Commissioner Of Income-Tax (Central) v. Shree Nirmal Commercial Ltd.

I.G Shah, J.:— Income Tax Reference No. 1 of 1982 has been made by the Income Tax Appellate Tribunal under section 256(1) of the Income Tax Act, 1961 both at the instance of the Revenue and the Assessee. It pertains to A.Y 1971–1972 and 1972–1973.

2. The following three questions have been referred at the instance of the Revenue.

(1) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the compensation received from the shareholders was to be taxed as income from business and not as income from property and also in holding that the ITO was not entitled to enhance the compensation to the extent of the compensation received by the shareholders in their own right?

(2) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in cancelling the order passed under section 104 of the Income Tax Act, 1961, thereby deleting the additional demand of Rs. 22,242/- for A.Y 1970–1971?

(3) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the ITO was not entitled to enhance the compensation to the extent of compensation received by the shareholders in their own right?

3. The following three questions have been referred at the instance of the assessee.

(4) Whether on the facts and in the circumstances of the case, the sums of Rs. 2,96,285/- and Rs. 77,100/- received by the applicant during the relevant assessment years 1971–1972 and 1972–1973 respectively as ‘non-refundable’ deposits were income of the applicant?

(5) Whether on the facts and in the circumstances of the case, the claim of the applicant that the amount of Rs. 4,77,393/- and Rs. 4,79,176/- for assessment years 1971–1972 and 1972–1973 respectively are allowable as deduction either under section 28 or under section 37 of the Act has been rightly rejected by the Tribunal?

(6) Whether on the facts and in the circumstances of the case, the claim of the applicant that losses of past years should be carried forward and adjusted against the income of the applicant for the assessment years 1971–1972 and 1972–1973 has been rightly rejected by the Tribunal?

4. In Income Tax Reference No. 138 of 1982 the Income Tax Appellate Tribunal has referred the following two questions for the assessment years 1973–1974, 1974–1975 and 1975–1976 at the instance of the assessee.

(1) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 2,87,250/-, Rs. 13,000/- and Rs. 2,87,250/- received by the assessee during the assessment years 1973–1974, 1974–1975 and 1975–1976 respectively as non-refundable deposits were assessable as income of the assessee?

(2) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the claim of the assessee to deduct a sum of Rs. 4,47,399/- for A.Y 1973–1974, Rs. 4,16,775/- for A.Y 1974–1975 and Rs. 3,24,694/- for A.Y 1975–1976, being payment of interest on deposits either under section 28 and/or under section 37 of the Act was not allowable?

5. The said References came up before the Division Bench consisting of learned brothers Dr. B.P Saraf and D.R Dhanuka, JJ. of this Court. The Division Bench on consideration of the References in the background of the facts and circumstances of the case and various authorities placed by the counsel of both the sides, felt that for a proper determination of various legal issues arising in the case it was necessary to scrutinise some of the legal propositions already laid down by some of the Division Benches of this Court, more particularly in cases referred to in 118 I.T.R 902 : 142 I.T.R 696 and the assessee's own case reported in 193 ITR 694, and to take fresh decision in case some of these decisions were felt to be in conflict with others, it was necessary to refer the matter to a larger Bench. They were also of the opinion that the decision in the case of the assessee itself needs reconsideration in the light of the Supreme Court decision, earlier decision of this Court and the provisions of the Income Tax Act, Transfer of Property Act, Registration Act etc. The Division Bench therefore without expressing any opinion on merits of the rival contentions of the parties directed that the Hon'ble Chief Justice be moved for forming a Full Bench for the decision of these two References. Accordingly two References are placed before us after obtaining necessary orders from the Hon'ble Chief Justice.

