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Judgment
Ratnam, J.—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.
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.
The first question referred to this court for its opinion at the instance of the Revenue under s. 256(1) of the I.T. Act, 1961 (hereinafter referred
to as ""the Act""), relates to the admissibility as a deduction of the interest payment made by the assessee and is as follows :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest for the period august 10,
1971, till the date of payment of the amount of Rs. 5.94 lakhs paid by the various persons for the purchase of the shares M/s. Madras Motors and
General Insurance Company Limited from the assessee company should be allowed as a deduction for the year 1972-73 ?
The contention of thee learned counsel for the Department is that the assessee did not borrow or intend to borrow capital for purposes of its
business, but had only attempted disinvestments in respect of its shares in the Madras Motors and General Insurance Company Limited and had
received a sum of Rs. 5.94 lakhs as consideration for the intended sale to those shares and, therefore, payment of interest made by the assessee on
amounts returned cannot be allowed as a deduction in computing the business income of the assessee. Reliance in this connection was also place
on the resolution passed by the assessee-company on April 9, 1971. The learned counsel drew our attention in support of this to the decisions in
Metro Theatre Bombay Ltd. v. CIT [1964] 14 ITR 638 , V. Ramaswami Ayyangar and K.R. Subramania Ayyar, Receivers to the Estate of late
Rm. A.R.A. R Rm. Arunachalam Chettiar Vs. The Commissioner of Income Tax, , BOMBAY STEAM NAVIGATION CO. (1953) PRIVATE
LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY., and Madhav Prasad Jatia Vs. Commissioner of Income Tax, U.P. Lucknow, . On
the other hand, the learned counsel for the assessee submitted that the very disposal of the shares held by the assessee in Madras Motors and
General Insurance Company Limited was contemplated only with a view to augment the internal resources of the assessee in view of the launching
of a programme of expansion requiring additional resources over and above the paid up capital and bank borrowings, that the consideration of Rs.
5.94 lakhs received by the assessee was also utilised by the assessee and that the interest paid by the assessee would, therefore, be properly
allowable as a deduction.
Under s. 36(1)(iii) of the Act, the following conditions have to be satisfied by the assessee before it can claim a deduction in respect of payment
of interest on borrowed capital : (1) there should have been a borrowing of money (capital) by the assessee; (2) such borrowing should have been
for the purpose of the business of the assessee; and (3) the assessee must have paid interest on the said borrowing and claimed it as a deduction.
We shall now consider whether, on the facts in this case, the assessee has fulfilled the aforesaid requirements. The business of the assessee is the
manufacture of fasteners used in automobile industry. The assessee purchased 4,500 equity shares of Madras Motors and General Insurance
Company Limited in May 1970. Subsequently, the assessee decided to part with the shares held by it for a consideration, by a resolution dated
March 13, 1970, enabling the assessee to invest in the shares of Madras Motors; and General Insurance Company Limited. These shares were
intended to be held from the beginning as an investment of the assessee. The resolution dated April 9, 1971, stated that owing to scheme for
expansion of the assessee-company, additional resources over the paid up capital and bank borrowings were necessary and that with a view to
pool that internal resources, the assessee decided to dispose of its shares in the Madras Motors and General Insurance Company Limited. The
resolution further authorised one of the directors of the assessee-company to negotiate for the disposal of the investment of the assessee to the
advantage of the assessee''s financial resources. The purport of this resolution is clear. The assessee desired the disposal of its shareholding in
Madras Motors and General Insurance Company to its best advantage. Thereupon the shares held by the assessee in Madras Motors and General
Insurance Company Limited as an investment were purported to be sold to twenty-two difference persons for a total consideration of Rs. 5.94
lakhs, which the assessee received in two sums of Rs. 1.98 lakhs and Rs. 3.96 lakhs on May 4, 1971, and May 7, 1971 respectively. The course
of action culminating in the receipt of these amounts by the assessee is thus not referable to any act of borrowing on the part of the assessee from
the different persons, but is attributable to a sale of the shares of the assessee to them. Those purchasers had also paid the amounts to the assessee
only as consideration for the sale of the shares of the assessee to them. Those purchasers had also paid the amounts to the assessee and not with
the idea of securing a return or payment of the amounts from the assessee. Thus, the positive act of lending by one and the acceptance thereof by
the other coupled with an element of refund or repayment inherent in a transaction of borrowing, is totally absent. At best, a mere liability to pay
back or refund the consideration paid by the purchasers was fastened on the assessee when the transaction did not go through, but that is not
