1964 (10) TMI 12 - SC - Income Tax

Whether on the facts and in the circumstances of the case the said sum of ₹ 2,74,610 and ₹ 2,86,823 being the interest paid by the assessee is allowable as a deduction under the Income-tax Act under any of the sections 10(2)(iii), 10(2)(xv) or 10(i) ? Held that - We are, therefore, of the view that the allowance claimed is a permissible deduction under section 10(2)(xv). Appeal allowed.

Summary

Issues Involved:
1. Allowability of interest paid as a deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922.
2. Allowability of interest paid as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.
3. Consideration of interest paid as a necessary outgoing under section 10(1) of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Allowability of Interest Paid under Section 10(2)(iii)
The primary issue is whether the interest paid by the assessee-company on the unpaid balance of the purchase price for assets acquired from the Scindias can be allowed as a deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922.

Key Points:
- The assessee-company purchased assets from the Scindias and agreed to pay part of the consideration by allotting shares and treating the balance as a loan.
- The original clause 3(b) of the contract was modified to treat the unpaid balance as a balance of purchase money remaining unpaid rather than a loan.
- The court held that "interest paid in respect of capital borrowed" under section 10(2)(iii) refers to interest on money borrowed, not on any other asset acquired under a contract.
- The court concluded that the transaction did not involve borrowed capital but was merely a deferred payment of the purchase price. Therefore, the interest paid could not be allowed under section 10(2)(iii).

Conclusion:
The claim for deduction of the amount of interest under section 10(2)(iii) is not admissible as there was no capital borrowed by the assessee-company.

2. Allowability of Interest Paid under Section 10(2)(xv)
The next issue is whether the interest paid can be allowed as a deduction under section 10(2)(xv), which permits deductions for "any expenditure... laid out or expended wholly and exclusively for the purpose of such business."

Key Points:
- Section 10(2)(xv) allows for deductions of expenditures not covered under clauses (i) to (xiv) and not being in the nature of capital expenditure or personal expenses.
- The court considered whether the expenditure was of a capital nature and concluded that it was not.
- The court emphasized that the expenditure must be viewed in the context of business necessity or expediency.
- The interest paid was closely related to the business operations and was necessary for the acquisition of assets required for carrying on the business.

Conclusion:
The court held that the interest paid by the assessee-company is a permissible deduction under section 10(2)(xv) as it was incurred wholly and exclusively for the purpose of the business.

3. Consideration under Section 10(1)
Lastly, the court considered whether the interest paid could be regarded as a necessary outgoing under section 10(1), which pertains to the computation of profits or gains of a business.

Key Points:
- Section 10(1) requires that tax be payable on the profits or gains of any business carried on by the assessee in the year of account.
- The court noted that since the interest was paid during the period when the business was carried on, it could be considered a necessary outgoing for the purpose of the business.

Conclusion:
The court did not feel the need to examine this issue further, as the allowance was already deemed permissible under section 10(2)(xv).

Final Judgment:
The appeals were allowed with costs, and the interest paid by the assessee-company was deemed a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The claim under section 10(2)(iii) was not admissible, and the court did not find it necessary to consider the claim under section 10(1).