1964-VIL-34-MP-DT

Equivalent Citation: [1965] 56 ITR 186 (MP)

MADHYA PRADESH HIGH COURT

Miscellaneous Civil Case No 198 of 1962

Dated: 21.04.1964

RAM KISHAN OIL MILLS

Vs

COMMISSIONER OF INCOME-TAX, U.P

B. D. Gupta, for the Appellant

R. J. Bhave (Government Advocate) for the Respondent

Bench

P. V. DIXIT and K. L. PANDEY, JJ.

JUDGMENT

The judgment of the court was delivered by

DIXIT C.J.--In this reference under section 66(1) of the Indian Income- tax Act, 1922, at the instance of the assessee, the questions that have been placed by the Tribunal before us for decision are:

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"1. Whether interest paid towards a loan raised for acquiring the assessee's brother's interest in the family business on partition of the family assets, is in the nature of a capital payment and not allowable under section 10(2)(iii)?

2. Whether, in the circumstances of the case, the Income-tax Officer's action in reopening the case under section 34(1)(b) for the years 1953-54 and 1954-55 was justified?"

The material facts are that in a partition of a joint family property between the assessee, Gangadharrao, who is the proprietor of the firm, Messrs. Ram Kishan Oil Mills, Lashkar, and his brother, Narayanrao, according to an order dated 5th August, 1946, of the Maharaja of Gwalior, Gangadharrao was required to pay Rs 10,000 to his brother in lieu of Narayanarao's share in certain item of property, and an amount of Rs 42,855 for the half share of Narayanarao in Messrs. Ramkishan Oil Mills, Lashkar, which was allotted to Gangadharrao. At the time of the partition, the jagir estate of Gangadharrao was under the court of wards. In order to make this payment, a loan of Rs 52,855 was advanced by the finance department of the former Gwalior State to Gangadharrao. In the assessment years 1953-54 and 1954-55 the assessee claimed a deduction under section 10(2)(iii) of the interest amount paid to the Gwalior Government on this loan. This claim was allowed by the Income-tax Officer, Gwalior, on 29th August, 1953. It was, however, disallowed in the assessment years 1955-56 and 1956-57. The Income-tax Officer also issued a notice to the assessee under section 34(1)(b) of the Act for reopening the assessment for the years 1953-54 and 1954-55, and in these reassessment proceedings the deduction on account of interest was ultimately disallowed for that assessment year also. The Income-tax Officer disallowed the deduction taking the view that the loan was not borrowed for the purpose of business, and that the assessee was still disputing in a civil court his liability to pay the amount that was ordered to be paid, by the order of the Maharaja of Gwalior, to his brother, Narayanarao, and the assessee had at the time of the partition a large deposit amount in the bank and had no need to borrow any money. In the appeals against the assessments for the four assessment years mentioned above, the Appellate Assistant Commissioner agreed with this view, and so did the Tribunal. This is a consolidated reference on the questions of law stated above arising out of the Tribunal's common order disposing of the four appeals preferred by the assessee against the assessment orders made in the assessment years 1953-54, 1954-55, 1955-56 and 1956-57.

Under section 10(2)(iii) of the Act, the amount of the interest paid "in respect of capital borrowed for the purposes of the business" is a permissible deduction in the computation of profits and gains of business, profession or vocation. It is plain from the language of clause (iii) of section 10(2) that for a claim for deduction of interest under that provision all that is necessary is that, first, the money, that is capital, must have been borrowed by the assessee; secondly, it should have been borrowed for the purposes of the business, profession or vocation of the assessee; and, thirdly, the assessee should have paid this amount as an allowance under that clause. This clause makes no distinction between the capital borrowed in order to acquire a revenue asset and the amount borrowed to acquire a capital asset. It also does not say that for the purposes of business the borrowing of capital should have been necessary, so that if at the time of borrowing the assessee had sufficient money of his own to invest in the business then the deduction cannot be allowed. Again, as held by this court in Birla Gwalior Private Ltd. v. Commissioner of Income-tax [1962] 44 I.T.R. 847 the interest paid is also not subject to the test of reasonableness. When the Income-tax Officer finds that the borrowing transaction was not illusory or colourable and that the capital was borrowed by the assessee for the purposes of the business and the amount of interest was paid, then the claim made by the assessee for deduction on account of the interest paid on borrowed capital has to be allowed. In holding that the interest paid by the assessee on the amount lent to him by the Gwalior State for acquiring his brother's share in the Ram Kishan Oil Mills was not a permissible deduction, the Tribunal relied on Metro Theatre, Bombay Ltd. v. Commissioner of Income-tax**. That was a case where an assessee purchased a 999 years old leasehold interest in his business premises for a premium payable by instalments, and paid interest on the instalments outstanding from time to time. The Bombay High Court disallowed the deduction of interest amount as not being expenditure wholly and exclusively incurred for the purposes of the business. In that case, Stone C.J. said:

