The Judgment of the Court was delivered by

P.B Mukharji, A.C.J:— In this income-tax reference, under section 66(2) of the Indian Income-tax Act, the following question requires an answer from this court:

“Whether, on the facts and in the cirmstances of the case, the inference of the Tribunal that remittances to the U.K came out of the profits earned in India and that the bank overdraft in India had in fact been utilised in carrying on the assessee's business was sustainable in law and whether on such inference the Tribunal was right in holding that the income-tax authorities were not justified in disallowing any part of the bank's interest on the overdraft?”

2. The facts giving rise to this question lie within a small compass. The assessee is a sterling company and its status is that of a non-resident under the Indian Income-tax Act, 1922. The assessment years involved in this reference are 1958–59, 1959–60, 1960–61 and 1961–62, for which the corresponding previous years are the calendar years 1957, 1958, 1959 and 1960, respectively. The assessee-company owns tea gardens in the taxable territories. This tea is mostly exported to foreign countries. As a non-resident company, it has remitted profits from time to time to the United Kingdom for the purpose of declaration of dividends to its shareholders and the surplus balance has been kept with the bank in the United Kingdom as deposits. During the relevant accounting years the assessee-company paid interest accruing on its overdrafts to the banks in India. For the assessment years under reference, the assessee-company claimed deduction of the amounts of Rs. 26,468, Rs. 11,650, Rs. 4,613 and Rs. 1,840, respectively, as interest paid on overdrafts incurred for the purpose of its business.

3. The Income-tax Officer rejected the claim for each of the aforesaid years on the ground that the overdrafts from the banks were not incurred wholly and exclusively for the assessee's business. The matter came up before the Appellate Assistant Commissioner for disposal on appeals by the assessee. Briefly, the Appellate Assistant Commissioner held that the assessee-company made remittances to the United Kingdom by taking overdrafts from the banks in India and the borrowings from the banks in India were partly invested in earning the interest income in the United Kingdom. The Appellate Assistant Commissioner sustained a disallowance of Rs. 18,920 for the assessment year 1958–59, and also maintained in full the disallowance by the Income-tax Officer of the claims for interest for the other years. In other words, the net result of the order of the Appellate Assistant Commissioner is that the assessee-company had claimed interest of Rs. 26,468 which was fully disallowed by the Income-tax Officer, but, as stated above, only a part of it, i.e, Rs. 18,920, was required to be disallowed. Hence, what the Appellate Assistant Commissioner did was to reduce the Income-tax Officer's disallowance by Rs. 7,548 and directed the Income-tax Officer to modify the assessment for the year 1958–59 accordingly. The assessee appealed to the Tribunal. The Tribunal observed that it appeared to be a fact that the profits of the assessee-company of each year could not be promptly remitted to the United Kingdom by reason of the time lag in the matter of obtaining the permission of the Reserve Bank and the availability of funds and because the profits as and when earned were ploughed back into the business itself and could not be readily withdrawn unless replaced by borrowed capital on which the company had depended all along for its business in India. The fact is, as found by the Tribunal, that the profits earned remained in the business and were represented by various assets as set out in the balance-sheet or by way of reduction of its liabilities and when remittances of profits were made, they went out of the business and from that point of view, remittances could not be correctly said to have been made out of loans taken from the Indian banks. What the Tribunal says is this that the assessee-company remitted from its own profits which it was permitted to remit to U.K because of its non-resident status, and the Tribunal also finds that the revenue authorities could not compel such an assessee to carry on the business in India only by ploughing back its own profits without any remittance whatsoever. The Tribunal rejected the contention of the revenue authorities that the remittances should be confined to the sums required to meet only liabilities on account of dividends payable in the United Kingdom. The Tribunal was of the opinion that on the facts the correct way to interpret the transaction would be that the remittances to U.K came out of the profits earned in India and that the bank overdrafts in India had in fact been utilised in carrying on the assessee's business. Therefore, the Tribunal held that the income-tax authorities were not justified in disallowing any part of the bank interest paid by the assessee in the taxable territories on its bank overdrafts. The Tribunal allowed the assessee's appeals.

