Income-tax---

----Business income---Allowances---Interest on borrowed capital---Business expenditure---Interest paid on instalments of price of property purchased for business---Whether allowable---Income-tax Act. 1922, Ss.10(2)(iii) & 10(2)(xv).

Interest paid on moneys payable for purchase of a property in which a business is carried on is not in all cases allowable as interest on capital borrowed for purposes of the business under section 10(2)(iii), or as business expenditure under section 10(2)(xv). Nor is interest payable on purchase money deductible under either of those clauses merely because the price is stipulated to be paid in instalments alongwith interest on the outstanding balance. The test to be applied in such cases is whether the interest was paid by the assessee in his capacity as owner of the property for acquiring the property or in his character as a trader for carrying on his business.

The assessee took a property on lease for 99 years to carry on a business with a condition for sale of the property by the lessor to the lessee and for purchase of the property by the lessee for Rs. 4,09,959 within 5 years on giving 6 months' notice. The assessee made default when called upon to purchase the land and in a suit for specific performance by the lessor, a consent decree was passed under which the assessee agreed to pay a certain amount when the decree was passed and the balance of the agreed price due to the lessor with interest at 5-1/4 per cent. in monthly instalments. For the assessment year 1955-56, the assessee claimed deduction in respect of two amounts, namely, Rs.12,486 being the amount of interest due on the balance remaining outstanding for the period from May 6, 1954 to March 31, 1955, and for an amount of Rs.17,281 being interest for the period between March 31, 1951 to May 5, 1954 which was included in the amount paid on May 8, 1954, when the decree was passed. The claim for deduction in respect of these two items was made primarily under clause (iii) and, in the alternative, under section 10(2), clause (xv). The Tribunal allowed both the claims mainly on the ground that the payments had not brought into existence any capital asset or increased the value of any such asset but were made exclusively for the purposes of the business.

Held, that since neither the acquisition of the property nor the stipulation to pay in instalments with interest thereon were parts of an integrated scheme entered into for the purposes of carrying on the business of the assessee but were made by the assessee more in his character as an owner of property than as a trader, and on account of his default in complying with the agreement to purchase within 5 years on six months' notice, the amounts in question were not allowable either under section 10(2)(iii) or section 10(2)(xv). On the facts, the case was governed by the decision in Metro Theatres Ltd. v. Commissioner of Income-tax (1946) 14 ITR 638 and not by the decision in State of Madras v. Coelho (1964) 53 ITR 186. The latter case was distinguishable because there the transaction of purchase and borrowing of funds were parts of an integrated scheme for carrying on a business.

Assam-Bengal Cement Co. Ltd. v. Commissioner of Income-tax (1955) 27, ITR 34; (1955) 1 SCR 972; Bombay Steam Navigation Co. v. Commissioner of Income-tax (1963) 48 ITR 476; Commissioner of Income-tax v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC); Commissioner of Income-tax v. Minsararasam & Co. Ltd. AIR 1932 Mad. 437; Hudson's Bay Company v. Thew (1919) 7 Tax Cas. 206; Metro Theatre Bombay Ltd. v. Commissioner of Income-tax (1946) 14 ITR 638 and State of Madras v. G.J. Coelho (1964) 53 ITR 186 (SC) ref.

J.M. Thakore, Advocate-General with M.M. Thakore and M.G. Doshit for the Commissioner.

I.M. Nanavati for the Assessee.

JUDGMENT

J.M. SHELAT, CJ. ---By a deed of lease dated March 10, 1945, the assessee-company took over a plot of land admeasuring 4,059 square yards on lease for a period of ninety-nine years at an annual rent of Rs.12,685 per year and built thereupon its press where it carried on its business as printers and publishers of a daily newspaper called "Sandesh". The deed of lease gave option to both the parties, the lessor to sell the said land at a price of Rs. 4,09,959 at the rate of Rs.101 per square yard, and the lessee to purchase it at the said price, both parties agreeing to exercise their respective option during a period of five years commencing from January 1, 1948, and ending on December 31, 1953, after giving six months' notice. The deed of lease is in Gujarati and, as translated, clause (4) thereof runs as follows:

"If the land leased is acquired under the provisions of the Land Acquisition Act, or the leased land is notified for acquisition and such notification is subsequently cancelled and thereafter whatever may be the balance of the lease land, either party may, within five years after the Ist January, 1948, i.e. up to the 31st December, 1953, call upon the other party by six months' notice either to sell or purchase the leased land at the price of Rs.4,09,959 calculated at the rate of Rs.101 per square yard and the other party shall be bound to sell or purchase at the said price. If the party of the first part is willing to sell the leased land at the rate calculated at Rs.101 per square yard within the hereinabove stipulated time and the party of the second part commits breach in purchasing the leased land, the party of the first part shall recover the sale price together with costs and interest thereon at the rate of six per cent. per annum of the leased land and the structures constructed thereon, and the deficiency, if any, shall be recovered from the other properties of the party of the second part. And if the party of the second part is willing to purchase the leased land and the party of the first part fails to execute. conveyance, the party of the second part shall deposit the said amount either with the Imperial Bank, the Central Bank or the Indian Bank in the name of the party of the first part or pay the same to the party of the first part and on such payment being made, rent shall cease and the party of the second part shall be entitled to obtain conveyance from the party of the first part and, in the said circumstances, two-thirds of the expenses shall be borne by the party of the second part and one-third expenses shall be borne by the party of the first part. If within the hereinabove stipulated period either party fails to effect the sale, the lease shall remain operative and thereafter neither party shall be entitled either to sell or purchase the leased land."