6. Brief facts giving rise to these two References are as under:

7. By an agreement of lease dated 28-11-1964 the Government of Maharashtra agreed to grant a long term lease in respect of certain plots of land situate at the Backbay Reclamation, Nariman Point, Bombay in favour of the assessee. The assessee has constructed a multi-storied building on the said plots of land known as “Nirmal”. The assessee is the owner of the said building and lessee of the said plots. The assessee collected large amounts from its shareholders during the course of years under the caption “non-refundable deposits”. The assessee allotted floor space in the said building to its sharehoders and conferred rights on the shareholders-allottees to transfer their occupancy rights to the third parties. The shareholders-allottees are liable to pay periodical amounts to the assessee lebelled as “compensation” as fixed by the assessee, mainly having regard to the object of covering maintenance charges and liabilities for municipal taxes etc. payble for the property. The shareholders-allottees charge higher “compensation” to the third party occupants. The third party occupants are inducted in the premises forming part of the building. Income Tax References No. 108 of 1977 and 216 of 1977 (concerning the Assessee) for A.Y 1967–1968, 1968–1969, 1969–1970 were decided by this Court by its judgment and order dated 10-25 April 1991. By the said judgment and order, this Court inter alia held—

“(1) Notwithstanding the use of nomenclature of ‘deposit’, the so-called non-refundable deposits were in essence the consideration paid by the shareholder for sale of occupancy rights. The amounts of so-called deposits were liable to be treated as “revenue receipts” in the hands of the assessee. The so-called deposits were taxable as ‘business income of the assessee’ after deducting therefrom the cost of construction.

(2) The assessee continued to retain the residuary ownership rights in the building although the ‘occupancy rights’ were sold out by the assessee to its shareholders.

(3) Section 22 of the Income Tax Act was inapplicable as the property was inherently incapable of being let out by the assessee even though the assessee had retained ownership rights in the building with itself while making allotments of floor space in the building to the shareholders concerned.

(4) ‘Compensation’ received by the assessee from shareholders was liable to be taxed as business income and not as income from house property under section 22 of the Act.

(5) For determination of the income of the assessee company, the ITO cannot enhance the compensation to the extent of the compensation received by the shareholders from other parties for occupation of the premises allotted to them by the assessee.”

8. The contention of the assessee is that the controversy concerning questions 1, 4 and 6 pertaining to assessment years 1971–1972 and 1972–1973 and question No. 1 pertaining to assessment years 1973–1974, 1974–1975 and 1975–1976 stands concluded by the above referred judgment of this Court since reported in 193 ITR 694. The assessee contends that the said judgment was delivered in the assessee's own case and therefore is binding and the ratio of the said decision must be followed in this reference. The assessee therefore in short contends that the only question which needs to be considered in the present References is “whether the assessee is entitled to deduction of interest payable on the amounts of ‘non-refundable deposits’ despite the so-called deposits themselves having been held by this Court as trading receipts/revenue receipts in the hands of the assessee”.

9. The Division Bench of this Court which has referred the matter to the Full Bench has expressed that there appears to be some inconsistency in the views expressed by this Court earlier in the earlier decisions reported in 83 ITR 794, CIT v. Union Land and Bldg. Soc. Pvt. Ltd. and 102 ITR 499, CIT v. Zorostrian Bldg. Soc. Ltd., on one side and 193 ITR 694, CIT v. Nirmal Commercial Ltd. In the decisions reported in 83 ITR 794 and 102 ITR 499, it was held that the liability of a owner to pay any tax under section 22 of the Income Tax Act, 1961 does not depend either on the power of the owner to earn the income therefrom or the capacity of the portion to let out or his power to receive rent or income from bona fide annual value. Even decision of the Supreme Court reported in 162 ITR 888, Nawab Sir Mir Usman Khan v. CWT, is relied upon which lays down that the assessee company construed to be owner of the property and annual letting value of the said property computed in the manner laid down in section 23 of the said Act, is assessable in the hand of owner under the head of ‘income from house property’. In view of this, first it would be proper to consider whether any such conflict really exists or not. On behalf of the Revenue also, the contention is raised that there is conflict as indicated by the learned Division Bench and the view taken by the Division Bench in the decision reported in 193 ITR 694 being in conflict with the earlier decisions of the Division Bench of this Court is not correct. It would be proper to state here only that the decision in 193 ITR 694 is in fact accepted by the Revenue as they have not appealed against the said decision.

