COMMISSIONER OF INCOME TAX Vs. PUNJAB ELECTRICS LIMITED

JUDGEMENT

(1.) THE following question has been referred to this Court by the Tribunal under S. 66(2) of the Indian IT Act, 1922 :

(2.) THE question arises out of the proceedings of assessment, for the asst. year 1961 -62, of the Punjab Electrics Ltd. The relevant previous year ended on December 31, 1960. The assessee had advanced a sum of Rs. 1,46,614 to All India Finance and Commerce Ltd. (hereinafter referred to as the "debtor company"). It is common ground that the amounts advanced were bearing interest at 12per cent per annum. For the asst. year 1961 - 62, the assessee -company included in its income - tax return interest in respect of outstandings due from the debtor company only in respect of a period of 6 months, i.e., a period up to August 31, 1960. No interest for the rest of the accounting year was taken into consideration. It appears that in the course of the previous year the debtor company had acquired 4,799 shares out of the total of 4,950 shares in the assessee -company, with the result that the assessee -company became a subsidiary of the debtor company w. e. f. that date.

(3.) THE view taken by the Tribunal is clearly untenable. Though the assessee might have become the subsidiary of the debtor company they are separate corporate entities. There is no legal warrant for the apportionment which the Tribunal has done, after coming to the conclusion that an addition was called for. The view that the relationship of debtor and creditor between the two companies would cease to exist to the extent to which the parent company held the shares in the assessee -company is patently incorrect. We are, therefore, clearly of opinion that the Tribunal was in error in directing that only proportionate interest in respect of the 151 shares in the assessee - company not held by the debtor company could be brought to tax in the hands of the present assessee. Mr. P. N. Monga, learned counsel appearing for the assessee, did not seek to support the line of reasoning of the Tribunal. But taking advantage of the wide frame of the question referred to us, he sought to contend that the question should be answered in the negative and that no part of the interest of Rs. 6,000 would be at all assessable in the hands of the assessee -company. His contention is that though the assessee had previously advanced loans on interest it had decided not to charge any interest w. e. f. August 31, 1960, because on that date the debtor company had practically become the owner of the shares in the assessee - company and no real purpose would be served by the assessee charging the debtor company the interest thereafter. He contended, therefore, that w. e. f. August 31, 1960, a variation in the terms of agreement between the two companies should be inferred. Thereafter, no interest at all accrued to the assessee - company. Mr. P. N. Monga characterised income by way of interest subsequent to August 31, 1960, as a purely notional income and he relied upon several decisions to support a contention that such notional income should not be assessed.