On or about March 23, 1946, the assessee-company executed a sub lease in respect of 1,728 square yards out of the said land at the annual rent of Rs.6,048 which sub-lease contained a similar option to sell and purchase the aforesaid 1,728 square yards at the price of Rs.1,74,528. The said sub-lease was in favour of one N.C. Bodiwala, one of the directors of the assessee-company. Thus, as against the price of Rs.4,09,959, the assessee-company was entitled to exercise its option against the said Bodiwala, and on such exercise of the option, Bodiwala was liable to purchase 1,728 square yards at the price of Rs.1,74,528 and the assessee-company thus would be liable to pay Rs.4,09,959 less Rs. 1,74,528 to the lessor for the balance of the land.

The lessor exercised his option and thereupon the assessee-company became liable to purchase the leased land at the aforesaid price on and from March 1, 1951, that being the date when the six months' notice presumably expired. When called upon to purchase the land, the assessee-company made default in consequence of which the lessor filed a suit on December 31, 1952, against the assessee-company, being Suit No.244 of 1952, in the Court of the Joint Civil Judge, Senior Division, Ahmedabad, to recover the aforesaid purchase price together with interest thereupon at the rate of six per cent. per annum from March 1, 1951.

On May 8, 1954, the parties took a consent decree which, after reciting the fact of the assessee-company having withdrawn its objection to the title of the lessor to transfer the property, and the willingness of the assessee-company to purchase the said land, provided for the specific performance of the provisions of clause (4) in the deed of lease and payment by the assessee company of the purchase price together with interest thereupon at the rate of 5-1/4 per cent. per annum on the balance due to the lessor. The decree also provided that the amount remaining outstanding could be paid by the assessee company by monthly instalments of Rs.6,000 with interest at the rate of 5-1/4 per cent. per annum on the reducing balance. During the pendency of the suit, the assessee-company had paid four sums on different dates aggregating to Rs.1,43,740. The claim made in the suit was for Rs.4,81,890 which comprised the balance of the purchase price and interest thereupon from March 1, 1951. After deducting the aforesaid sum of Rs.1,43,740 the balance remaining outstanding came to Rs.3,38,150. Out of this amount, the assessee paid Rs.38,150 on the date of the consent decree, i.e., on May 8, 1954, and, therefore, the amount remaining payable came to Rs.3,00,000 which was payable by monthly instalments of Rs.6,000 each and interest at the rate of 5-1/4 per cent. per annum on the reducing balance. The decree expressly provided that the lessor was to execute a deed of conveyance only after the entire amount together with interest due under the decree to the lessor was fully paid. The decree also provided for a charge, not only on the aforesaid land but also on the premises built by the lessee thereon and other assets belonging to the lessee lying therein and other properties of the lessee until the decretal amount was fully paid off.