10. To wriggle out of this situation, an attempt is made to contend on behalf of the Revenue that there is no principle of res judicata applicable in the matter of assessment under the Income Tax Act. There is no doubt that the said contention is legally sound. However, at the same time, Shri Dastur, the learned counsel appearing for the assessee, has invited our attention to a decision of our Court reported in 30 I.T.R 618, H.A Shah and Co. v. C.I.T, wherein Chagla, C.J held that the effect of revising an earlier decision should not lead to injustice and the Court must always be anxious to avoid injustice being done to the assessee and therefore the present case is not a fit case for which issue referred to by the Division Bench to the Full Bench should be gone into. It is further rightly contended by Shri Dustur that the Department having accepted the decision, there is no occasion to take a different view. We do feel that there is considerable force in the argument of Shri Dastur. Having urged earlier that the income in the earlier assessment years was income from business or trade, it would not be proper to allow the Department to completely turn and now contend that the income of the assessee is taxable under the head ‘house property’ so as to disallow the deductions claimed by the assessee in respect of interest paid on the non-refundable deposits of the shareholders either under section 28 or section 37 of the Income Tax Act, 1961. The income of the assessee must be treated as income from trade or business.

11. The second limb of argument of Shri Jetly, learned counsel appearing for the Department, is based on the decisions reported in 83 ITR 794 and 102 ITR 499. Relying on these two decisions, he urged that it is already conclusively held that the non-refundable deposits are sale proceeds and income of the assessee. The third limb of the argument of Shri Jetly is that the property of ‘Nirmal’ building is of the ownership of the assessee as no conveyance is executed and therefore the assessee is still the owner and therefore the assessee is required to be held liable to pay tax under the head ‘house property’. Not only that it is further urged that as the assessee under the head of the property is liable to pay tax on annual letting value, in the present case, if the shareholders have let out the premises at higher rate, the annual letting value being the basis for assessing the income from the house property, the owner of the property is liable to pay tax on that annual letting value. Shri Dastur, on the other hand, has urged that in fact the Department cannot be allowed now to contend that the assessee is liable to be assessed on the basis of income under the head of the house property. The assessee being not the owner of the property, the assessee is not liable to be assessed under section 22 of the Income Tax Act, 1961 under the head ‘house property’.

