COMMISSIONER OF INCOME TAX Vs. SUNDARAM FASTNERS LIMITED

JUDGEMENT

(1.) THE assessee is a company. On March 13, 1970, the assessee resolved to purchase 4,500 equity shares in Madras Motors and General Insurance Company Limited and the shares were so purchased in May, 1970. Subsequently, be another resolution passed on April 9, 1971, the assessee decided to dispose of its shareholding in the Madras Motors and General Insurance Company Limited and authoriised one to its directors to negotiate in that behalf. Pursuant to this, the assessee purposed to sell its shareholing in the Madras Motors and General Insurance Company Limited to twenty-two different persons on receipt of consideration of 1.98 lakhs of rupees on May 4, 1971, and 3.96 lakhs of rupees on May 7, 1971, from the purchasers. THE amount received thus by the assessee aggregating to 5.94 lakhs of rupees was deposited with the United Bank of India, Broadway Branch, were it had an overdraft account. THE deposit of the sum of 5.94 lakhs of rupees temporarily brought about a reduction in the balance due (to the bank) from the assessee. By its letter dated May 13, 1971, the assessee informed the madras Motors and General Insurance Company Limited that it had sold the 4,500 equity shares held by it to twenty-two persons and, enclosing the share transfer deeds duly completed along with the share certificates, requested the Madras Motors and General Insurance Company Limited to give effect to the transfers. During the tendency of the proceedings for transfer, the assessee addressed a letter on August 9,1971, to the Madras MOtors and General Insurance Company Limited drawing attention to its earlier letter dated May 13,1971, and stating that as the assessee and the transfers had since agreed that the transfers need not be put through, the assessee was withdrawing its request for effecting the transfer of the shares. THErein, the assessee had also requested that the application for transfer may be treated as cancelled and the share certificate as well as the shares transfer deeds and the declaration from relating to the 4,500 equity shares may be returned to the assessee. In accordance with this letter, the Madras Motors and General Insurance Company Limited did not effect the transfer of the 4,500 equity shares. However, the consideration of 5.94 lakhs of rupees received by the assessee continued to remain with it till January 5,1972, when the assessee returned the amounts to those persons to whom the assessee had earlier purported to sell the shares. On March 10,1972, those persons who had so received the amounts refunded by the assessee, wrote a letter to the assessee drawing its attention to the circumstances that the money paid by them had been lying with the assessee and stating that if that amount had been in deposit with M/s. T.V. Sundaram Iyengar & Sons (P.) Limited, Madurai, it would have earned interest at the rate of 10 per cent. per annum and, therefore, the assessee may consider allowing interest on the amounts retained by the assessee for the period from April 29, 1971, till January 5, 1972. In return, the assessee-company resolved on March 30, 1972, that interest at 10 per cent. per annum may be paid from May 5, 1971, till December 31, 1971, on the amounts paid to it by those who had wanted to purchase the shares and paid that interest as well.

(2.) IN the course of the assessment proceedings relating to the assessment year 1972-73, the assessee claimed that the sum of Rs. 39,057 so paid as interest should be allowed as a deduction in computing the business income of the assessee. The ITO negatived the claim of the assessee on the view that the amount of Rs. 5.94 lakhs was not borrowed by the assessee for its business and the circumstance that the amounts received were deposited by it in the overdraft account would not make any difference. On appeal, the AAC held that though the motive with which the amounts were received by the assessee was really immaterial, yet there was no evidence to establish that but for the receipt of the amount of Rs. 5.94 lakhs by the assessee, it would have been obliged to borrow money on interest and, therefore, the assessee was really not in need of the amount received from the various persons, who had wanted to buy the shares. The disallowance was ultimately upheld. On further, appeal to the Tribunal, it made a distinction between the period from May 5, 1971, to August 9, 1971, and subsequently and in respect of the former period, the Tribunal concluded that as the assessee had done everything to part with its title in the shares in favour of the purchasers and the deal was called off only on August 9, 1971, when the assessee became liable to repay the amount, there was no liability on the part of the assessee to pay interest for that period and the claim of the assessee for deduction of the interest paid was, therefore, not in order. For the period subsequent to August 9, 1971, the Tribunal was of the view that the assessee had utilised the amount of Rs. 5.94 lakhs in the overdraft account, which was admittedly for business purposes, and as the assessee had paid only 10 per cent. interest to the persons to whom the amounts were returned, while the rate of interest payable on overdraft account was 101/2 per cent. the payment of interest was not excessive and was for the purpose of business and, therefore, interest was not excessive and was for the purpose of business and, therefore, interest from August 10, 1971, till the date of repayment would be an admissible deduction. A direction to rework and allow this sum as a deduction was given to the ITO.

(3.) WE may now refer to the decisions to which our attention was invited by the learned counsel for the Revenue. In Metro Theatre Bombay Ltd. v. CIT [1946] 14 ITR 638 (Bom), under an arrangement to receive to long-term lease of property, the assessee agreed to pay the consideration stipulated in half-yearly installment spread over a number of years with interest at 5 per cent. per annum, on the balance outstanding. The interest paid on the balance was disallowed as a permissible deduction in computing the total assessable income of the assessee. The Bombay High Court held that mere purchase of a capital asset on a long-term credit with a stipulation for the payment of interest on the reduced balance did not amount to borrowing of capital within the meaning of s. 10(2)(iii) of the Indian I.T. Act, 1922. In that case, the liability to pay interest arose out of an agreement to receive a lease in future, whereas, in the present case, interest had been paid on the refund of consideration paid for sale of shares but in either case, though amounts were paid as interest, it was not interest paid in respect of the capital borrowed. The assessee in V. Ramaswami Ayyangar v. CIT [1950] 18 ITR 150 (Mad), was carrying on business in money-lending. He claimed that in the computation of his business income, he was entitled under s. 10(2)(iii) of the Indian Act, 1922, to deduct interest paid on the death duty to the Government of Ceylon in relation to properties left by a deceased person. The court negatived the claim for deduction holding that though the amount which was not paid as death duty was used for the purpose of business, yet it could in no sense be regarded as a borrowing from the Government of Ceylon and that s. 10(2)(iii) contemplated lending of money to a borrower and the borrowing of the money from a lender with a contractual stipulation for repayment with interest on the loan. It was also pointed out that if the loan so borrowed is employed in or for the business, the interest on such loan is a permissible deduction, but the amount due under the statute cannot be regarded as borrowed capital, for the expression capital borrowed predicates the relationship of borrower and lender, which relationship did not exist in that case, as in this also. In Bombay Steam Navigation Co. (1953) Private Ltd. v. CIT [1965] 56 ITR 52 (SC), the Supreme Court pointed out that an agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan and though it may be that a loan of money results in a debt, every debt cannot be regarded as a lender. Applying this to the present case, the assessee, at best, was a debtor, was not a loan borrowed and he cannot claim that there was a borrowing and the interest paid thereon by the assessee should be deducted. Again, the Madhav Prasad Jatia v. CIT , where the assessee made a borrowing to meet her personal obligation and not any business obligation and had paid interest in such borrowing, the Supreme Court had not hesitation in holding that the expenditure incurred by the assessee by way of interest was not for carrying on business in her capacity as a person carrying on that business, and would not, therefore, deductible either under s. 10(2)(iii) or under s. 10(2)(xv) of the Indian I.T. Act, 1922. In this case also, the business of the assessee is not dealing in shares, but the manufacture of fasteners used in automobile industry. Therefore, the payment of interest can, at best, be viewed as a self-imposed obligation on the part of the assessee to pay interest to the purchasers of the shares held by the assessee as its investment and totally unrelated to its business.