"In my judgment this interest payment on unpaid instalments cannot be stated to be wholly or exclusively a payment for the purpose of such business. No doubt the payment of interest on the arrears of purchase price of this leasehold interest in which the business is carried on may be said to be for the purposes of the business but it is not wholly or exclusively for the purposes of the business. For example, if the cinema business had to be closed down the appellant would still have to make this payment unless he was prepared to have the licence forfeited."

Here, the case of Metro Theatre** has no applicability at all. In that case, there was no question of payment of interest on any loan contracted to provide capital for investment in the business. The question that arose in that case was about the payment of interest on the instalments where the purchase-money was payable by instalments. In Metro Theatre's case.[1946] 14 I.T.R. 638, 643 it was distinctly held that a mere purchase of capital asset on a long term credit with a stipulation for the payment of interest on the reduced balance does not amount to the borrowing of capital.

Metro Theatre's case [1946] 14 I.T.R. 638 was dissented from in G.J. Coelho v. State of Madras [1960] 40 I.T.R. 686, where the assessee claimed deduction of the interest paid by him on moneys borrowed for the purpose of purchasing a plantation. The deduction was claimed under the Madras Agricultural Income-tax Act, 1955. Rajagopalan J., who delivered the judgment of the court, while expressing his disagreement with the observations of Stone C.J. in Metro Theatre's case*, said [1960] 40 I.T.R. 686, 691

"These observations were really in the nature of obiter. Besides there is obviously a difference between the unpaid instalments the learned Chief Justice had to consider in that case and a loan contracted to provide the capital for investment in business, or as in this case for the purchase of the land, the income yielding investment. With all respect to the learned Chief Justice we are unable to agree with the implied principle, that though the payment of interest would satisfy the test that it had been incurred for purposes of the business, it would not satisfy the further test, that it must have been incurred wholly and exclusively for that business."

In our opinion, the decision that is in point here is the decision of the Bombay High Court in Calico Dyeing and Printing Works v. Commissioner of Income-tax [1958] 34 I.T.R. 265. In that case, the assessee-firm, which carried on the business of bleaching, dyeing and printing cloth, borrowed money in the year of account for extending its business, purchased land and erected additional plant and machinery, and paid interest on the borrowed capital. The assessee made a claim for deduction of interest under section 10(2)(iii), which was rejected by the taxing authority on the ground that the plant and the machinery were not used for business in the year of account. Chagla C.J., while holding that the deduction was permissible, said that for a deduction under section 10(2)(iii) all that the assessee has to show is that the capital which was borrowed was used for the purposes of the business of the assessee in the relevant year of account and it does not matter whether the capital was borrowed to acquire a revenue asset or a capital asset.

Now, here, no dispute was ever raised before the taxing authorities or the Tribunal about the genuineness of the borrowing. It was also not disputed that the capital was borrowed for the purposes of the business of the assessee and that the interest amount, which the assessee claimed to deduct, was in fact paid. On these facts, the question whether the interest amount paid by the assessee, Gangadharrao, on the moneys borrowed by him from the Gwalior Government for acquiring his brother's interest in the family business on partition can be allowed, must be answered in the affirmative. The payment of such interest cannot be treated as capital expenditure.