12. Relying on the decision reported in 118 ITR 902, CIT v. Mahendra, J. Shah; 142 ITR 696, Commissioner Of Income-Tax (Central), Bombay v. Shah Construction Co. Ltd.; 69 ITR 598, CIT v. R.B Jodhamal Kuthiala; 82 ITR 570 (575), R.B lodhamal Kuthiala v. CIT; 48 ITR 507, Sir Currimbhoy Baronetcy Trust v. CIT and 14 ITR 298, D.M Vakil v. CIT, Shri Dastur contended that the decisions relied upon by Shri Jetly have no application to the present case on facts. The cases relied upon by Shri Jetly were in respect of classical property of house and land, while in the present case the property is not such a classical property. Shri Dastur for the assessee pointed out that in 142 ITR 696 a building was constructed by a limited company called Khaitan Society Ltd. The assessee company viz. Shah Construction Co. Ltd. as a shareholder have been allotted a flat. Shareholders were required to pay monthly rent to the company viz. Khaitan Society Ltd. for the flats allotted to them. The Supreme Court held that in view of the decision in 118 ITR 902 the assessee viz. Shah Construction Co. was the real owner of the flat in question. In 118 ITR 902 the question which was referred to directly was as to whether the assessee Mr. Mahendra, J. Shah who was allotted a flat as a shareholder of the same company Khaitan Society Ltd. was assessable to tax in respect of the said property as income from the house property under section 9 of the Income Tax Act, 1922 (corresponding to section 22 of the Income Tax Act, 1961). The High Court answered the question in affirmative. It was submitted that the facts in the two decisions cited above and the present case before us turn on their own facts and the peculiar position emerging from the right of occupancy arising from ownership of share in a company and the principles to be applied in such a case were wholly different from the principles to be applied in the case of agreement to sell classical immovable property in the form of land and structure which was considered by our Court in 83 ITR 794 and 102 ITR 499. Shri Dastur strenuously pointed out that in these two earlier decisions agreement for sale was entered into but conveyance which was necessary to be executed for vesting title in the transferee had not been executed. He further pointed out that in 118 ITR 902 and 142 ITR 696 and in the present case there is nothing which has remained to be executed, as, a conveyance is not at all contemplated and by virtue of ownership of shares being transferred, full ownership is vested in the shareholder for occupying and enjoying the unit which goes with the holding of the shares. Shri Dastur therefore pointed out that there is no conflict to be resolved in the earlier two decisions and the decision in 193 ITR 694. In the decision reported in 118 ITR 902 the Court held that where a building was constructed with the monies of the flat owners who were in actual possession of the respective flats in the building, it was the flat owners who should be regarded as owners of the area occupied by them and the company to whom the land initially belonged could not claim ownership rights. Without prejudice to the above contentions, Shri Dastur also submitted that the earlier decisions of the High Court reported in 83 ITR 794 and 102 ITR 499 required reconsideration in the light of decision of the Supreme Court in 82 ITR 570. The Supreme Court in the said decision pointed out that for the purposes of section 9 of the Income Tax Act, 1922, the owner of a property is a person who can exercise the rights of owner in his own right. The Supreme Court confirmed the decision of the Full Bench of the Delhi High Court reported in 69 ITR 598. In the above said decision the Supreme Court noted particularly at page 579 the consequences of taking a contrary view. In the present case also, according to Shri Dastur, if a contrary view is taken, it would mean that in a case where a person purchases a share in a company and where the shares entitle him to occupy a certain unit, he would not be regarded as the owner and accordingly the benefit conferred by section 54 of the Income Tax Act, 1961, where a residential house is sold and another residential house is purchased, may not be held to be available to him. He conceded that the consequences of interpretation are not determinative of the issue normally, but according to him they would be useful to fix meaning of statutory language where it is of some doubt. To support this proposition, Shri Dastur relied upon a decision reported in 121 ITR 1 (17), CIT v. Surat Art Silk Cloth Manufacturers' Association. He also submitted that it is for this very reason that the Court observed in 82 ITR 570 (575) — “It is therefore equitable considerations are irrelevant in interpreting the tax laws. But those laws like all other laws have to be interpreted reasonably and in consonance with justice.” Shri Dastur also submitted that it is necessary to note that in 83 ITR 794 the High Court has noticed that the decision of the Full Bench of the Delhi High Court was contrary to the earlier decision of the High Court of Bombay reported in 48 ITR 507 and 14 ITR 298. He therefore pointed out that the decision in 83 ITR 794 was based on the earlier decisions of this Court in 48 ITR 507 and 14 ITR 298. Shri Dastur therefore contended that it is clear from the decision reported in 82 ITR 570 and the decision of the Delhi High Court reported in 69 ITR 598, that the decision in 83 ITR 794 is no longer a good law. He also pointed out that in 102 ITR 499 this apparent conflict was pointed out to the High Court, but the High Court took the view that there was no contradiction and unless a conveyance was executed the original owner continues to be the owner of the house property. Shri Dastur then was at pains to point out that in view of the decisions relied upon by him, the said view is erroneous and in the present case this Court should, if necessary, correct the said earlier decisions. According to Shri Dastur, the said decisions overlook the fact that a person would be assessable to income from house property even when he does not enjoy any income from the property and even though someone else enjoys that income and has been assessed thereto. He also contended that it would lead to double assessment which is repugnant to the basic principles of law of taxation. Shri Dastur tried to contend by giving an example that if ‘A’ has agreed to sell the land and building to ‘B’ and ‘B’ is in possession and lets out the same to another, ‘B’ would be chargeable to tax in respect of the income as he earns the same, but according to the Department ‘A’ would be also chargeable as alleged owner of the property if the contention of the Department is acceptable. Shri Dastur also relied upon the decision reported in 156 ITR 127, Saifuddin v. CIT, of the Rajasthan High Court wherein it is held that the person who met the cost of construction was to be recorded as the owner of the immovable property and the Rajasthan High Court had followed the decision of this Court in Fazalbhoy Investments' case reported in 109 ITR 802 and also the decision of Punjab and Haryana High Court in Kala Rani v. CIT, 130 ITR 321. He pointed out that the said Courts have applied the principles laid down in Kuthiala's case reported in 82 ITR 570 that the owner must be the person who can exercise the rights of owner. He also pointed out that similar view has been taken by the Calcutta High Court in 184 ITR 484, Madgul Udyog v. CIT. In that case, he pointed out that a builder had built a building and sold the individual flats to buyers, and the conveyance had not been executed. But it was held that individual purchasers of the flats were to be regarded as the owners of the flats holding that the word ‘owner’ appearing in section 22 of the Income Tax Act, 1961 must be construed in the setting of socio-economic development in the concept of ownership and it was also pointed out that there cannot be and should not be a double assessment of the same income, once in the hands of the assessee firm and again in the hands of the buyers. Shri Dastur also very strenuously pointed out that at page 502 of the said decision after referring to decision in Kuthiala's case it is stated that the decision in 77 ITR 637, CIT v. Ganga Properties Ltd., should be read and understood in the light of the subsequent decision in Kuthiala's case and that the Ganga Properties Ltd. case did not deal with all aspects of ownership and did not consider the recent development of concept of multi-storeyed buildings and issues incidental thereto and he also further pointed out that in both the decisions i.e 102 ITR 499 and 83 ITR 794 this Court had placed great reliance on the decision of Calcutta High Court in Ganga Properties Ltd. case while the Calcutta High Court itself in 184 ITR 484 stated that the decision in Ganga Properties Ltd. case would have to be read in context of the decision in Kuthiala's case and should not be regarded as laying down the final law. Similarly he also further pointed out that the Calcutta High Court again in 82 ITR 753, Chitpore Golabari Co. Pvt. Ltd. v. CIT, held that the decision in Ganga Properties Ltd. case has not considered all aspects of ownership.