referable to any act of borrowing by the assessee. That there had been a borrowing by the assessee. That there had been a borrowing by the
assessee has not been established, as the sole object of the assessee was to dispose of to other persons its investments in the form of shares
establishing the relationship of seller and purchaser and not to enter into any transaction of borrowing and lending between the assessee and the
purchasers. The receipt of the amount aggregating to Rs. 5.94 lakhs was not for purposes of the business of the assessee, viz., manufacture of
fasteners, as the amount represented the proceeds of the sale of the investment of the assessee in the form of shares. The payment of interest by
the assessee on the amounts received by it from the several intending purchasers of the shares held as an investment by the assessee in relation to
the refund of those amounts when the deal fell through, cannot be regarded as interest paid on a borrowing of capital made by the assessee for
purpose of the business, as the amount received by the assessee was not as a result of a transaction of borrowing or even intended to be such for
purposes of the business of the assessee. The circumstance that these amounts came to be deposited by the assessee in its bank account for
business purposes cannot in any manner affect or alter the position and cover the character of consideration received for transfer of shares into one
of amounts received by borrowing for purposes of business. The deposit of the amount by the assessee into its bank account for business purposes
is not a criterion for considering the true nature of the transaction. It so happened that the consideration received by the assessee for the sale of it
investment in the form of shares in Madras Motors and General Insurance Company Limited was just deposited into the bank account of the
assessee. If, at the inception, the amount was not borrowed capital, we do not see how its subsequent deposit in the overdraft account of the
assessee for business, will make it a borrowing. In other words, what was sale consideration at the inception in this case, cannot be converted into
a borrowing for business purposes, by the mere deposit of the amount received by the assessee into its overdraft account for business purposes.
We are unable, therefore, to agree with the Tribunal that as the overdraft account had been maintained for business purposes, the amount received
by the assessee avowedly towards consideration for the sale of its shares, when deposited into that account, should be treated as having been
borrowed and used for business purposes.
Even according to the Tribunal, between May 5, 1971, and August 9, 1971, no interest was payable by the assessee on the amounts and on
this reasoning, the Tribunal upheld the disallowance of the claims of the assessee for deduction of interest paid for that period. However, according
to the Tribunal, the position was different after August 9, 1971, as the assessee had utilised the amount after depositing it in the overdraft account,
which was admittedly one for business purposes, and, therefore, the payment of interest to the persons, who had paid amounts for the purchase of
shares, at 10 per cent. per annum by the assessee, which was less than the overdraft interest payable by the assessee at 101/2 per cent. per
annum, was not excessive and was also for business purposes. When the intended sale of the shares held by the assessee as an investment in the
Madras Motors and General Insurance Company Limited did not go through, the assessee was bound to return the amount received by it to the
purchasers. The accidental deposit of the amounts received by the assessee towards consideration for the sale of the shares held by it as an
investment into its business overdraft account or the repayment of the amounts by the assessee from out of the overdraft account would not make
any difference to the true character of the receipt as consideration for the sale of shares of the assessee in the hands of the assessee. Indeed, having
regard to the nature of the transaction which enabled the assessee to come by Rs. 5.94 lakhs, there can be no question of borrowing at all or the
use of borrowed moneys for business purposes merely by the deposit of the amounts so realised into the overdraft account of the assessee
maintained for business purposes. That the rate of interest paid by the assessee is not excessive is no justification for countenancing the claim for
deduction of interest which is otherwise not made out. Nor does the use by the assessee, of the amount received by it as consideration for the sale
of shares, even for business purposes, justify the deduction of interest paid by the assessee treating the transaction as one of borrowing after
August 9, 1971, for which there is no basis at all. We have earlier pointed out how at the inception the transaction never partook the character of a
borrowing and that it would not make any difference, even if the assessee had deposited the consideration for the sale of shares received by it in
the overdraft account with the bank maintained for business purposes and refunded the accounts as well from out of that account. The Tribunal
was, therefore, in error in holding that payment of 10 per cent. interest by the assessee was not excessive and was for business purposes and
would be eligible for deduction.
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. Vs. COMMISSIONER OF Income Tax., , 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 and K.R. Subramania Ayyar, Receivers to the Estate of late Rm. A.R.A. R Rm.
