COMMISSIONER OF INCOME-TAX Vs. CHOWRINGHEE PROPERTIES LTD

JUDGEMENT

(1.) The assessees are a limited company owning house properties of considerable value. The assessment concerned is for the year 1939-40 in respect of the accounting year 1938-39. In this reference obtained at the instance of the Commissioner of Income-tax, there are two questions raised, they are: Question 1. -- Whether in the facts and circumstances of the case the debentures have been kept alive for the purpose mentioned in Section 127, Clause (3), Companies Act. Question 2. -- If the answer to the first question should be in the affirmative, whether interest accrued due and payable in respect of these debentures and should be treated as allowable deduction under Section 9(1) (iv), Income-tax Act.

(2.) It was conceded at the outset, by learned Counsel for the Commissioner of Income-tax, that the answer to the first question should be in the affirmative. Therefore, consideration is required only with respect to the second question. Before stating the facts it is convenient to set out the relevant provisions of the Income-tax Act: Section 8. -- The tax shall be payable by an assessee under the head Interest on securities in respect of the interest receivable by him on any security.... Provided that no income-tax shall be payable under this section by the assessee... in respect of any interest payable on money borrowed for the purpose of investment in the securities, by the assessee.... Section 9(1). -- The tax shall be payable by an assessee under the head Income from property in respect of the bona fide annual value of property... subject to the following allowances, namely, (iv) Where the property is subject to a mortgage... the amount of any interest on such mortgage....

(3.) About the year 1920, the company issued 3 series of debentures totalling Rs. 31,50,000; this reference is concerned solely with the second series. Each debenture in this series was for Rs. 500, the total amount issued was Rs. 9,00,000, bearing interest at the rate of 7 per cent. per annum. Originally they were redeemable in 1935, the date of redemption was subsequently extended to 1942, they were covered by a trust deed dated 7 July 1920, in which they are called "the second debentures." At some date, which has not been stated but which has no importance, the company purchased Rs. 7,35,000 of this series leaving Rs. 1,65,000 held by the public. The company borrowed the necessary funds to effect this purchase by means of an overdraft with the Allahabad Bank. This loan carried interest at the rate of about 31/2 per cent. per annum which was at all times fully paid. Having obtained the debentures the company deposited them with the bank as security for the loan. The annual amount of interest paid to the bank was about Rs. 21,000 and the annual amount of interest in respect of the deposited debentures was Rs. 51,450. Up to and including the year 1937/38, the year before the year of account, the company paid all the interest on the three series of debentures, including interest on the debentures in the second series, for Rs. 1,65,000 which the public held. The income-tax assessments upon the company were made in the following manner: (a) Under Section 8 of the Act, on the sum of Rs. 51,400 in respect of interest upon the securities of Rs. 7,35,000 debentures, from which amount the interest, about Rs. 21,000 paid by the company to the bank was deducted. Thus making a net assessment of about Rs. 30,000. (b) Under Section 9(1) of the Act, on the amount of the bona fide annual value of the company's properties, less a deduction of the sum paid for interest in respect of all the debentures which deduction included Rs. 51,450, the amount of interest borne by the debentures for Rs. 7,35,000 which were deposited with the bank.