For the assessment year 1955-56, the assessee claimed deduction in respect of two months, namely, Rs.12,486 being the amount of interest due on the balance remaining outstanding for the period from May 6, 1954 to March 31, 1955, and for an amount of Rs.17,281 being interest for the period between March 31, 1951 to May 5, 1954, which was included in the amount paid on May 8, 1954, when the decree was passed. The claim for deduction in respect of these two items was made primarily under clause (iii) and, in the alternative, under section 10(2), clause (xv). The Income-tax Officer allowed the item of Rs.12,486 on the ground that it comprised of interest paid by the assessee company, but disallowed the other item of Rs.17,281. As regards the item of Rs.17,281 he held that that amount, though described as interest, was not paid on the amount borrowed and utilised for the purposes of the business but that the assessee-company was required to pay that amount as a result of the compromise entered into between it and the lessor. He observed that the stand taken up by the assessee-company in the suit was that the amount was not payable at all and hence, it was not a debt due to the other party and, therefore, as long as the assessee did not admit the existence of the debt due to the other party, the question of allowance of interest on that debt did not arise. The assessee, aggrieved by this order, filed an appeal. The Appellate Assistant Commissioner was not only of the view that the amount of Rs.17,281 could not be claimed as allowance, but was also of the view that the other amount of Rs.12,486 had been wrongly allowed by the Income-tax Officer. He therefore issued a notice upon the assessee-company for enhancement. His view was that the amount of Rs.12,486 allowed by the Income-tax Officer was not admissible as a deduction either under clause (iii) or clause (xv) of section 10(2) as that item could be attributable only to the consideration for the price of the land and, therefore, must be regarded as capital expenditure. As regards the item of Rs.17,281, the Appellate Assistant Commissioner was of the view that that amount also was not admissible either under clause (iii) or clause (xv) of section 10(2) as the amount comprised of interest payable by the lessee to the lessor as a result of the default committed by the lessee on March 1, 1951, and the interest payable by the lessee was consequently nothing else than an addition to the cost of the land. Relying upon the decision of the High Court of Bombay in Metro Theatre Bombay Ltd. v. Commissioner of Income-tax, (1946) 14 ITR 638 he held that the transaction was of purchase of a capital asset on a long term credit with stipulation for payment of interest on reducing balance and therefore did not amount to borrowing of capital within the meaning of clause (iii) of section 10(2). He also added "the present case contains another adverse factor as the interest really is a measure of the inflation of the purchase price due to a breach of contract on the part of the appellant-company to purchase the land outright on March 1, 1951:" He also dismissed the claim under clause (xv) relying upon the aforesaid decision and holding that the amount in question was not spent wholly and exclusively for the purposes of the business. The Tribunal allowed the appeal filed by the assessee-company, holding that both the amounts had been spent wholly and exclusively for the purposes of the business of the assessee-company and were therefore allowable deductions. The principal ground upon which it arrived at this conclusion was that the amounts were in reality paid by the assessee company for the use of the land and that by the payment of Rs.17,281 the assessee-company had not brought into existence any capital asset and, therefore, the expenditure in question could not be styled as capital expenditure. The Tribunal also held that the money spent in the purchase of an asset of business was money spent for the purposes of the business and, therefore, interest paid on such amount was an allowable deduction under clause (iii) or clause (xv) of section 10(2). Though the Tribunal observed that it was difficult to define the exact nature of the item of Rs. 17,281 and did not specifically say whether it was an item of interest or an item of ground rent, it held that in either case the expenditure had not brought into existence any capital asset and, therefore, the payment was, wholly and solely for the purposes of the business and was an allowable deduction. As regards the item of Rs.12,486, that item also had not increased the value of the capital asset namely, the land, by reason of the delay in payment of the purchase price and, therefore, could not be regarded as capital expenditure.

Before we proceed to consider the question of law arising in this reference, it would be necessary to appreciate how the assessee-company arrived at the figure of Rs.17,281 in respect of which it claimed deduction under clauses (iii) and (xv) of section 10(2). It appears that on May 5, 1954, three days before the consent decree was taken, the parties had made up the accounts and according to the accounts so made up, the lessor claimed Rs.4,81,890 as being the amount due to him. That amount was made up as follow

Pending the suit, the lessee, as aforesaid, had paid four amounts aggregating to Rs.1,43,740, namely Rs.26,055 on January 30, 1953, being the ground rent for two years plus Rs.685 due on February 28,. 1950; Rs.12,685 being ground rent paid on January 1, 1953; Rs. 30,000 paid on July 10, 1953, and Rs. 75,000 paid on March 13,1954. Since it was agreed that the lessee was bound to purchase the property as from March 1, 1951, the amounts paid as ground rent were agreed to be treated as payments towards the purchase price. The balance payable on May 5, 1954, therefore, came to Rs.4,81,890 less Rs.1,43,150, i.e. Rs.3,38,150. As the assessee-company paid on May 8, 1954 a further sum of Rs.38,150, the principal amount remaining due by the company to the lessor came to Rs.3,00,000 payable under the decree by monthly instalments of Rs.6,000 and interest at the rate of 5-1/4 per cent. per annum on the reducing balance.

The statement of account produced by the assessee-company before the Income-tax Officer explains how the amount of Rs.24,687, being interest amount for the period December 31, 1952 to May 5, 1954 was made up. First the account of interest due to the lessor was made up and that account was as follows:

making a total of the interest amount to Rs.68,603 and adding thereto Rs.685 (arrears of ground rent) totalling to Rs.69,288. As against this amount, the lessee deducted Rs.43,097 consisting of the following amounts:

The assessee-company added to this amount the two amounts of Rs.26,055 and Rs.12,685 paid as ground rent on January 30, 1953 and January 1, 1953 and these made up the total of Rs.43,097. The interest thus payable to the lessor on making up the accounts came to Rs.69,288 less Rs. 43,097, that is Rs.26,191. The account as made up by the parties then was as follows:

The easiest way to understand the calculations made by the assessee company would appear to be as follows:

The assessee then debited from out of the amount of Rs.26,191, Rs.8,910 being interest payable by Bodiwala on the purchase price of Rs.1,74,528 payable by him in respect of the aforesaid 1,728 square yards. The balance thus came to Rs.17,281 which, as aforesaid, was the amount claimed for deduction. The statement of account shows that the parties adopted this computation on the basis that the assessee-company became bound under clause (4) of the deed of lease to purchase the aforesaid land and to pay the aforesaid purchase price on March 1, 1951, and hence interest was added to the purchase price from March 1, 1951, up to the date of the making up of the accounts i.e. May 5,1954.