13. The decisions relied upon by Shri Dastur support his contention that the property of the assessee in the present case is of a different nature than that of a classical property where a conveyance is necessary. Real ownership in fact is to be taken the basis according to the decisions relied upon by Shri Dastur and in the present case the assessee cannot be considered as the real owner of the property. At the highest, the assessee has only some residuary interest in the property. Therefore, the assessee in the present case cannot be assessed under the head of ‘income from house property’. The income of the assessee has to be assessed as trading or business income.

14. The next question that arises is whether the assessee in view of the fact that his income is to be assessed as income from trade or business is entitled to deduction of interest payable by him on non-refundable deposits under section 28 or section 37 of the Income Tax Act, 1961. On behalf of the Department the said claim is strenuously resisted on the ground that under section 28 of the Income Tax Act deduction of interest is allowed on borrowed capital only. In view of the fact that the non-refundable deposits are already held to be the income of the assessee, they are the property of the assessee and hence interest cannot be allowed to be deducted under section 28 of the Income Tax Act. Shri Dastur however tried to contend that even if the non-refundable deposits are held by the Department as revenue receipts or trading receipts for the purposes of tax, their basic nature of being deposits cannot be lost or forgotten, and they continue to be the non-refundable deposits on which under contractual obligation the assessee has to pay interest at 6% as per terms of the contract and hence the same must be allowed as deduction permissible under section 28 of the Income Tax Act. Alternatively, according to Shri Dastur, the interest payable being a payment for business or trade in any case would be required to be allowed as deductible under section 37 of the Income Tax Act. The contention of Shri Dastur needs to be accepted. Shri Dastur has rightly pointed out that the Department has never disputed the terms of the contract and therefore the argument of Shri Jetly that by this arrangement the assessee is trying to siphon out the taxable income will have to be negatived. Shri Dastur contended that there is not even a whisper at any point of time from the side of the Department that the agreement of payment of interest was fraudulent. He was at pains to point out that the Department had not even contended so at any point of time and this, according to him, is apparent from the observations made by the Tribunal also. He relied upon the observations made by the Tribunal at page 116 of the paper book wherein it is stated as under:

“It is of course true that nobody has doubted the genuineness of the agreement or clause 3 under which the interest is said to have been paid on the said initial deposits.”

15. Shri Dastur also pointed out that even the High Court at page 707 in the decision reported in 193 ITR 694 has observed—

“The Department had not produced any material to show that the agreements between the assessee and its members were collusive arrangement.”

