- Bookmark
- Share
- CaseIQ
Maharajadhiraj Sir Kameshwar Singh v. Commissioner Of Income Tax, Patna
Factual and Procedural Background
For the assessment year 1951-52, the assessee claimed that Rs. 2,00,000 out of the overdrafts taken from banks was utilised for an advance payment of income-tax under section 18A of the Income-tax Act. The assessee contended that the interest paid on the overdraft should be allowed as a deductible expense. The Income-tax Officer denied this deduction, which was affirmed on appeal by the Appellate Assistant Commissioner. The assessee then appealed to the Income-tax Appellate Tribunal, which dismissed the appeal on the ground that interest paid on borrowed money for meeting tax liability is not a legitimate deduction. Consequently, the Income-tax Appellate Tribunal submitted the following question of law to the High Court:
"Whether the interest paid by the assessee on money borrowed for paying tax under section 18A of the Indian Income-tax Act is an allowable deduction?"
Legal Issues Presented
- Is the interest paid by the assessee on money borrowed for the purpose of paying advance income-tax under section 18A of the Income-tax Act an allowable deduction under the Act?
Arguments of the Parties
Assessee's Arguments
- The interest received by the assessee on the advance payment of tax under section 18A was taxable income.
- By parity of reasoning, the interest paid on borrowing money to pay such tax should be allowed as a legitimate deduction.
- The claim was based on section 12(2) of the Income-tax Act, which permits deduction of expenditure incurred solely for the purpose of making or earning taxable income.
- Relied on the Supreme Court decision in Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal, which held that expenses incurred voluntarily for commercial expediency and to indirectly facilitate business are deductible.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal | Expenses incurred voluntarily and for commercial expediency to facilitate business may be deductible. | Assessee relied on this case to argue that interest paid on borrowed money for advance tax was deductible, but the court rejected this analogy. |
| Ashton Gas Co. v. Attorney-General | Income-tax is not a deductible expense; it is a charge on profits after they have been earned. | The court adopted this principle to hold that interest on money borrowed to pay tax is not deductible as it relates to discharge of tax liability, not earning profits. |
| Allen v. Farquharson Brothers and Company | Confirmed the principle that income-tax is not deductible as business expenditure. | Supported the court’s view that interest on borrowed money to pay tax is not deductible. |
| Aruna Mills Ltd. v. Commissioner of Income-Tax, Bombay | Interest payable under section 18A(7) for underestimated tax is not deductible against interest received under section 18A(5); interest payable for tax liability is not business expenditure. | The court cited this to reinforce that interest on borrowed money to pay advance tax is not deductible. |
| Bai Bhuriben Lallubhai v. Commissioner of Income-tax | Interest on money borrowed for non-income-earning purposes (household expenses, advance tax) is not deductible under section 12(2). | Used to illustrate that borrowing to pay advance tax is for statutory compliance, not income earning, thus no deduction allowed. |
| Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax | Consistent with the principle that interest on money borrowed for payment of advance tax is not deductible. | Referenced as a prior ruling of this High Court supporting the present decision. |
Court's Reasoning and Analysis
The court analyzed the nature of income-tax and the statutory provisions governing deductions. It emphasized the well-established principle that income-tax is not deductible as a business expense because it represents a charge on profits after they are earned, not an expense incurred to earn those profits. The court referenced the House of Lords decision in Ashton Gas Co. v. Attorney-General to underline that income-tax is part of the profits and cannot be treated as expenditure.
The court further examined section 12(2) of the Income-tax Act, which allows deductions only for expenditure incurred solely for the purpose of earning taxable income. It concluded that borrowing money to pay advance tax is a statutory obligation, not a commercial expediency or a step taken to earn income.
Additionally, the court noted that though section 18A(5) provides for interest payable by the government on advance tax payments, this interest is incidental and does not transform the purpose of the advance payment into an income-earning activity. The borrowing was purely to discharge a statutory liability.
The court also relied on decisions of the Bombay High Court and previous rulings of this High Court to support the view that interest on money borrowed for payment of advance tax is not deductible under section 12(2) or any other provision.