Though these two items of Rs.17,281 and Rs. 12,685 were claimed originally as deductions allowable under clause (iii) and in the alternative under clause (xv) of section 10(2), Mr. Nanavati appearing for the assessee company made it clear before us that he was supporting the Tribunal's judgment more on clause (xv) than on clause (iii) and, therefore, we shall proceed to consider the case from the point of view first of clause (xv). Section 10(2)(xv) runs as follows:

"10. (2) Such profits or gains shall be computed after making the following allowances, namely:---...

(xv)any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation."

The first question that would arise is whether the two amounts of interest payable under the deed of lease and the decree respectively and having to be paid by the assessee-company by reason of its failure to pay the purchase price when it became due on March 1, 1951, and by reason of the assessee company being given the facility to pay the decretal amount by instalments, in other words by reason of the judgment-creditor foregoing his right to demand the decretal amount all at once, can be said to be expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee-company. The learned Advocate-General argued that the two sums of Rs.17,281 and Rs.12,685 cannot be legitimately called expenditure wholly and exclusively expended or laid out for the purpose of the business of the assessee company as they became payable as a result of the default on the part of the assessee-company to carry out the provisions of the deed of lease. Such a default, he argued, was totally unconnected with the business of the assessee company which was that of printers and publishers of a daily newspaper. The learned Advocate-General relied on Metro Theatre Bombay Ltd. v. Commissioner of Income-tax (1946) 14 ITR 638, which was a decision in a case nearest to the one before us. The assessee-company there had also claimed deduction of an amount of Rs.9,825 under clause (iii) and clause (xv) and the question was whether that amount was allowable under either of the two clauses. The assessee had entered into a building agreement with the Government by which in consideration of the company agreeing to build upon the land and to pay a sum of three lakh and odd rupees, it was to receive a lease for 99 years. The agreement provided for the payment of the amount by six monthly instalments with interest on the instalments outstanding from time to time, and it was in respect of Rs.9,825, which was the interest payable in the relevant year, that the claim for deduction was made by the assessee. The agreement which was entered into by the assessee, inter alia, provided that in consideration of the licensee agreeing to pay Rs.3,81,796 by instalments with interest as therein provided for, the Government agreed to grant to the assessee a licence and authority to enter upon the piece of land described in the first schedule thereto for the purpose of building and executing works thereon as therein set out. Clause 2 provided, inter alia, that the assessee company should pay to the Government the purchase money and the instalments therein set out, and further provided that if the assessee-company were to make any default in the payment of any instalment, it would be lawful for the Government to recover the sum under the Bombay City Land Revenue Act of 1876, and after notice of demand as if the arrears were arrears of land revenue due in respect of the said land. Clause 3 provided that as soon as the assessee-company certified that all buildings had been erected in accordance with the terms set out in the licence and provided that the company shall have paid all sums payable under the licence and shall have observed all the stipulations and conditions contained therein, the Government would grant and the company or its approved nominee would accept the lease of the said land and the buildings erected thereupon for a term of 99 years at the yearly rent of rupee one. After negativing the claim under clause (iii) on the ground that purchase of a capital asset on a long-term credit with the stipulation for payment of interest on the reduced balance did not amount to borrowing of capital within the meaning of that clause, the learned Chief Justice negatived the claim for deduction under clause (xv) also by observing that interest payable on unpaid instalments could not be said to be payment wholly or exclusively for the purposes of such business. He also observed that, no doubt, payment of interest on arrears of purchase price of the leasehold interest in which the business was carried on might be said to be for the purposes of the business, but it was not wholly and exclusively for the purposes of the business, and illustrated that proposition by stating that if the cinema business had to be closed down, the assessee would still have to make the payment unless he was prepared to have the licence forfeited. Kania J., as he then was first dealt with clause (iii) and observed that on a scrutiny of the agreement in that case, it was clear that till the lease was obtained the assessee was merely a licensee. He had agreed to purchase the property on payment of Rs.3,81,796 and was given some facility in payment of the same by instalments as provided in clause 2. The obligation was to pay the whole amount and therefore for the facility granted for deferred payments, interest had to be paid by the assessee in respect of the balance which remained unpaid. The minimum amount of instalments was also stipulated but the assessee had the right, if he chose, to pay a larger amount and reduce his liability to that extent, both for the payment of the principal and interest. On the terms of the agreement he found himself unable to accept the contention that the transaction amounted to capital borrowed for the purposes of the business. He also stated that the transaction was neither a loan transaction nor was it for the purposes of the business. As regards the claim for exemption under clause (xii) which as it stood then, was similar to the present clause (xv), he held that the assessee could not get the exemption claimed under that clause also. The business was of showing cinema films. That business could be conducted in rented premises and it could not be argued that the amount was payment of rent. The payment again could in no event be stated to be an expenditure wholly and exclusively for the purposes of the business, If the interest was not paid, the result would be not necessarily stoppage of the business of showing cinema films, but the assessee would not acquire the