4. The Commissioner now comes to this court on the above reference.

5. If the facts found by the Tribunal are taken as correct, as they should be, because the Tribunal is the last fact-finding authority, then the facts found by the Tribunal are that the remittances by the assessee to U.K came out of the profits earned in India and that the bank overdrafts in India had in fact been utilised in carrying on the assessee's business and then nothing remains of the question except to answer it in the affirmative. But Mr. Pal for the revenue authorities contends that this finding of fact by the Tribunal is only an inference and, therefore, it is a question of law whether such an inference could be drawn or not.

6. The argument for the revenue authorities can be, briefly, summarised. It rests on the interpretation and application of section 10(2)(iii) of the Income-tax Act. This well-known section deals with business. It reads, inter alia, as follows:

“(1) The tax shall be payable by an assessee under the head ‘profits and gains of business, profession or vocation’ in respect of the profits or gains of any business, profession or vocation carried on by him.

(2) Such profits or gains shall be computed after making the following allowances, namely:— ….

(iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid….”

followed by a proviso and an Explanation. Neither the proviso nor the Explanation is relevant for purposes of this reference.

7. The first argument for the revenue is that the interest on the borrowed capital in this case should not be deducted on the ground that it was not for “the purposes of the business” within the meaning of that expression under section 10(2)(iii) of the Income-tax Act. It is argued for the revenue that this was interest earned by the money deposited in the banks in U.K and was not for the purpose of the business of the assessee. Basically, this argument suffers from a fallacy. The facts have already been set out. They show that this money was remitted to U.K for the purpose of paying dividends to the shareholders of the sterling non-resident assessee in U.K Payment of dividend, in our opinion, is within the meaning of the expression “purpose of the business”. We are of the view that payment of dividend is a part of the business of the company and one of its purposes. The fact that subsequently after payment of the dividends to the shareholders of the sterling non-resident assessee some money remained as residue in the banks in U.K which earned interest, does not affect, modify or alter the purpose for which this money was sent, namely, to pay dividends which was the purpose of the business within the meaning of section 10(2)(iii) of the Income-tax Act. That being so, the rest must follow. The interest then becomes one of the items which should be allowed under that section as deduction.

8. The next argument for the revenue is that this is not borrowed capital within the meaning of section 10(2)(iii) of the Income-tax Act, and, therefore, the interest upon this amount cannot be deducted in computing profits and gains of business under section 10 of the Income-tax Act. The argument is developed in this way by Mr. Pal for the Commisioner. It is contended by him that dividend cannot be paid out of capital. Therefore, this remittance cannot be treated or regarded as remittance of borrowed capital within the meaning of section 10(2)(iii) of the Income-tax Act. A part of this contention is based on his further submission that dividends can only be paid out of profits, and, therefore, it has to be established by the assessee that this remittance came out of the profits. His next step of the argument on this branch is that profits had already been ploughed back in the working of the company and there was no money available and, therefore, this borrowing was resorted to. Hence, this borrowing from the Indian banks was an independent loan and an independent transaction. This argument is ingenious, but the facts do not support this argument. On the facts set out in the statement of the case, it is to be noted that most of the tea produced by this assessee in India is exported to foreign countries. It is an admitted fact that as non-resident company, the assessee has remitted the profits from time to time to the United Kingdom for the purpose of declaration of dividends to the shareholders. Again, it is an admitted fact that the surplus balance had been kept with the bank in the United Kingdom as deposits. Further, it is an admitted fact that the deposits made in U.K are from remittances made from the overdrafts from the banks in India. The sale proceeds of tea on export outside India come back to India. The other fact however is that in respect of sales effected in countries outside India the proceeds are required to be repatriated into this country under the Foreign Exchange Regulation Act of the Government of India. The still other fact is that permission was obtained from the Reserve Bank of India for the remittances of profits from India to U.K The Tribunal, therefore, in our view, correctly observes that the profits of each year of the assessee cannot promptly be remitted to U.K because of the time lag for obtaining permission of the Reserve Bank of India and the ready availability of funds because the profits as and when earned were ploughed back into the business itself and could not be readily withdrawn unless replaced by borrowed capital. That is exactly what has happened in this case. It is on that basis the Tribunal correctly interprets the facts to observe that these remittances to the United Kingdom in essence, in substance and in the ultimate analysis came only out of profits earned in India and it was for that purpose that the bank overdrafts in India, in fact, were utilised to carry on the assessee's business. It is difficult to read the facts in any other way.