Shri Bhave, learned Government advocate, appearing for the department, referred us to Bombay Steam Navigation Co. v. Commissioner of Income-tax*. That case is distinguishable by the circumstance that in that case the interest amount, of which deduction was claimed, was paid on the unpaid balance of the price of the assets acquired and there was no borrowing. The case of Bombay Steam Navigation Co.  [1963] 48 I.T.R. 476 was analogous to Metro Theatre's case [1946] 14 I.T.R. 638 and was decided by following the decision in the latter case.

It was also urged that there was no material to show that interest was paid by the assessee to the Gwalior Government or the successor Government. As to this, it is sufficient to say that we have not been asked to answer the question whether on the facts and circumstances of the case the amount in respect of which the assessee claimed deduction was paid by him as interest to the Government. Our answer to the first question, therefore, is that the interest paid by the assessee on the loan amount borrowed by him for acquiring his brother's share in the family business in a partition can be deducted under section 10(2)(iii) of the Act.

This answer renders it strictly unnecessary for us to answer the other question. But it must be said in connection with that question that there was no information before the Income-tax Officer justifying the reopening of the assessment under section 34(1)(b) for the assessment years 1953-54 and 1954-55. According to the decision of the Supreme Court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax*** two conditions must be satisfied before the Income-tax Officer can act under section 34(1)(b). They are, that he must have come into possession, subsequent to the making of the assessment order in question, "information"; and that information must lead to his belief that income chargeable to income-tax has escaped assessment, or that it has been under-assessed or assessed at too low a rate or has been made the subject of excessive relief under the Act. The Supreme Court has further held that information for the purposes of section 34(1)(b) is not limited to factual information but includes information as to the true and correct state of the law, and so covers information as to relevant judicial decisions. In Maharaj Kumar Kamal Singh's case [1959] 35 I.T.R. 1; [1959] Supp. 1 S.C.R. 10 the Supreme Court left open the question whether the Income-tax Officer could act under section 34(1)(b) even if he merely changed his mind without any information from an external source and came to the conclusion that in a particular case he had erroneously allowed an assessee's income to escape assessment. But so far as this court is concerned, it has been held in Income-tax Appellate Tribunal v. B.P. Byramji and Co. [1946] 14 I.T.R. 174 that an Income-tax Officer cannot take any action under section 34 merely because he intended to change his view or to hold an opinion different from that of his predecessor on some set of facts. In the statement of the case before us, there is no indication whatsoever of the information which came into the possession of the Income-tax Officer subsequent to the making of the assessments for the assessment years 1953-54 and 1954-55 which led to his belief that the assessee had been wrongly allowed in those assessment years deduction on account of interest. The facts and circumstances in which the deduction was claimed were known to the Income-tax Officer even in the assessment years 1953-54 and 1954-55. In the assessment order, which the Income-tax Officer recorded on 1st February, 1958, in the reassessment proceedings for the assessment year 1953-54, it was said that proceedings under section 34(1)(b) had been initiated not on account of any change of opinion but because his predecessor-Income-tax Officer had not applied his mind to the admissibility of the deduction claimed "probably because full details about this interest had not been submitted before him". The Income-tax Officer did not indicate the material which came into his possession subsequently, and the use of the word "presumably" made by him indicates that he was also not certain as regards the material which was before his predecessor. If the predecessor of the Income-tax Officer did not apply his mind to the question of the deduction of interest amount, and his successor did, that does not mean that the successor-Income-tax Officer came into possession of information justifying the reopening of assessments under section 34(1)(b). On the other hand, the justification of "application of mind" for the issue of a notice under section 34(1)(b) only indicates that the notice was issued because of change of opinion. In our judgment, there was no justification whatsoever for reopening the assessments for the years 1953-54 and 1954-55. Consequently, the second question must be answered in the negative.

We accordingly answer the two questions in the manner stated above. The assessee shall have costs of this reference. Counsel's fee is fixed at Rs 150.