lease of the property. The basis of this reasoning was that the business of the assessee there was of exhibiting cinema films and not of owning property or buildings and, therefore, the interest payable under the agreement between the assessee and the Government had nothing to do with the business of exhibition of cinema films and, therefore, it was not an expenditure laid out or expended wholly and exclusively for the purposes of the business. This decision has been recently followed by the High Court of Bombay in Bombay Steam Navigation Co. v. Commissioner of Income-tax (1963) 48 ITR 476. The question there also related to two payments, which the assessee-company had made in the assessment years 1955 56 and 1956-57 and which, it claimed as deductions under the Act. The company was incorporated in August, 1953, and under a scheme of amalgamation, the Bombay Steam Navigation Company Limited was amalgamated with the Scindia Steam Navigation Company with effect from June 30, 1952. The scheme, inter alia, provided that the Scindias would be entitled to float and establish a joint stock company with the object of taking over passenger services in the Bombay harbour and certain other places which were formerly carried on by the Bombay Steam Navigation Company. Pursuant to this object, the assessee-company was floated in August, 1953. On August 12, 1953, the assessee-company entered into an agreement with the Scindias under which the assessee-company took over certain assets for a price and that price was to be paid by issue and allotment of twenty-nine thousand and odd shares, credited as fully paid up, of the face value of Rs.100 each in the share 'capital of the assessee-company and the balance was to be treated as a loan granted by the transferor company and secured by a promissory note executed by the transferee company, and until that loan was repaid in full, it was to carry interest at six per cent. per annum. Subsequently, an alteration was made in the agreement by means of a supplemental agreement in which it was stated that it was not the intention of the parties to make the transaction appear as a loan by the transferor company to the transferee company and since that intention had not been properly stated in the original agreement, a new clause 3(b) was substituted therein. Under this agreement the assessee-company paid Rs.2,74,610 to the Scindias as interest on the outstanding balance for the period ending June 30, 1954, and another sum of Rs.2,86,823 as interest for the year ending June 30, 1955, and it was in :respect of these two amounts that deductions were sought under clauses (iii) and (xv) of section 10(2). The learned Judges, following the decision in Metro Theatre Bombay Ltd. (1946) 14 ITR 638 held that the interest amounts were not in respect of moneys borrowed for the purposes of the business as it was clearly not a case of borrowing in view of the position clarified by the supplemental agreement, They also held that the claim could not be made under clause (xv), for the price paid for the acquisition of a capital asset was undoubtedly capital expenditure and the amount or payment, which was required to be made by way of interest on the purchase price of the capital asset, if the price was not paid in full in time, was an amount paid towards acquisition of the capital asset and in the nature of capital expenditure. They held that interest which the assessee-company paid on the balance of the price of the capital asset purchased by it was, therefore, expenditure of a capital nature and did not fall under clause (xv). Negativing the contention of the assessee-company that payment made by the assessee by way of interest was not for the acquisition of capital asset but for the maintenance of the capital asset in the business of the assessee, for unless interest was paid, the capital assets being in hypothecation with the Scindias, would have been proceeded against by them and thus taken out of the assessee's business, the learned Judges observed that the interest paid by the assessee-company was not any such expenditure for the maintenance of the capital assets of the business, for such interest was payment in addition to the purchase price that the assessee-company was required to make for the delay in payment of the, purchase price of the assets and, therefore, was in the nature of payment made in the acquisition of the assets and not in maintaining it. The circumstance that, in the event of default of payment of the balance of the purchase price, the assets would have been proceeded against under the hypothecation clause, they said, would not make payment of the purchase price of the capital asset a revenue expenditure for the purpose of maintaining the capital asset. In Commissioner of Income-tax v. Minsararasam & Co. Ltd. AIR 1932 Mad. 434 a Special Bench of the High Court of Madras also held payment of royalty to be capital expenditure and declined to admit the deduction of an amount of Rs.28,000 paid as and by way of royalty. The assessee-company there had entered into an agreement with one Dr. Varadarajulu Naidu for the purchase of all rights and privileges of manufacturing, selling and dealing in a certain medicine and had covenanted that if they successfully promoted the company, Dr. Varadarajulu Naidu should sell to them all such rights and privileges for manufacturing, selling and dealing in the medicine subject to certain conditions. Under these conditions, the assessee-company had to pay to Dr. Varadaraju Naidu a lump sum of Rs.81,000 in five-yearly instalments of not less than Rs.16,000 a year with effect from April 1, 1928, and after the expiry of five years the assessee-company had to pay royalty of eight annas on every bottle of medicine sold by it to Dr. Vardarajulu Naidu as long as the company was in existence. In the year of account, the company paid to Dr. Varadarajulu Naidu the sum of R$.13,000 and odd representing eight annas for every bottle of the medicine sold by the company and the company claimed deduction of that amount on the ground that it was a payment made by it solely for the purpose of earning profits or gains of the business which, in the year of account, amounted to Rs. 28,000.

The Special Bench held that taking the two clauses together, they provided for the consideration of the purchase of the medicine, and the amount of RS.13,OfC was capital expenditure. It was an amount expended for the purchase by the company of the medicine and, as such, would be assessable and would not be a lawful deduction under clause (ix) of section 10(2) which was similar to the present clause (xv).