9. It will be appropriate at this stage to notice the four cases on which Mr. Pal for the revenue relied. The first one is a decision of the Division Bench of the Lahore High Court in Macnabb v. Commissioner of Income-tax [1936] 4 I.T.R 306 Lah... There the court held that the interest paid on sums borrowed in British India at that time, to purchase sterling securities, which were retained and the income from which was received outside British India had to be treated as a charge on the interest from those securities which was not liable to Indian income-tax and not deductible under the then section 10(2)(iii) from the other income of the assessee liable to tax in British India. This case, in our opinion, has no application to the instant reference and the point which we have to decide. That was a case of a salaried person. The assessee in that case was a civil servant in India. It was no part of his profession or vocation to invest money. He did it entirely on his personal account. What he did was that he used to deposit his salary in the bank as a fixed deposit and borrowed from the bank certain sums of money on the security of that fixed deposit and, in fact, purchased certain shares in England, the dividends of which were payable in England and not taxable in India. Mr. Pal for the revenue relied on the observations of that court, appearing at page 308, which are as follows:

“Even if it be presumed that he was engaged on a foreign business there is authority for the view that the interest paid on sums borrowed in British India to purchase sterling securities, retaining those securities and the interest therefrom outside British India, has to be treated as a charge on the interest from those securities which are not liable to Indian income-tax and is not deductible under section 10(2)(iii) of the Income-tax Act from the other income of the assessee liable to tax as accruing and arising in British India. This was laid down in Provident Investment Co. Ltd., In re by a Bench of the Bombay High Court and there is a similar decision of the Madras High Court in Commissioner Of Income-Tax v. V.S.K.S. Somasundaram Chettiar A.I.R 1928 Mad. 487..”

10. The principle of that decision, which distinguishes the instant reference before us, was stated by the learned judges of that court at page 308 and can be found from the observations quoted below:

“The case of the assessee before us is even worse as it cannot be held that he is carrying on business. All that he did was to raise capital in British India to invest it outside British India and the interest he had to pay on the borrowed capital was an expense incurred in connection with his outside investment and had nothing to do with anything else. It is only in case he is carrying on business that such a deduction can be claimed and from the authorities quoted it is clear that the borrowing must be for the purpose of carrying on a business the profits of which accrue in British India.”

11. We are aware that the words “profession and vocation” were added subsequently to this decision. But even then the distinction of facts noted above is valid.

12. The next case on which Mr. Pal for the Commissioner relied is Henriksen (H.M Inspector of Taxes) v. Grafton Hotel Ltd. [1942] 2 K.B 184 for the purpose of invoking the principle laid down by Lord Greene M.R, at page 460:

“It frequently happens in income-tax cases that the same result in a business sense can be secured by two different legal transactions, one of which may attract tax and the other not. This is no justification for saying that a taxpayer who has adopted the method which attracts tax is to be treated as though he had chosen the method which does not, or vice versa.”

13. This has been enforced by the other English decision in Commissioners of Inland Revenue v. Wesleyan and General Assurance Society [1948] 1 All E.R 555, where Viscount Simon, at page 25, observed:

“Secondly, a transaction, which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax.”

14. Finally, Mr. Pal for the revenue cites a Division Bench decision of this court in Commissioner Of Income-Tax, Calcutta v. Sri Bibhuti Bhusan Dutt., to show that this principle just mentioned has been followed by this court by drawing our attention to the observations appearing at page 241 of that report.