Holding and Implications
The court held that the interest paid by the assessee on money borrowed for payment of advance income-tax under section 18A is not an allowable deduction.
Accordingly, the question of law referred by the Income-tax Appellate Tribunal was answered in favour of the Income-tax Department and against the assessee. The assessee was also directed to pay the costs of the reference. The decision does not set a new precedent but reaffirms existing principles that interest on borrowed money for tax payment is not deductible as business expenditure.
- For the assessment year 1951-52 the assessee claimed that out of the overdrafts taken by him from the banks, he had utilised a sum of Rs. 2,00,000 for an advance payment of income-tax under section 18A of the Income-tax Act and that the interest paid on the overdraft must be allowed as an expense. The Income-tax Officer refused to allow the deduction and on appeal the order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner. The assessee took the matter on appeal to the Income-tax Appellate Tribunal. The appeal was dismissed by the appellate Tribunal on the ground that the interest paid for borrowing money for the purpose of meeting tax liability cannot be a legitimate deduction. In these circumstances the income-tax Appellate Tribunal has submitted the following question of law for the determination of this High Court :
"Whether the interest paid by the assessee on money borrowed for paying tax under section 18A of the Indian Income-tax Act is an allowable deduction ?"
On behalf of the assessee learned counsel put forward the argument that the interest received by the assessee on the advance payment of tax under section 18A was a taxable income and on the same reasoning the interest paid by the assessee for borrowing the amount to pay the tax was a legitimate deduction. The claim of the assessee was based upon section 12(2) of the Income-tax Act, which is to the following effect :
"12. (2) Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains and further in the case of any income by way of dividend, for any reasonable sum paid by way of commission or remuneration to a banker or any other person realising such dividend on behalf of the assessee...."
Learned counsel for the assessee also referred in this connection to the decision of the Supreme Court in Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal, where it was observed that "it is enough to show that the money was expended not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business." In my opinion, the argument of learned counsel for the assessee is misconceived and cannot be accepted as correct. It is a well established proposition that the amount of income-tax paid by an assessee cannot be deducted as a business expenditure. The reason is that income-tax is not a deduction before you arrive at the net profits of the assessee. It is said in an English case that income-tax represents "the Crowns share of the profits". It is not an expenditure for the purpose of earning profits. It is, on the contrary, a case of application of profits after they have been earned and not expenditure necessary to earn such profits. That is the principle laid down by the House of Lords in Ashton Gas Co. v. Attorney-General and at page 12 the Lord Chancellor states in the course of his speech as follows :
"My Lords, so presented the case appears to me to be perfectly clear. The fallacy has been in arguing as if you can deduct from the income-tax which you have got to pay something which alters what is the real nature of the profit. Now the profit upon which the income-tax is charged is what is left after you have paid all the necessary expenses to earn that profit. Profit is a plain English word; that is what is charged with income-tax. But if you confound what is the necessary expenditure to earn that profit with the income-tax, which is a part of the profit itself, one can understand how you get into the confusion which has induced the learned counsel at such very considerable length to point out that this is not a charge upon the profits at all. The answer is that it is. The income-tax is a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax - you have no right to deduct the income tax before you ascertain what the profit is. I cannot understand how you can make the income-tax part of the expenditure. I share Buckley J.s difficulty in understanding how so plain a matter has been discussed in all the courts at such extravagant length."
The same view has been taken by Finlay, J., in Allen v. Farquharson Brothers and Company. An identical principle has been expressly embodied in section 10(4) of the Income-tax Act, which states as follows :
"Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains;...."
In view of the statutory provisions it follows as a necessary corollary that a deduction of interest on money borrowed for payment of tax is not a legitimate deduction, and the claim put forward on behalf of the assessee for deducting such interest cannot be allowed.