Mr. Nanavati, however, argued that the interest payable as a result of the stipulation providing deferred payments was not capital but revenue expenditure and was expenditure wholly and exclusively expended for the purpose of the business of the assessee-company. In support of his contention, he relied upon State of Madras v. G.J. Coelho, (1964) 53 ITR 186 (SC), where, on the facts of that case, the Supreme Court held that interest paid by the respondent on borrowings made by him for the purpose of purchasing a plantation would not constitute capital expenditure as no new asset was acquired or enduring benefit obtained as a result of payment of interest and that it was entitled to exemption. The assessee there purchased an estate in 1950 known as Silver Cloud Estate, consisting of tea, coffee and rubber plantations. Out of the sale price of Rs.3,10,000 he borrowed Rs.2,90,000 with interest varying from seven to eight per cent. per annum. For the assessment year 1955-56, he claimed to deduct interest on this amount which was Rs.22,628. The Agricultural Income-tax Officer, however, only allowed Rs.1,570 but disallowed the remaining amount of Rs.21,057-15-1 under section 5(e) of the Madras Plantations Agricultural Income-tax Act (V of 1955). On the matter reaching the High Court in a revision application by the assessee, the question was whether the interest paid on moneys borrowed for the purchase of the plantation was expenditure of the nature referred to in section 5(e) of the Act and should therefore be deducted in assessing the income of the plantation during the year. Section 5(e) of that Act was in identical terms as clause (xv) of section 10(2) of the Income-tax Act. It was contended before the Supreme Court in an appeal against the High Court's judgment that the interest paid by the assessee was not taxable under section 5(e) of the Madras Act, first, because it was in the nature of capital expenditure, secondly, that it was personal expenditure of the assessee, and thirdly, that it was not laid out or expended wholly and exclusively for the purpose of the plantation. Relying on its previous judgment in Assam-Bengal Cement Co. Ltd. v. Commissioner of Income-tax (1955) 27 ITR 34, 44; (1955) 1 SCR 972, the Supreme Court held that the payment of interest on the facts of that case was revenue expenditure because no new asset was acquired with the payment of that interest nor was any enduring benefit obtained. As regards the nature of the expenditure, the Supreme Court cited its own dicta in Commissioner of Income-tax v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC), where it has stated that the expression "for the purpose of the business" was wider in scope than the expression "for the purpose of earning profits," but where at the same time the Supreme Court had also observed that, however wide the meaning of the expression might be, its limits were implicit in it. The purpose should be for the purpose of the business, that is to say, the expenditure incurred should be for the carrying on of the business and the assessee should incur it in his capacity as a person carrying on the business. The Supreme Court held that it was not possible to dissociate the character of the assessee as the owner of the plantations and as a person working them as plantations and that, if the payment of interest on the amount borrowed for the purpose of the plantations and the purchase of the plantations were to be viewed as an integrated whole, the payment of interest was so closely related to the plantations that the expenditure could be said to have been laid out or expended wholly and exclusively for the purpose of the plantations. The Supreme Court also observed that looking to the transaction in that case, it was impossible to dissociate the character of the assessee as the owner of the plantations and as a person working the plantations. The assessee had bought the plantation for working it as a plantation; the payment of interest, therefore, was closely connected with the plantation itself and, therefore, such interest would fall within the purview of section 5(e) of that Act. On behalf of the State of Madras reliance, however, was placed on the Bombay decision in Metro Theatre Bombay Ltd. v. Commissioner of Income-tax (1946) 14 ITR 638, 645. The Supreme Court distinguished that case on the ground that the interest claimed to be deducted in the Bombay case and which was disallowed was in respect of the amount borrowed for acquiring land on 99 years lease on which the cinema was subsequently built. There was therefore no immediate connection between the interest paid and the cinema business. For this observation, the learned Judges relied upon a statement to be found in the judgment of Kania, J., as he then was, where that learned Judge has stated (1946) 14 ITR 638, 645: "If the interest was not paid the result would be not necessarily the stoppage of the business of showing cinema films, but the assessee will not acquire the lease of this property." It will be seen that the Supreme Court did not dissent from or disapprove the decision in Metro Theatre Bombay Ltd. (1946) 14 ITR 638, 645, but distinguished it on the point which, as aforesaid was stressed by it, namely, that the purchase of the plantation, the borrowing therefore and the payment of interest on the capital borrowed, all formed one integrated transaction, so that it was not possible to treat the assessee into two separate capacities, one as a farmer and the other as the owner of the plantation. It was not possible to dissociate the assessee into two different capacities because the assessee there had purchased the plantation with the object of following the vocation of farming that plantation and without having that plantation he could not have followed such vocation. The, decision in Metro Theatre's case (1946) 14 (ITR 638, 645 was therefore held not to be applicable to the facts of that case as the facts there were different from those before the Supreme Court in the sense that, as stated at page 193 of the report (1964) 53 ITR 186 (SC), the payment of interest in the Bombay case was on moneys borrowed for acquiring the lease on which the cinema was subsequently built and, therefore, there was no immediate connection between the interest paid and the conduct of the cinema business, and it was to distinguish that case that reliance was placed on the aforesaid observation of Kania, J., as he then was.

