, plant and machinery, and the remaining part as a consideration for purchase of floating assets, such as, raw material, finished products, stock-in-trade, book debts etc. It was urged before the said Tribunal that if the entire interest could not be allowed, at least that part of the interest attributable to that 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 Appellate Tribunal rejected this argument of the applicant and by its consolidated order dated 24-I1-1966 dismissed the four appeals. The Tribunal observed in its order as follows :- "After considering the facts of the case we are of the opinion that on the basis of admitted facts the entire consideration was for the purchase of the Mill as a going concern. The outstanding payment therefore, represented nothing but a part of this consideration. This considera--petition 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."
4. The applicant then submitted application under section 66(1) of the Act, in respect of each of the four charge years, seeking reference to the High Court of certain common questions of law said to arise from the Tribunal's consolidated order dated 24-11-1966. But these applications were rejected by the Appellate Tribunal on the ground that the questions proposed by the applicant, were questions of fact. The applicant has therefore moved the present applications under section 66(2) of the Act.
5. Mr. A.I Athar, learned counsel for the applicant, submitted that the applicant claimed the entire amount of interest paid in each year as an expenditure incurred wholly and exclusively for the purpose of its business as an allowance under section 10(2) (xvi) of the Act and, therefore, he did not press the question proposed in these applications relating to the allowance of the interest amount on that portion of the balance of - the purchase price attributable to the purchase of the floating assets and the question relating to capitalization of the remaining interest. He urged that these questions may be refrained to read as follows "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."
As the question of allowance of interest as revenue expenditure under section 10(2) (xvi) of the Act was raised before the Appellate Tribunal, there is no difficulty in holding that the above question does arise out of the said order of the Tribunal and also that it is a question of law. It is also A not disputed that the High Court may reframe a question proposed by the applicant under section 66(2) of the Act, if it arises out of the order of the Appellate Tribunal. We now proceed to answer the said question.
6. The submission of Mr. A.I Athar is that the interest amount paid by the applicant on the unpaid purchase price was a revenue expenditure, incurred wholly and exclusively for the purpose of its business and was, therefore, allowable under section 10(2) (xvi) of the Act. On the other hand, the contention of Mr. Mansoor Ahmed Khan, learned counsel for the Commis--sioner, is that the balance of the unpaid purchase price was. Nothing but part of the total consideration for acquiring the mills, which are undoubtedly capital assets of a permanent and enduring nature. It was also argued by him that the interest amount payable on the unpaid purchase price, when added to the principal amount then due, itself became part of the principal amount. In support of this contention that interest when added to the balance principal amount becomes "principal money" due, he cited the case of the Bank of the Bahwalpur Ltd. v. Syed Muhammad Shies (PLD 1967 Kar. 433in which the Division Bench had construed the expression appearing in section 79 of the Negotiable Instruments Act, 1881, "interest shall be calculated at the rate specified on the amount of the principal money due thereon". It was held that when monthly interest is added to the amount of principal due, the total becomes "principal money due". This case, in our opinion, is distinguishable as it was considering a different provision of law and not the tax provision of section 10(2) (xvi) of the Act. Upon a construction of the Deed of Sale, it seems to us clear that as simple interest at 3 1 % per annum , t was payable on the unpaid balance of the purchase price, it is to be treated separately from the principal amount due. The submission of learned counsel for the Commissioner, therefore, does not seem to have any force that interest paid was to be treated as part of the balance of the purchase price, or even as extra payment for acquiring the capital assets.
