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PETITIONER: M/S. EAST INDIA PHARMACEUTICAL WORKS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX. WEST BENGAL

DATE OF JUDGMENT:       11/03/1997

BENCH: S.C. AGRAWAL, G.B. PATTANAIK

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T PATTANAIK, J.      This appeal  by grant  of certificate under Section 261 of the  Income Tax Act, 1961 (hereinafter referred to as the Act) by  the High  Court of Calcutta is directed against the judgment  and   order  of  the  Calcutta  High  Court  dated 21.4.1978 in  Tax Reference  No. 404/75.  On an  application being filed before the Income Tax Appellate Tribunal Section 256(1) of  the  Act  the  Tribunal  referred  the  following question for being answered by the High Court :-      "Whether, on  the facts  and in the      circumstances  of   the  case,  the      Tribunal was  right in holding that      the  payment  of  interest  of  Rs.      28,488/-  on   money  borrowed  for      payment of  income-tax was  not  an      expenditure  laid  out  wholly  and      exclusively  for   the  purpose  of      business as  contemplated  by  sub-      section (1)  of Section  37 of  the      Income-tax Act, 1961?"      The assessee  is a company having an over draft account with a Bank. During the assessment year 1972-73 the assessee claimed a sum of rupees 28.488/- as an allowable expenditure under Section 37(1) of the Act, the said amount representing the interest which the assessee had to pay on the over-draft amount, the said over-draft having been made for the payment of income  tax.  The  Income  Tax  Officer  dis-allowed  the aforesaid deduction claimed by the assessee as he was of the opinion that  the payment of income tax cannot be held to be the payment for the purpose assessee preferred an appeal and the Appellate  Authority agreeing with the assessing officer came to hold that the over-draft utilised for payment of tax cannot he  said to  be for  the  business  purposes  of  the company. In coming to the aforesaid conclusion the Appellate Authority relied  upon the  decision of  the  Calcutta  High Court in  the case  of Mannalal Ratanlal Vs. Commissioner of Income-Tax, 58  I.T.R. 182.  The assessee  the  carried  the matter in  second appeal  before the  Tribunal.  Before  the Tribunal it  was contended  by the  assessee  that  the  tax

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liability being  to the tune of couple of lakhs. If the said liability would   not  have been  discharged then the entire business of  the assessee  would  have  been  crippled  and, therefore, discharge  of such  liability from the over-draft account would be held to be an expense for business purpose. The Tribunal,  however, relying  upon the  decisions of  the Calcutta High Court in Mannalal Ratanlal Vs. Commissioner of Income Tax, 58 I.T.R. 182 and commissioner of Income-Tax Vs. Calcutta Landing  & Shipping co. Ltd. 77 I.T.R. 575, come to hold that  the interest on money borrowed for payment of tax cannot  be  considered  to  be  an  allowable  deduction  in computing business  profits. Having dismissed the assessee’s second appeal  the Tribunal  on an  application  being  made referred the  question for being answered by the High court, as already  stated.  The  High  Court  of  Calcutta  by  the impugned of  tax cannot  be said  to  be  for  the  business purpose  of   the  company.   In  coming  to  the  aforesaid conclusion the  Appellate Authority relied upon the decision of the  Calcutta High Court in the case of Mannalal Ratanlal Vs. Commissioner  of Income-Tax, 58 I.T.R. 182. The assesses then  carried   the  matter  in  second  appeal  before  the Tribunal. Before  the  Tribunal  it  was  contended  by  the assessee that  the tax liability being to the tune of couple of  lakhs,   if the  said  liability  would  not  have  been discharged then  the entire  business of  the assessee would have  been   crippled  and,  therefore,  discharge  of  such liability form the over-draft account would be held to be an expense for business purpose. The Tribunal, however, relying upon the  decisions of  the Calcutta  High Court in Mannalal Ratanlal Vs.  Commissioner of  Income Tax. 58 I.T.R. 182 and Commissioner of  Income Tax  Vs. Calcutta Landing & Shipping Co. Ltd.  77 I.T.R.  575, came  to hold that the interest on money borrowed for payment of tax cannot be considered to be an allowable deduction in computing business profits. having dismissed the  assessee’s second  appeal the  Tribunal on an application being  made  referred  the  question  for  being answered by  the High  Court, as  already stated.  The  High Court of  Calcutta by  the impugned  judgment  came  to  the conclusion that  an  expenditure  cannot  be  allowed  as  a business expenditure  under Section  37(1) of the Act unless it was  incurred or  laid out  directly or  indirectly by an assessee wholly  and exclusively  for  the  purpose  of  his business. It  also came  to the conclusion that the  payment of Income-tax  will not  fall within the scope of expression "for the  purpose of business". Relying upon the judgment of this Court  in Birla cotton Spinning & Weaving Mills Ltd. 82 ITR 166.  it came to hold that the amount paid as income-tax is not  an expenditure, not even a business expenditure and, therefore, the  interest paid  by a  treader  on  the  money borrowed for  the payment of income-tax cannot be held to be a business expenditure on any commercial principle, not even on the ground of commercial expediency. It also further held that the  payment of  income-tax  or  the  interest  on  the borrowed money  for the  payment of income-tax is not at all related with  the purpose  and object of the business and no element of  trade in its commercial sense is involved in it. With this  conclusion the  High Court  answered the question posed in  the   affirmative and in favour of the Revenue and against the assessee and thus this appeal.      Mr. Deepak Bhattacharyya, learned counsel appearing for the appellant  argued with  vehemence    that  the  assessee having  deposited  the  entire  profits  in  the  over-draft account and  the amount  thus deposited  in  the  over-draft account being much more compared to the income-tax liability and the  tax paid,  it should  have been  presumed  that  in