Since the decision in Metro Theatre Bombay Ltd. (1946) 14 ITR 638, has not been disapproved of or dissented from in Coelho's case (1964) 53 ITR 186 (SC), that decision is binding upon us unless Mr. Nanavati distinguishes it from the present case as it was done before the Supreme Court. Mr. Nanavati urged that the instant case was similar to the one before the Supreme Court in Coelho's case (1964) 53 ITR 186 (SC), and argued that the purchase of the land, the conduct of the business of printers and publishers and conducting a newspaper and the payment of interest were so closely connected that they formed an integrated transaction and that, therefore, the payment of interest by the assessee-company must be regarded, as was done in Coelho's case, (1964) 53 ITR 186 (SC), as revenue expenditure and an expenditure incurred wholly and exclusively for the purposes of the business of the assessee company. For that purpose, he relied upon a statement made by the Tribunal in paragraph 2 of the statement of the case where it is stated that the assessee company had taken on lease land admeasuring 4,059 square yards "for the purpose of its business" at an annual rent of Rs.12,685 upon which it had built a printing press. He also relied upon an observation made by the Commissioner of Income-tax in his application for reference in paragrpah 1 of which it has been stated that the assessee built a press upon the land so acquired and carried on the business of publishers in that press. In spite of these statements, the question still is whether the land was agreed to be purchased by the assessee-company for the purpose of its business, i.e., the business of carrying on a daily newspaper and the business as printers and publishers. As Sir Leonard Stone stated in the Metro Theatre's case (1946) 14 ITR 638, a piece of land may be acquired by an assessee for the purpose of his business, but that does not necessarily mean that it is purchased wholly and exclusively for the purpose of his business. The assessee might well say that it would be better to house his press on the premises owned by him rather than to rented premises and for that reason might purchase a property, but that would not necessarily mean, as the Supreme Court held on the facts in State of Madras v. Coelho, (1964) 53 ITR 186 (SC), that the transaction was linked with the borrowing and the payments of interest were closely connected with the business of running a firm. Such a thing can be said, perhaps, in the case of purchase of a capital asset, namely, the machinery for the press, for without having a press the assessee can reasonably say that the business of printing and publishing cannot be carried on by him. But that cannot be said of a property on which the assessee desires to house the press, that is to say, that it cannot be. reasonably run unless he purchases a property on borrowed moneys and that, therefore, the interest payable on such borrowing is expenditure wholly and exclusively for the purposes of the business. In such a case, it would be possible to say that he has to pay interest not in his capacity as a trader, but as the owner of the property. In each case, therefore, it would be necessary to examine the facts and circumstances to find out whether the expenditure incurred or interest paid is incurred or paid by the assessee in his capacity as a trader or as an owner of the property.

In the present case, this distinction appears in an accentuated form by reason of the fact that interest became payable by the assessee, not because he had borrowed moneys for the purchase of the property but because of breach of the agreement by him. If the assessee-company had agreed to purchase the land as being a necessity for his business and as part of his scheme of carrying on that business, as was the case in State of Madras v. Coelho (1964) 53 ITR 186 (SC), is it possible that instead of purchasing the property as soon as the lessor exercised his option, the assessee would commit default of clause 4 of the deed of lease and agree to purchase the land only when a suit had to be filed? In this connection, it would be pertinent also to remember two facts: (1) that as early as 1946, the assessee had agreed to sell 1,728 square yards to Bodiwala which would mean that the assessee-company did not at any rate require the whole of the land for the purposes of its business, and (2) the building had already been put up by the assessee-company for housing the press when it still occupied the land as the lessee. These facts clearly distinguish the present case from the one before the Supreme Court where, on the facts before it, the Supreme Court held that the transaction was one integrated scheme for the purpose of cultivating and running the plantation, that is, (1) the borrowing by the assessee, (2) the purchase of the plantation with the borrowed moneys, (3) running the plantation and, lastly, (4) the payment of interest on the moneys borrowed from a third party by the assessee. In that case, the purchase of the capital asset, namely, the plantation, was vital and essential for the very running of the plantation which was the business or vocation carried on by the assessee. That cannot be said to be the case here and, on the facts before us, we are of the view that the decision in Metro Theatre Bombay Ltd. (1946) 14 ITR 638, would be applicable. It will also be noticed that under the decree, the vendor was to pass the conveyance deed only after the assessee-company had fully paid off the balance of the purchase price together with interest thereon. The decree expressly provided that until the entire amount together with interest thereon was fully paid, the ownership in the land was not to pass to the assessee-company. This would clearly mean that if the assessee-company were to fail to pay even a part of the interest due to the vendor, the vendor would not be bound to pass the deed of conveyance and consequently, the title in the property would not pass from the vendor to the assessee-company. These provisions are clear indications that the interest payable by the assessee-company on the reducing balances was not interest on moneys borrowed in the purchase of a capital asset but was to form part of the purchase price. In State of Madras v. Coelho (1964) 53 ITR 186 (SC), on the other hand, the interest payable by the assessee was something which was payable after the plantation had been purchased by the assessee and the passing of the title in the property did not depend upon payment of interest. The loan which the assessee there took also was from a third party and, consequently, the interest paid on such a loan did not go to the vendor or towards payment of the purchase price. It was, therefore, that the Supreme Court in that case said that no new asset was acquired with the interest amount and no ending benefit was obtained with the help of that amount.