7. The next submission of Mr. Mansoor Ahmed Khan is that the interest amount was not wholly and exclusively incurred for the purpose of the business. In this connection, he relied, as did the Income-tax Officer, on the case of the Metro Theatre Bombay Ltd., referred to above. In that case, the assessee Metro Theatre, Bombay Ltd. Had entered into a building agreement with the Government, by which in consideration of building upon the land and paying a sum of Rs. 3 lacs and odd, it was to receive a lease for 99 years. The agreement provided for the payment of this sum in six-monthly instalments with interest on the instalments outstanding from time to time. The assessee paid a sum of Rs. 9,825 as interest in the relevant year and claimed the amount as a deduction, inter alia, under section 10(2) (xii) (corresponding to the present section 10(2) (xvi) of the Act. The building was partly used as a Cinema and partly let out to others. It was held that the payment of interest on the arrears of purchase price of the leasehold interest, in which the cinema business was carried on, may, no doubt, be said to have been for the purpose of the business, but it was not wholly and exclusively incurred for the purpose of the cinema business because if the cinema business had closed down, the assessee would still have to make the payment of interest and therefore the in--terest claimed was accordingly disallowed. This case besides being distinguish--able on its facts, is also no authority for the proposition that interest paid on unpaid instalments of purchase price is not allowable as revenue expen--diture.
8. Mr. A.I Athar relied on the decision of the Indian Supreme Court in Bombay Steam Navigation Co.
(1933) (Private) Ltd. v. Commissioner of Income---tax, Bombay ((1965) 65 1 T R 52which ruled to the contrary and held that the interest paid was allowable as a deduction. In that case, pursuant to a scheme of amalgamation between two shipping companies, the assessee-Company was incorporated to take over certain passengers and ferry services carried on by one of the former.
The company took over the assets at an agreed price, which was to be satisfied partly by allotment of fully paid-up shares to the vendor-Company and the balance of the purchase price was to be paid to the vendor-Company at simple interest @ 6 % per annum until payment. During the relevant account year, the assessee paid interest on the balance outstanding and claimed it as an allowance under section 10(2) (xv) of the Indian Income-tax Act, 1922. The claim of the assessee was allowed and it was held that the interest paid by the assessee was a business expenditure, because the transaction for acquisition of assets was closely related to the carrying on of the business of the assessee and interest paid on unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expended for the purpose of the business which was carried on in the accounting period. The Supreme Court observed on page 59 as follows :- "Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. 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.
The Metro Theatre's case, referred to above, was however mentioned by the Indian Supreme Court on another point. Incidentally, the commentators of the Law and Practice of Income-tax by Kanga & Palkhiwala, 7th Edition, Vol. I, page 474, observe in the foot-note that the Metro Theatre's case must be treated as overruled on the point under consideration. In the Commissioner of Income-tax v. Messrs Rohtas Industries Ltd. (67 I T R 783=AIR 1966 Pat. 338a piece of land was acquired by the Government for the assesses-Company under the Land Acquisition Act and the compensation determined was paid by the assessee. Since possession of the land was taken by the company before the total compensation money as finally determined under the Act was paid, a sum of Rs.
22,438 was paid by the assesses-Company as interest as required under section 34 of the Land Acquisition Act. The assessee claimed the interest as an allowance under section 10(2) (xv) of the Indian Income-tax Act. It was held that the said interest was an allowable deduction as the land was acquired for the purpose of the business of the company and the payment of interest was in relation thereto.
9. It is not in dispute that the applicant was carrying on the business in the year of account in which the interest amount was paid. Paragraph 4 (b) of the Deed of Sale provided that the applicant- Company recognised the vendor's lien over the property under sale until the stipulated remainder of the said price with interest was paid by the company. If the applicant had not paid the stipulated interest, it is possible that the business may have been, in jeopardy, if the vendor decided to enforce its lien. It is, therefore, clear to us that the payment of interest was wholly and exclusively incurred as business necessity or business expediency for carrying on the business and as an integral part of the profit-earning process rather than for acquisition of capital assets of a permanent character. It was however, contended by Mr. Mansoor Ahmad Khan that if the business was discontinued by the applicant, the interest amount would still have to be paid .To the vendor and, therefore, the interest amount was not paid' wholly or exclusively for the purpose of its business. In our opinion, this submission is misconceived. While the interest would, no doubt, still be payable even if the business was not carried in the account year, its effect would be that the allowance would then not be permissible.
10. For the foregoing reasons, we would answer the question framed by us in the affirmative in favour of the applicant in each of these cases. In the circumstances of the case, we would make no order as to costs. s. A. H. Question framed by Court itself and answered in applicant's favour