Citation Codes

Equivalent Citations

citation codes

Case Number

Misc. Judicial Case No. 364 of 1957

Judges

V. Ramaswami, C.J
Kanhaiya Singh, J.

Acts

SECTION 18 A INCOME TAX ACT
provisions of Section 12(2) of the Income-tax Act.5.
SECTION 18 INDIAN INCOME TAX ACT
provisions of sub-section (1) of S. 17
Section 12(2) of the Income-tax Act
Section 10(4) of the Income-tax Act,

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

For the assessment year 1951-1952 the assessee claimed that he had utilised Rs. 2,00,000 of bank overdrafts to make an advance payment of income-tax under Section 18-A of the Income-tax Act, and that the interest paid on those overdrafts should be allowed as a business expense. The Income-tax Officer disallowed the deduction, and this decision was affirmed by the Appellate Assistant Commissioner. The assessee appealed to the Income-tax Appellate Tribunal, which dismissed the appeal on the ground that interest paid on borrowing to meet tax liabilities is not deductible. The Tribunal referred the following question of law to the High Court:

“Whether the interest paid by the assessee on borrowed [money] for paying tax under Section 18-A of the Indian Income-tax Act is an allowable deduction?”

Legal Issues Presented

Whether interest paid by the assessee on money borrowed to pay advance income-tax under Section 18A of the Income-tax Act is an allowable deduction.

Arguments of the Parties

Assessee's Arguments

The assessee argued that interest received by him on the advance payment of tax under Section 18-A was taxable income; by parity of reasoning, the interest paid to borrow the amount to make that payment should be an allowable deduction under Section 12(2) of the Income-tax Act (i.e., expenditure incurred solely for the purpose of making or earning such income).
The assessee relied upon the principle discussed in Eastern Investments Ltd v. Commissioner of Income Tax, West Bengal to show that an expenditure voluntarily incurred on grounds of commercial expediency which indirectly facilitates the carrying on of business can be allowable.

The opinion does not contain a detailed account of specific arguments advanced on behalf of the Revenue in adversarial form; the court's reasoning sets out the legal and statutory bases for upholding the Revenue's position.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal (1951) 20 ITR 1 : AIR 1951 SC 278	That voluntary expenditure made on grounds of commercial expediency which indirectly facilitates carrying on the business may, in some circumstances, be allowable.	The Court noted the assessee relied on this decision but held that the reasoning was misconceived here: the particular expenditure (interest on borrowing to pay tax) was not of the nature contemplated because income-tax itself is not an expenditure for earning profits.
Ashton Gas Company v. Attorney-General (1906 AC 10)	Authority for the principle that income-tax is a charge upon profits (the Crown's share) and cannot be treated as a deductible expense incurred in earning those profits.	The Court applied this House of Lords principle to affirm that tax is applied after profit is ascertained and so cannot be converted into an expenditure deductible under provisions like Section 12(2).
Allen v. Farquharson Brothers and Co. (1932) 17 Tax Cas 59	Judicial support (Finley, J.) for the same view that income-tax is not deductible as an expense in earning profits.	The Court cited this authority as reinforcing the established proposition that income-tax cannot be allowed as a business deduction.
Aruna Mills, Ltd., Ahmedabad v. Commissioner of Income-tax, Bombay (1957) 31 ITR 153 : AIR 1956 Bom 756	That interest payable by an assessee under sub-s. (7) of Section 18A (penalty/interest for under-estimation) and interest receivable by the assessee under sub-s. (5) of Section 18A (interest on advance tax paid) do not arise out of the same transaction and that the former cannot be deducted from the latter nor claimed as business expenditure under Section 10(2)(xv) or general commercial expediency principles.	The Court relied on this decision to support the position that interest paid on borrowing to meet tax liabilities is not deductible and that receipts and payments under different sub-sections are not the same transaction.
Bai Bhuriben Lallubhai v. Commissioner of Income-tax, Bombay, North Cutch and Saurashtra (1956) 29 ITR 543 : AIR 1956 Bom 41	Held that borrowing for household expenses, purchase of jewellery and advance payment of tax bore no connection to income from fixed deposit and could not be deducted under Section 12(2).	The Court treated this case as consistent authority showing that borrowing to meet advance tax is not connected with the income-earning transaction relied upon for deduction and thus supports disallowance.
Kameshwar Singh v. Commissioner of Income-tax, B. and O. (1957) 32 ITR 377 : AIR 1957 Pat 400	A prior Bench of the same High Court took a view similar to the present one on the non-deductibility of interest on loans taken to pay advance tax under Section 18A.	The Court cited this earlier decision of the same assessee and Bench as precedent endorsing the present conclusion that such interest is not deductible.