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essence and  true character  the taxes  were paid out of the profits of  the relevant  year and not out of the over-draft account for  the running  of the  business. Consequently the interest paid  by the  assessee on  the  over-draft  account relatable to  the payment  of income-tax  should  have  been allowed as an admissible deduction in the commutation of the assessee’s business  income. In  support of  this contention the learned  counsel appearing for the appellant relied upon the   decisions of the Calcutta High Court in Woolcombers of India  Ltd.   Vs.  Commissioner   of  Income-Tax  (Central), Calcutta 134  ITR 219,  Reckitt and Colman of India Ltd. Vs. Commissioner of  Income Tax.  135 ITR  698. Indian Explosive Ltd Vs. Commissioner of Income Tax, West Bengal-II, Calcutta 147 ITR 392, and Alkali & Chemical Corporation of India Ltd. Vs. Commissioner  of Income  Tax 161  ITR 820.  The  learned counsel also  urged that  these decision having been allowed to be  operative for  more than  14 years,  the principle of stare decisis  should be  made applicable and, therefore. it must be  held that  the High  Court committed  error in  not accepting the assesse’s contention. The learned counsel also placed before us a schedule appended to the assessment order to indicate  that the  amount of  receipts deposited  in the over-draft account  was much  more compared  to the tax that the said  payment of  raising the  presumption that the said payment was  out  of  the  profits,  in  the  light  of  the observations made  by the  Calcutta  High  Court    in  four decisions referred  to supra,  the learned counsel appearing for the Revenue on the other hand contended for the assessee had infact  not been  raised either before the High Court or before the  Tribunal and,  as such this question never arose out of the order for the Revenue the question referred to by the Tribunal  to the  High Court under Section 256(1) of the Act was  merely relatable  to an   interpretation of Section 37(1) of  the Act and whether the interest paid on the money borrowed for  payment of  income-tax can  be held  to be  an expenditure allowable  in computing  the income-tax  can  be held to be an expenditure allowable in computing the income- tax under  Section 37(1)  of the  Act. The  learned  counsel further urged  that in view of the decision of this Court in the case  of Madhav  Prasad Jatia Vs. Commissioner of Income Tax, U.P.,  Lucknow 1979 (3) SCR 745 as well as the decision of this   Court in the case of Smt. Padmavati Jaikrishna Vs. Addl. Commissioner  of Income-tax,  Gujarat 166  ITR 176  no deduction can  be claimed  by an  assessee in respect of the interest on  borrowed capital  made  for  discharge  of  the income-tax liability.  According to  the learned counsel the liability for  payment of  income-tax is a personal on e and payment thereof  is not  to earn  income  but  to  meet  the statutory liability  and, therefore,  the   expenditure thus incurred cannot be held to be wholly and exclusively for the purpose of  earning  income  within  the  ambit  of  Section 57(iii) of the Act.      Having considered  the rival  submissions  at  the  bar though we  find considerable force in the arguments advanced by the  learned counsel  appearing for  the appellant but in the facts  and circumstances  of the  present case, on going through the  order of  the Tribunal  as well as the question referred to  by the  Tribunal for being answered by the High Court and the arguments advanced before the Tribunal as well as in  the High  Court by  the  counsel  appearing  for  the assessee, it  is not  possible for  us to hold that any such contention,  as  was  advanced  before  this  court  by  the assessee  had  in  fact  been  advanced  either  before  the Tribunal or  before the High Court. The question whether the presumption can be drawn that the taxes were paid out of the

