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Issues Involved
1. Whether the sum of Rs. 1,17,500 claimed by the assessee-company as interest paid to Seth Gopaldas Mohta on the unpaid price of assets purchased can be allowed as an expenditure under section 10(2)(iii) or section 10(2)(xv) of the Indian Income-tax Act, 1922. Detailed Analysis 1. Preliminary Objections by Revenue - Contention on Framing of Question: The revenue argued that the question framed postulates the amount paid as interest on unpaid price of assets, which was not warranted. However, the court held that the question did not require reframing as it merely stated the assessee's claim. - Claim under Section 10(2)(xv): The revenue contended that the assessee did not claim the deduction under section 10(2)(xv) before the income-tax authorities or the Tribunal, and thus, the words "or section 10(2)(xv)" should be deleted. The court, referencing the Supreme Court's decision in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., concluded that the question of law could be considered as arising out of the Tribunal's order if it was the principal contention, regardless of the specific legal provision cited initially. 2. Merits of the Case - Claim under Section 10(2)(iii): The assessee conceded that in light of the Supreme Court decision in Bombay Steam Navigation Co. v. Commissioner of Income-tax, the expenditure would not be a permissible allowance under section 10(2)(iii). - Claim under Section 10(2)(xv): Section 10(2)(xv) allows any expenditure laid out or expended wholly and exclusively for business purposes, excluding capital or personal expenses. The assessee argued that the interest was connected with the business as it was paid due to the delay in allotting shares, which was a part of acquiring business assets. Court's Analysis: - Nature of Interest Payment: The court noted that the interest was paid due to the delay in issuing shares, not on unpaid purchase price or borrowed money for purchasing assets. The agreement described the unpaid price as a loan, but this was merely a contractual description and not the actual nature of the transaction. - Relevance to Business: The court found that the interest payment had no connection with the running of the business. The business was conducted from the date of incorporation, even before the assets were formally transferred. Interest was paid for a period even before the acquisition of assets, indicating it was not related to business operations. - Distinguishing Precedents: The court distinguished the case from State of Madras v. G.J. Coelho and Bombay Steam Navigation Co. v. Commissioner of Income-tax, where interest was paid on borrowed money for acquiring business assets. In the present case, it was a conversion of a proprietary business into a limited company, not an acquisition involving borrowed funds. Conclusion The court concluded that the interest payment was not related to the carrying on of the business and thus not allowable under section 10(2)(xv). The question referred was answered in the negative, and the assessee was directed to pay the costs of the Commissioner. Question answered in the negative.
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