Arunachalam Chettiar Vs. The Commissioner of Income Tax, , 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. Vs. COMMISSIONER OF Income Tax, BOMBAY., , 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 Vs. Commissioner of Income Tax, U.P. Lucknow, , 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.
We may now briefly notice two decisions of the Supreme Court. In Shree Ram Mills Ltd., Bombay Vs. Commr. of Excess Profits Tax, Central
Bombay, , the managing agents of the assessee-company left lying with assessee-company, the commission which was due to them on the 31st of
December for every year and payable to them after the annual accounts of the company had been passed by the shareholders of the assessee-
company. The assessee-company contended that the amounts so left would constitute a ""borrowing"" within the meaning of r. 2A of Sch. II of the
Excess profits Tax Act. The Supreme Court, in repelling this argument held that a loan imports a positive act of lending coupled with an acceptance
by the other side of the money as loan and be mere inaction, the relationship of borrower and lender cannot come about. In K.M.S. Lakshmanier
and Sons Vs. Commissioner of Income Tax and Excess Profits Tax, Madras, the assesses, who were the sole selling agents for distribution of yarn
manufactured by a textile mill of customers under forward contracts, obtained from their customers advances of moneys which were adjusted
towards the final payment of purchase price at the time of delivery of goods. This arrangement was subsequently changed by the assesses from
May 5, 1944, from which date the advance payments in relation to each contract was kept by the assesses under the heading ""Contracts Advance
Fixed Deposit Account"" under which arrangement, the customer had to pay the price of the bales of yarn in full and the deposit would be returned
on completion of delivery under the contract. Subsequently, from February 14, 1945, the arrangement was again modified by which the assesses
demanded from the customer certain sums as security deposit to be held by them as security for the due performance of the contract by the
customers so long as the dealings with them by way of forward contracts continued. The customer was also obliged to pay the price in full against
the delivery in respect of each contract without any adjustment out of the deposit which carried interest at 3 per cent. per annum. During the
chargeable accounting period May 13, 1944, to April 12, 1945, the question arose whether the amounts received by the assesses constituted
borrowed money"" within the meaning of r. 2A of Sch. II of the Excess Profits Tax Act, 1940, and the Supreme court held that the transaction
between the assesses and the customer after February 14,1945, had all the essentials of a contract of loan, and, therefore, the deposits received
after that date constituted borrowed money for the purposes of r. 2A and that the deposits received by the assesses from May 5, 1944 to
February 14, 1945, partook more of the nature of trading receipts than of security deposits and, therefore, the sums received during that period
could not be regarded as borrowed money for the purpose of r. 2A. In doing so, the Supreme Court pointed out that the term ""borrowed money
must be construed in its natural and ordinary meaning and implies a real borrowing and a real lending.
In the light of the aforesaid principles and on the facts and the in the circumstances of this case, the amount was received by the assessee only as
consideration for the sale of the shares held by the assessee as its investment in another company and did not partake the character of any
borrowing by the assessee from the buyers of those shares or lending by them to the assessee and the circumstance that the amounts were
deposited by the assessee in its overdraft account for purposes of business was of no consequence and could not convert the transaction into one
of borrowing and lending which it was not at the inception. Even if such amounts were utilised by the assesses for its business purposes, there was
no justification for the Tribunal to conclude that the position subsequent to August 9, 1971, was different and, therefore, the assessee would be
entitled to claim a deduction for payment of interest. We cannot agree with the view of the Tribunal in this regard.
The learned counsel for the assessee, however, attempted to sustain the claim for deduction on the ground that it would be allowable under s.
37(1) of the Act, which corresponds to s. 10(2)(xv) of the Indian. I.T. Act, 1922. In order to claim the benefit of deduction under this provision in
respect of an expenditure, three requirements have to be fulfilled : (1) the expenditure must not be an allowance of the nature mentioned in the
other clauses; (2) it must not be in the nature of capital expenditure or personal expenses of the assessee; and (3) it must have been laid out or
expended wholly or exclusively for the purpose of business. In this case, the receipt of consideration by the assessee has earlier been found to be
not for purposes of the business of the assessee. Even on the footing that the expression ""for the purposes of the business"" has to be given a very
wide meaning, its limits are also clearly made out in that the incurring of the assessee, as a person carrying on the business, should have incurred it.