15. In our view, that proposition of Lord Greene M.R or Viscount Simon is not in question. It is not a question in the instant reference before us of the assessee in this case adopting a method or arrangement which attracts the tax. Mr. Pal for the revenue tried to apply the decisions by suggesting that the assessee in this case if it had sent the money after the permission of the Reserve Bank of India had been obtained or without anticipating it, then he would not have been liable to pay tax on this interpretation which he has been taxed by the Income-tax Officer or the Appellate Assistant Commissioner. Mr. Pal contends that because the assessee chose the other method of borrowing the capital from the bank, therefore, this adopted method attracts the tax. This argument really is begging the question and is also misleading. If the assessee had waited to send the money under the Reserve Bank of India permission, then there would be no question under section 10(2)(iii) of paying interest on borrowed capital at all. Therefore, it was a competing or an alternative method of arrangement, one attracting the tax and the other not, a principle which was mentioned by Lord Greene M.R and also by Viscount Simon.

16. Dr. Pal appearing for the assessee has not disputed Lord Green's or Viscount Simon's propositions. In fact, that proposition is a very well-established axiom in the law of taxation. But there are authorities which support the view that we are taking and which the Tribunal has taken. Dr. Pal appearing for the assessee relied on those authorities. It would be necessary to examine two such authorities. The first authority to notice is Commissioner of Income-tax v. Indian Bank Ltd., where the Supreme Court lays down the principle that there is nothing in the language of section 10 of the Indian Income-tax Act, 1922, from which it can be fairly implied that an expenditure or allowance falling within the section must fulfil some other condition before it can be allowed and that, in allowing a deduction which is permissible, one need not look beyond the expenditure and see whether it has the quality of directly or indirectly producing taxable income. The Supreme Court emphasised that in construing the several clauses of section 10 the court must adhere closely to the language of the Act.

17. Closely adhering to the language of the Act in section 10(2)(iii), it appears to us that if the test of the purpose of the business is satisfied in respect of the capital borrowed on which the amount of interest is paid or earned, then this court should not impose any further conditions or considerations. It is an admitted fact in this case that capital was borrowed in India by taking overdrafts from banks in India. The money so taken on the overdrafts from banks in India were with the knowledge and permission of the Reserve Bank of India sent to U.K stamped with the purpose of paying dividends to the shareholders of the non-resident sterling company of the assessee. The subsequent fact that those monies after paying such dividends had a remnant or residue in the bank which produced an interest cannot alter or modify the purpose of the business for which it was sent and can, in our view, claim the deduction on the principle laid down by the Supreme Court in this case. At pages 79 and 80 in Commissioner of Income-tax v. Indian Bank Ltd., the significant observations relevant on the point for decision in the instant reference are as follows:

“Then is there such a principle as has been formulated above? If there is one, can it be invoked to cut down the express language of section 10(2)(iii), which expressly allows as a deduction interest on capital borrowed for the purpose of the business? In our opinion, in construing the Act, we must adhere closely to the language of the Act. If there is ambiguity in the terms of a provision, recourse must naturally be had to well-established principles of construction, but it is not permissible first to create an artificial ambiguity and then try to resolve the ambiguity by resort to some general principle.”

18. The Supreme Court in that case, Commissioner of Income-tax v. Indian Bank Ltd., at page 80, gives the logical steps which the court should follow in construing section 10 of the Income-tax Act. The relevant observations on the point, at page 80, are as follows:

“If he is carrying on an activity which is not business, we must leave out of account the receipts of that activity. That is the first step. Secondly, we must look at section 10(2) and deduct all the allowances permissible to him. In allowing a deduction which is permissible the question arises: Do we look behind the expenditure and see whether it has the quality of directly or indirectly producing taxable income? The answer must be in the negative for two reasons: First, Parliament has not directed us to undertake this enquiry. There are no words in section 10(2) to that effect. On the other hand, indications are to the contrary…. The legislature stops short at directing that it be ascertained what was the purpose of the expenditure. If the answer is that it is for the purpose of the business, Parliament is not concerned to find out whether the expenditure has produced or will produce taxable income. Secondly, the reason may well be that Parliament assumes that most types of expenditure which are laid out wholly and exclusively for the purpose of business, (there the Supreme Court was discussing section 10(2)(xv)) would directly or indirectly produce taxable income, and it is not worth the administrative effort involved to go further and trace the expenditure to some taxable income.”