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profits of  the relevant  year and not out of the over-draft account for  the running  of the  business as  was drawn  in Woolcombers’s case  (supra) by  the Calcutta  High Court and was followed  in 3 other cases of the same High Court, would essentially depend  upon the  fact as  to whether the entire profits had  been  pumped  into    the  over-draft  account, whether such  profits were more than the tax amount paid for the relevant  year and  all other  germane factors. But when the assessee never advanced the contention either before the Tribunal or  before the High Court does not bring within its seep the  contention as  is advanced  by Mr.  Bhattacharyya. Learned counsel  in this  Court, it would not be appropriate for this  Court to  look into the additional papers produced by  the   assessee  for   entertaining  the  contention  and answering the  same. It is true that the Calcutta High Court in Woolcombers  case (supra)  came to  the  conclusion  that where profits  were  sufficient  to  meet  the  advance  tax liability and  profits were  deposited  into  the  overdraft account of  the assessee then it should be presumed that the taxes were  paid out  of the profits of the year and not out of the  overdraft account  for the  running of the business. But to  raise the  presumption in that particular case there were sufficient  materials and  the assessee  had urged  the contention before the High Court. The aforesaid decision has been followed  in the  case of Reckitt (supra) where without any  further  discussion  the  Woolcomber’s  case  has  been followed. But  it may be noticed that the question posed i n Reckitt’s case  was directly  to the  effect as to where the entire trading  receipts deposited  by the  assessee in  the overdraft account  and the tax was paid out of the overdraft account whether  the interest  paid the assessee for payment of  tax  out  of  the  overdraft  account  is  an  allowable deduction.  In  Indian  Explosives  Ltd.  case  (supra)  the aforesaid two  decisions of the Calcutta High Court had been followed and  the question  that had  been posed  was to the effect whether  the interest  on an  overdraft account  paid towards the  amount drawn  for discharging the tax liability could be  an allowable expenditure and, therefore,  the High Court answered  in favour  of the  assessee and  against the Revenue. It  may be  noticed that  in the aforesaid case the Court did  not express  any opinion  on the question whether the interest  paid on  money borrowed for payment of tax was allowable as business expenditure. To the same effect is the decision of  the Calcutta  High Court  i n  Alkali  Chemical Corporation of India Ltd. (supra). It may be noticed that in the present case even before the Tribunal what was argued on behalf of  the assessee  is that the amount of interest paid to the  Bank represents and expenditure laid out or expended wholly and  exclusively for  the  purpose  of  business.  In furtherance of this contention it has also been urged before the Tribunal that non-payment of the taxes which were to the tune of  lakhs would have entirely crippled the business and even the  very existence  of the  company  would  have  been threatened and,  therefore, the  expenditure  thus  incurred should have  been held  to be an expenditure for carrying on the business  and thus  allowable under Section 37(1) of the Act which  contention, however, was rejected by the Tribunal relying  upon  the  decision  of  this  court  in  Padmawati (supra). In  Padmawati’s case  this court  held that meeting the liability  of income  tax was  a personal  one  and  the dominant purpose  for paying annuity deposit was not to earn income but  to meet  the statutory  liability of  making the deposit. It  was further held that the expenditure thus made was not  wholly and  exclusively for  the purpose of earning income and  consequently the  interest  which  was  paid  to

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discharge the  aforesaid tax  liability  was  not  allowable under Section 57(iii) of the Income Tax Act, 1961. In Madhav Prasad’s  case   (supra)  this  Court  also    came  to  the conclusion that  tin or  der to  enable an assessee to claim deduction in  respect of  the interest  on borrowed  capital under Section  10(2) (iii) of the Income Tax Act, 1922 three conditions are required to be satisfied; namely,      (1)  That  money   must  have   been  borrowed  by  the assessee;      (2)  that it must have been borrowed for the purpose of business; and      (3)  that the  assessee must  have paid interest on the said amount and claimed it as a deduction.      It was  further held  that  the  payment  made  by  the assessee by  drawing a cheque on the overdraft account was a borrowing which was made to meet her personal obligation and not the  obligation of  the business and as such expenditure incurred by  the assessee  by way  of  payment  of  interest thereon was  not for  carrying on  business and consequently said  expenditure   could  not   be  regarded   as  business expenditure. In the aforesaid case the overdraft in question has been  made by  the assessee  to discharge  her  personal obligation in pursuance to a promise made by her to donate a sum of  Rs.10 lakhs  for starting an Engineering College and the question  of payment  of income-tax  liability  did  not arise in  that case.  The case,  therefore, is  not  of  any direct assistance  to the  present case.  But the  principle laid down  therein, namely,  if capital  is borrowed to meet the personal obligation of the business then the expenditure cannot be  regarded as  a  business  expenditure  cannot  be regarded as  a business expenditure would apply. As has been already noticed  in Padmawati’s  case (supra) this Court has affirmatively held that meeting the liability for income tax was a  personal liability  and such expenditure can never be held to be wholly and exclusively for the purpose of earning income.      In the  aforesaid premises  and in view of the question that arose  out of  the order  of the Tribunal and which was referred by  the  Tribunal  to  the  High  Court  for  being answered given  by the  High Court. It may further be stated that even  before the  High Court the assessee has not taken any step  to get  the question  referred in the light of the contention which  were advanced  in this  Court by filing an application under Section 256(2) of the Act. In this view of the  matter   notwithstanding  the   fact   that   we   find considerable force  in the  question of  law  urged  by  Mr. Bhattacharyya, learned  counsel appearing  for the appellant but on  the materials  on record and on the amplitude of the question which  has been  referred to the High Court we find it difficult  to entertain  and decide the contention raised by the  learned counsel for the appellant. Further we do not find any  error in the answer given by the High Court to the question posed  before it  and,  therefore,  the  appeal  is devoid of  merit and  the same is accordingly dismissed. But in the circumstance there will be no order as to costs.