16. Shri Dastur therefore is right in inviting us to hold that the payment of interest being accepted as genuine, the same would be required to be allowed as deductible at least under section 37 if not under section 28 of the Income Tax Act. Shri Jetly in the last tried to contend that there was no occasion for payment of interest at all as the amounts are ‘non-refundable deposits’ and there was no necessity to agree to pay any interest at all. Shri Dastur tried to meet the said argument by contending that such an argument is untenable as it is for the assessee to decide as to what expenditure should be incurred for the betterment of the business of the assessee, and nobody can challenge the assessee's decision unless it is claimed to be a fraudulent claim which obviously is not the case of the Department in view of the material already on record. To substantiate this contention, Shri Dastur has relied upon a number of decisions. He has first pointed out that this Court in the assessee's own case reported in 193 ITR 694 at page 700 has observed that the arrangement arrived at by the assessee in the present case was devised for raising finance as the assessee company was faced with the stupendous task of raising funds of about Rs. 80 lakhs which was the estimated cost of construction of a commercial building and that the arrangement between the assessee company and its shareholders was a genuine and bona fide arrangement for payment of a sum of money designated as interest in return for the company obtaining finance for construction of the building. Shri Dastur also pointed out that the Income Tax Department and the Tribunal did not allow the assessee's claim for deduction of the sum of Rs. 4.77 lakhs and Rs. 4.79 lakhs for the two years on the ground that the deposits were trading receipts and accordingly the interest would not be payable on what constituted the assessee's trading receipt or income. Shri Dastur contended that the fact that the said receipts were considered as trading receipts did not alter the situation at all. They were the part of the arrangement for obtaining funds for carrying its activities under which the assessee company received the deposits and also collected monthly sums from the occupants. The sums were paid under the contractual liability. The payment was in no way excessive as it was only at the rate of 6% of the amount deposited, and, as pointed out earlier, the genuineness and bona fides of the arrangement is not under dispute at all and the Tribunal has found that there is no device or scheme in the said arrangement and though the amounts were deposits they partook the character of trading receipts and have been taken into account in determining the business profit or loss of the assessee company and what has been held is that the nature of the amount paid by way of deposit was a trading receipt and the High Court had set out how the amount was to be dealt with in the books of the assessee company i.e it was to remain to the credit of the unit holder. This Court in the assessee's case has observed that the Tribunal was right in holding that the said deposits were in essence the consideration paid by the shareholders for allotment of the floor space and that the Tribunal was right in its view that this was in the nature of sale proceeds. Shri Dastur however contended that this does not mean that the said deposits completely lose their character as deposits. Relying upon the decisions reported in 35 ITR 21 and 53 ITR 75 wherein the Supreme Court while determining the character of Empty Bottles Return Security Deposit Account held that the receipts reflected under that account partook the character of trading receipts. But that however did not mean that as between the parties the said amount would cease to be a deposit. The Supreme Court also observed in the said case that the amounts described as security deposits were also returned as and when the bottles were returned and therefore though they were treated as trading receipts in the hands of the manufacturers, they did not cease to be deposits as between the parties to the agreement. Shri Dastur contended in the present case also the interest at the rate of 6% has in fact been paid as per the terms of the agreement between the assessee and the shareholders on the said non-refundable deposits and therefore even if the said deposits were considered as taxable income on account of trade or business the interest paid thereon treating them as deposits, on which interest as per the terms of the contract was payable, cannot be disallowed as claimed by the Department. Reliance was also placed on the decision reported in 7 ITR 195, CIT v. Tata Sons Ltd., wherein an annual amount payable to a lender of money which was needed by the assessee was held to be deductible even if it was payable after the entire loan had been repaid. Shri Dastur relied upon the observation made in 18 I.T.R 460 (467), Tata Sons Ltd.…Assessees v. The Commissioner Of Income-Tax, Bombay….*, wherein it has been observed that “One has to consider the deductibility of the amount claimed by the assessee company by taking into account commercial expediency and the principles of ordinary commercial trading and whether the expenditure was a part of the process of profit making”. He also relied upon the observations made in 20 ITR 1 (4), Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal, wherein it is observed that in order to claim a deduction it is enough if it is shown that the money was expended not of necessity but voluntarily and on the ground of commercial expediency and in order to facilitate the carrying on of the business. Reliance was also placed on the observations made in 18 ITR 460 (468) wherein it was observed “Even a voluntary payment, if for commercial expediency, would still be an expenditure for the purpose of business.” Shri Dastur has also relied upon the observations made in the case of Eastern Investments Ltd. cited above to point out that it was observed in the said decision “One is not concerned with the legality or propriety of a transaction or whether the result could have been achieved in another way. What one is concerned with is whether the transaction was done in the ordinary course of business, however mistaken the Directors and shareholders may have been”, and also the further observations “It is irrelevant that a transaction was forced on the company by its principal shareholders.” Shri Dastur also relied upon the observations made in 36 ITR 114 (121), P.B Dinshaw Ltd. v. CIT, wherein it has been held that in the absence of fraud, the questions whether the transaction has the effect of diminishing an assessee's taxable income and whether it was necessary for the assessee to enter into the transaction are irrelevant. Shri Dastur also relied upon a decision reported in 62 ITR 638 (642), Commissioner Of Income Tax, U.P, Lucknow v. Nainital Bank Ltd., wherein it is held that “the sole question for determination is whether in incurring the expenditure the assessee company acted in the interests of and for the purpose of its business. Even if it is held — which is not at all admitted — that the assessee company was under no legal liability to make the payment, still if it made the payment for the purpose of its business the same would have been deductible”. In 118 ITR 261 (273), Sassoon, J. David and Co. Pvt. Ltd. v. CIT, it has been held that “Payment for the purposes of business is deductible whatever be the motive behind the payment, and it is for the assessee to decide whether the expenditure should be incurred in the course of its business. Such expenditure may be incurred voluntarily and without any necessity, and if it is incurred for promoting business and to earn profit, the same can be claimed as deduction”. The above said decisions no doubt clearly support the contention of Shri Dastur and in view of the same the proposition advanced by Shri Dastur in this respect has got to be accepted. We therefore hold that the payment of interest on non-refundable deposits will have to be allowed as deductible expenditure under section 37 if not under section 28 of the Income Tax Act, 1961.