19. The next case relevant on the point is Commissioner of Income-tax v. Malayalam Plantations Ltd., another decision of the Supreme Court. Although that was a case under section 10(2)(xv), its relevance lies in the interpretation which the Supreme Court gave to the expression “for the purpose of business”, which also appears in section 10(2)(iii) with which we are concerned in the instant reference. There, the Supreme Court holds that the expression “for the purpose of business” is wide and it may take in not only the day-to-day running of a business, but also the rationalisation of its administration and modernisation of its machinery and may include measures for the preservation of the business and for the protection of its assets and properties from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business or other acts incidental to the carrying on of the business. (See the relevant observations at pages 148-150 of that report).

20. We have no hesitation in holding, as we have done, that payment of dividend is a purpose of the business of the assessee in this case.

21. We cannot help feeling that in this matter the taxing authorities made a preliminary confusion between section 10(2)(xv) and section 10(2)(iii). The confusion first appears at page 6 of the paper book where the Income-tax Officer under the heading “Interest account” says:

“The assessee claimed that an interest on Rs. 26,468 was paid to bankers for overdrafts. When we look to the cash balance and investment, the overdraft cannot be said to have been raised for the purpose of wholly and exclusively for business. The same is therefore disallowed.”

22. Now, this expression “laid out or expended wholly and exclusively for the purpose of such business” appears in section 10(2)(xv) but this test of expenditure “wholly and exclusively for the purpose of such business” is absent in section 10(2)(iii) which is the section relevant and applicable to the point for determination in this reference. There the only common expression is the “purpose of business” and not the other parts of the expression “expended wholly and exclusively”. This was not a passing error of the Income-tax Officer. It crept into the order also of the Appellate Assistant Commissioner which will be apparent from the observations at pages 19-20 of the paper book where he was speaking of part of the borrowing being partly utilised in making deposits in U.K and by which he was dividing the part to be allowed and the part to be disallowed. His significant words are:

“It is, therefore, clear that the borrowings from the banks in India are not utilised for the working capital of the business in India, but have been partly utilised in making deposits in U.K The interest payments in India to the extent of £ 1,419 amounting to Rs. 18,920 are therefore required to be disallowed as the interest on borrowing utilised for the purpose other than business.”

23. That is why he reduced the Income-tax Officer's disallowance by Rs. 7,548. This division, according to the principle laid down by the Supreme Court, was clearly not permissible. Here, the taxing authorities were looking beyond the terms of the statute and introducing what was the final fate of the amounts deposited in the United Kingdom. The position is this: the whole of the money was sent from India from the overdraft account to U.K and deposited in U.K banks for the purpose of the business, namely, of payment of dividends to the shareholders of the nonresident sterling company in U.K, and, thereafter, some remnant was left in the bank which carried the interest for which the deduction is claimed by the assessee. It was, therefore, beyond the statute to enquire that, after the purpose has been fulfilled, an incidental or consequential effect was that a residue remained which earned an interest, and to disallow that interest was, in our view, against the principle of interpretation laid down by the Supreme Court. It must be noted here that this is not a case of fraud for the purpose of the business. It is not the allegation of the revenue authorities in this case that the assessee-company practised a fraud on the revenue. In fact, there is no such allegation at all in the records or in the reference.

24. For these reasons, we uphold the decision of the Tribunal. We answer both parts of the question in the affirmative, namely, we hold that the inference of the Tribunal that remittances to U.K came out of the profits earned in India and the bank overdraft in India had, in fact, been utilised in carrying on the assessee's business, is sustainable in law, and we hold further that on such inference or finding of fact, the Tribunal was right in holding that the income-tax authorities were not justified in disallowing any part of the bank's interest on the overdraft. The answer is given in favour of the assessee in both the parts of the question. The assessee is entitled to the costs of this reference.

T.K Basu, J.:— I agree.