Mr. Nanavati, however, relied upon Hudson's Bay Company v. Thew (1919) 7 Tax Cas. 206 where Rowlatt, J. held that the interest payable under an agreement containing a stipulation for payment by instalments would be interest and not capital in the hands of the vendor. The assessee-company in that case had sold part of the land which it possessed upon terms that the purchase money was payable by instalments and that in addition to each instalment, there was to be paid a further sum for interest on the balance of capital outstanding at the date when an instalment became due and was paid. The agreement was that the purchaser was to pay a certain sum due when the contract was signed and, when the next instalment came to be paid, he would pay interest on the full purchase money less the amount which was paid down when the contract was signed and so on until the last of the instalments was paid. Rowlatt J. held that the money that the company got by selling its land was not income but was realised capital, but negatived the connection urged on behalf of the company that interest, which was interest paid in respect of the company forbearing to collect for a certain time its purchase money, i.e., interest on unpaid pruchases money, was not income but was capital. This contention was repelled on the ground that if the company had collected the money, it would have invested that money and got interest. The purchaser had not paid it and he therefore paid interest until he paid it and, therefore, the interest which the company received was interest which the company would have earned if it had collected the entire money and invested it in some securities. Relying upon this decision, Mr. Nanavati urged that the interest paid by the assessee-company, being interest in the hands of the vendor, it would be revenue expenditure when it was paid by the assessee-company. But the converse of what was held by Rowlatt, J. would not always be correct. A receipt in the hands of a vendor may be income but it may be expenditure of a capital nature when it is paid by the purchaser, depending upon the facts and circumstances in each case. In a case where moneys are payable by instalments with a stipulation in the contract to pay interest on the remaining balance it would be sale price payable by instalments plus interest on the remaining balance, and the aggregate therefore would be the purchase price so far as the purchaser is concerned. This would be so because unless the purchaser pays not only the amount under the instalments but also interest on the remaining balance, he cannot be said to have paid the full consideration and if the contract contains a condition as in this case, there would be no question of his acquiring the property until the full payment is made, that is to say, the aggregate amount of the instalments and in addition thereto, interest payable under the contract. The contention urged by Mr. Nanavati therefore cannot be accepted. In our view, on the facts and circumstances of the case, the instant case is governed by the decision in Metro Theatre Bombay Ltd. v. Commissioner of Income-tax (1946) 14 ITR 638 and, therefore, it 'is not possible to accept the contention that the two amounts in question were expended or laid out wholly and exclusively for the purposes of the business, and, therefore, clause (xv) would not apply.

Mr. Nanavati in the alternative urged that, on a proper construction of the consent decree, that decree created relationship of creditor and debtor between the lessor and the lessee, the assessee-company. He urged that even if the assessee-company were not to take the conveyance from the plaintiff, the assessee-company was still under the decree bound to pay the decretal amount. He argued that the decree created relationship between the parties as a judgment-creditor and a judgment-debtor, that the judgment-debtor under the decree was given the facility to pay the decretal amount by instalments and that, therefore, that transaction recorded in the consent decree amounted to a transaction of borrowing. In our view, this contention has no merit. The relationship of a judgment-creditor and a judgment-debtor resulted as a consequence of the consent decree taken by the parties and sanctioned by the Court. The purchase price which is made payable by the assessee-company was on the ground that the decree had made the assessee-company liable to specifically perform the agreement contained in clause 4 of the deed of lease and had nothing to do with any such thing as a transaction of loan. It is the order for specific performance which placed the assessee-company under an obligation to purchase the property at the price specified therein and payable in the manner set out therein. Even if the assessee-company were not to take a deed of conveyance from the lessor, the obligation to pay the purchase price was founded upon the assessee-company's liability arising from the decree and not on the basis of any borrowing or loan. But Mr. Nanavati relied upon an expression used in the decree, namely, "out standings due to the plaintiff" (Vadi-nu-Lenu) as showing that the transaction embodied in the decree was a transaction of loan. We do not agree with any such construction of the decree, for the expression clearly means that the out standings, set out in the decree were the out standings which arose as a result of the decree for specific performance passed by the Court and under which the assessee-company became liable to pay the purchase price. The transaction, therefore, cannot amount to borrowing within the meaning of clause (iii). The contention urged on the basis of that clause must, therefore, be rejected.

In our view neither of the two sums can be claimed as a deduction either under clause (iii) or clause (xv) of section 10(2), and our answers, therefore, to the two questions referred to us must be:

Question No.1---in the negative.

Question No.2---in the negative.

The assessee will pay to the Commissioner the costs of this reference.

M.BA./2032/T Questions answered in the negative.