There is also another point of view from which the question can be approached. It is true that under sub-section (5) of section 18A of the Income-tax Act the Central Government is bound to pay simple interest at two per cent. per annum on any amount payable before the 1st of April, 1955, and four per cent. per annum on any amount payable after that date. But the purpose of the assessee in making an advance payment of tax under section 18A is not to earn the statutory rate of interest under sub-section (5) of section 18A; on the contrary, the object of the assessee in making the advance payment is to discharge the statutory obligations imposed upon the assessee by sub-section (1) of section 18A, which is to the following effect :
"18A. (1)(a) In the case of income in respect of which provision is not made under section 18 for deduction of income-tax at the time of payment, the Income-tax Officer may, on or after the 1st day of April, in any financial year, by order in writing, require an assessee to pay quarterly to the credit of the Central Government on the 15th day of June, 15th day of September, 15th day of December and 15th day of March in that year, respectively, an amount equal to one-quarter of the income-tax and super-tax payable on so much of such income as is included in his total income of the latest previous year in respect of which he has been assessed, if that total income exceeded the maximum amount not chargeable to tax in his case by two thousand five hundred rupees. Such income-tax and super-tax shall be calculated at the rates in force for the financial year in which he is required to pay the tax, and shall bear to the total amount of income-tax and super-tax so calculated on the said total income the same proportion as the amount of such inclusions bears to his total income or, in cases where under the provisions of sub-section (1) of section 17 both income-tax and super-tax or super-tax are chargeable with reference to the total world income, shall bear to the total amount of income-tax and super-tax which would have been payable on his total world income of the said previous year had it been his total income the same proportion as the amount of such inclusions bears to his total world income..."
It is manifest that the receipt of interest by the assessee under section 18A, sub-section (5), is purely incidental. I am satisfied that the borrowing of money by the assessee for the payment of an advance tax was not made for any purpose of commercial expediency but for the discharge of a statutory obligation imposed upon the assessee. It follows, therefore, that the interest paid by the assessee on the money borrowed cannot be deducted under the provisions of section 12(2) of the Income-tax Act. This view is borne out by a decision of the Bombay High Court in Aruna Mills Ltd., Ahmedabad…Applicant; v. Commr. Of Income-Tax, Bombay,…., where it is pointed out that the interest which an assessee has to pay under sub-section (7) of section 18A for having underestimated the tax payable by him by way of advance tax and the interest payable to him by the Government under sub-section (5) of the same section in respect of tax paid in advance, do not arise out of the same transaction; the interest payable by the assessee under sub-section (7) cannot, therefore, be deducted from the amount of interest received by him under sub-section (5) in determining his assessable income. Nor can the interest payable by him under sub-section (7) be claimed as business expenditure under section 10(2)(xv) of the Act, or on the general principles of commercial expediency. A similar view has been expressed by the Bombay High Court in Bai Bhuriben Lallubhai v. Commissioner of Income-tax, where the assessee claimed to deduct under section 12(2) of the Income-tax Act from interest earned by her from fixed deposit the interest on money borrowed by her for the purpose of meeting household expenses, purchasing jewellery and meeting advance payment of tax. It was held by Chagla, C.J., that the purpose for which the assessee borrowed money had no connection, whether direct or indirect, with the income which she earned from the fixed deposit and that she was not entitled to the deduction claimed under section 12(2). It might be that the assessees motive was to save her fixed deposit and interest and to meet household expenses, etc., by means of a loan borrowed, but that consideration was entirely irrelevant. Even as regards advance payment of tax the purpose of borrowing the money in order to pay advance tax was to discharge the statutory obligation upon the assessee, that receipt of interest on that tax was purely incidental and, therefore, the assessee could not claim the deduction on that ground either. A similar view has been taken by a Bench of this High Court in a previous case of the same assessee, Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax.
For the reasons expressed by me, I hold that the assessee is not entitled to a deduction of the amount of interest paid by him for the money borrowed for payment of the advance income-tax under section 18A. Accordingly I answer the question of law referred to the High Court by the Income-tax Appellate Tribunal in favour of the Income-tax Department and against the assessee. The assessee must pay the costs of this reference. Hearing fee Rs. 250.
KANHAIYA SINGH, J. - I agree.
Reference answered accordingly.
Alert