We have earlier pointed out how, on the facts and in the circumstances of the, case, the business of the assessee was merely attempting to liquidate
by sale its shareholding by way of investment made in another company. The payment of interest on the amounts paid to the assessee for the sale
of the shareholding of the assessee cannot, therefore, be labelled as an expenditure incurred by way of interest had also not been incurred by the
assessee as a person carrying on business, but only in its personal capacity as a person, who was unable to put through the transaction of the sale
of shares belonging to the assessee in favour of other third parties. Under these circumstances, we are of the opinion that s. 37(1) of the Act
cannot be pressed into service by the assessee. We answer question No. 1 in the negative and against the assessee.
That takes us on to a consideration of the second question referred and this related to the allowance of deduction by way of depreciation on
the full value of assets utilised for scientific research. In the assessment year 1971-72, depreciation was allowed to the extent of Rs. 2,082 in
respect of assets acquired by the assessee in the immediately preceding year at a cost of Rs. 18,000 and used in research. The assessee sought to
write off the balance in the assessment year 1972-73. The ITO, however, was of the view that at the time of the original assessment for 1971-72,
no outright deduction of the whole of the capital expenditure under s. 35(2)(iv) was claimed and since some depreciation had been allowed, the
depreciation admissible in this year would only be with reference to the written down value of Rs. 16,084. The AAC was of the view that since
there was no incurring of expenditure, the assessee would not be entitled to a write off for the assessment year 1972-73 of either the original
expenditure in full or the balance of the cost of the assets. It was also further found that the provisions of the Act do not permit the outright
deduction of the original cost of capital assets either in full or in part in a year other that the one in which it had been incurred. Before the Tribunal,
reliance was placed upon the order of the Tribunal, in I.T.A. No. 2094 (MDS) of 1975-76, dated February 10, 1977, in support of the claim that
even where a deduction was allowable of the full capital expenditure under s. 35(2) in any one assessment year, depreciation would be admissible
in the subsequent year with reference to the full actual cost in the earlier year and the written down value computed in the subsequent years. The
Tribunal found that the assessee was allowed depreciation of Rs. 2,082 on the actual cost last year and, therefore, depreciation is admissible only
on the WDV of Rs. 16,084 as had been done by the ITO. However, the Tribunal directed the ITO to recompute the allowance for depreciation in
the event of the assessee succeeding in an application preferred by it in relation to the assessment year 1971-72 to treat the full amount of about
Rs. 18,000 as a deduction under s. 35(2), in which case the written down value may undergo a change and in that event, the ITO was directed to
allow depreciation on the recomputed written down value inasmuch as the allowance under s. 35(2) of the Act would not be a bar to an allowance
of depreciation as laid down in the decision of the Tribunal in I.T.A. NO. 2094 (MDS) of 1975-76, dated February 10, 1977. That is how the
second question has been referred. which runs as under :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee would be entitled to
allowance of depreciation on the capital assets used for scientific research even though the full value of the assets was allowed as deduction u/s
35(2) in the earlier year ?
In Tax Case No. 1656 of 1977 Commissioner of Income Tax, Tamil Nadu-II Vs. Lucas-tvs Limited, arising out of the order of the Tribunal in
I.T.A. No. 2094 (MDS) of 19776, relied on by the asssessee, we had occasion to consider this aspect of the matter. In that case also, the
Tribunal was of the view that the assessee was entitled to depreciation with reference to assets for which relief had been granted under s. 35(2) for
the previous year on the ground that the statute prevents the assessee from claiming the benefit of depreciation in respect of the assets for which
relief had been granted under s 35(2) only in the same year and there is no bar against claimingg the relief of depreciation for the other years.
Section 35(2)(iv) has been amended by Finances (No. 2) Act of 1980, with retrospective effect from April 1, 1962, which states that where a
deduction is allowed for any previous year under s. 35 in respect of expenditure represented wholly or partly by an asset, no deduction shall be
allowed under s. 32 of the Act for this retrospective ammendment, the reasoing of the that asset. In view of this retrospective amendment, the
reasoning of the Tribunal that the assessee is entitled to allowance of depreciation on the capital assets used for scientific research, even though the
full value of the assets was allowed as a deduction under s. 35(2) in the earlier year, cannot hold good and since the amendment has been brought
into effect from April 1, 1962, it would apply to that assessment year in question. We, therefore, answer the second question referred to us in the
negative and against the assessee. However, there will be no order as to costs.