17. In the view which we have taken on the basis of the above discussion, it must be held that the I.T.O was not entitled to enhance the compensation to the extent of the compensation received by the shareholders in their own right.

18. The next question arises for consideration as to whether the claim of the assessee that losses of the past years should be carried forward and adjusted against the income of the assessee for the assessment years 1971–1972 and 1972–1973 has been rightly rejected by the Tribunal. The said claim of the assessee was rejected merely because the matter was finally not decided. In the view which we have taken, the losses would be required to be carried forward and adjusted against the income of the assessee for the assessment years 1971–1972 and 1972–1973.

19. In the result, the questions in Income Tax Reference No. 1 of 1982 are answered as under.

(1) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the compensation received from the shareholders was to be taxed as income from business and not as income from property and also in holding that the ITO was not entitled to enhance the compensation to the extent of the compensation received by the shareholders in their own right? Answer in the affirmative in favour of the assessee. (2) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in cancelling the order passed under section 104 of the Income Tax Act, 1961 thereby deleting the additional demand of Rs. 22,242/- for A.Y 1970–1971? Answered in the affirmative in favour of the assessee. (3) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the ITO was not entitled to enhance the compensation to the extent of compensation received by the shareholders in their own right? Answered in the affirmative in favour of the assessee. (4) Whether on the facts and in the circumstances of the case, the sum of Rs. 2,96,285/- and Rs. 77,100/- received by the applicant during the relevant assessment years 1971–1972 and 1972–1973 respectively as ‘non-refundable’ deposits were income of the applicant? Answered in the affirmative as income from business and trade. (5) Whether on the facts and in the circumstances of the case, the claim of the applicant that the amounts of Rs. 4,77,393/- and Rs. 4,79,176/- for assessment years 1971–1972 and 1972–1973 respectively are allowable as deduction either under section 37 of the Act has been rightly rejected by the Tribunal? Answered in the negative and in favour of the assessee, since claim was wrongly rejected. (6) Whether on the facts and in the circumstances of the case, the claim of the applicant that losses of past years should be carried forward and adjusted against the income of the applicant for the assessment years 1971–1972 and 1972–1973 has been rightly rejected by the Tribunal? Answered in the negative and against the Revenue.

20. The following questions in Income Tax Reference No. 138 of 1982 are answered as under:

(1) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 2,87,250/-, Rs. 13,000/- and Rs. 2,87,250/- received by the assessee during the assessment years 1973–1974, 1974–1975 and 1975–1976 respectively as non-refundable deposits were assessable as income of the assessee? Answered in the affirmative in favour of the Revenue. (2) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the claim of the assessee to deduct a sum of Rs. 4,47,399/- for A.Y 1973–1974, Rs. 4,16,775/- for A.Y 1974–1975 and Rs. 3,24,694/- for A.Y 1975–1976, being payment of interest on deposits either under section 28 or under section 37 of the Act was not allowable? Answered in the negative and against the Revenue.

21. No order as to costs.

Order accordingly.