Court's Reasoning and Analysis

The Court proceeded in a stepwise analytical manner, applying statutory provisions and established authorities strictly on the facts before it:

The Court first addressed the assessee's primary contention that, because interest received on advance tax under Section 18A(5) is taxable, interest paid on borrowing to make that advance payment must be deductible under Section 12(2) (allowing expenditures incurred solely for the purpose of making or earning such income). The Court found this argument misconceived.
The Court reiterated a well-established legal principle that income-tax itself is not a business expenditure deductible in computing profits. It explained the conceptual point: income-tax is a charge on profits — "the Crown's share" — and profits must be ascertained before tax is deducted; tax cannot be treated as an expense incurred in earning those profits. To support this, the Court relied on Ashton Gas Company v. Attorney-General and quoted the Lord Chancellor's clear explanation that tax is part of profit and not an expense to be deducted before ascertaining profit.
The Court noted that the same view had been adopted by other judges (citing Allen v. Farquharson Brothers) and that this principle is reflected in the statute itself — specifically Section 10(4) of the Income-tax Act, which expressly disallows allowance of sums paid on account of any tax levied on profits or gains of business, thereby sanctioning the non-deductibility principle as a statutory rule.
As an alternative line of analysis, the Court considered the special provisions of Section 18A. Although Section 18A(5) obliged the Central Government to pay simple interest on advance payments, the Court held the assessee's motive in making an advance payment was the discharge of a statutory obligation (Section 18A(1)) rather than an act intended to earn the statutory interest. Because the borrowing was undertaken to fulfil a statutory obligation and not for commercial expediency to earn income, the interest on such borrowing could not be treated as an expenditure "solely for the purpose of making or earning" the interest receipt under Section 12(2).
The Court further reinforced this conclusion by reference to relevant case law from the Bombay High Court (Aruna Mills; Bai Bhuriben) which held that interest payable by the assessee under relevant sub-sections of Section 18A and other borrowing for non-income-earning purposes do not connect to the income relied upon for deduction and therefore are not deductible. A prior Bench decision involving the same assessee (Kameshwar Singh) was also cited as taking the same view.
On these combined statutory and judicial foundations, the Court concluded that the interest paid on money borrowed to make advance tax payments under Section 18A cannot be deducted under Section 12(2) (nor under other provisions relied upon).

Holding and Implications

Holding: The High Court answered the question of law referred by the Income-tax Appellate Tribunal in favour of the Income-tax Department and against the assessee: the assessee is not entitled to a deduction of the amount of interest paid on money borrowed for the payment of advance income-tax under Section 18A of the Income-tax Act.

Implications:

Direct effect on the parties: The assessee's claim for deduction of the interest on loans taken to make advance tax payments is disallowed; the assessee must pay the costs of the reference. The opinion records a hearing fee of Rs. 250/-.
Broader legal consequence: The decision applies established statutory and precedential principles (as discussed above) to affirm the non-deductibility of borrowing costs incurred solely to discharge tax liabilities. The opinion relies on and follows existing authorities; it does not purport to establish a novel principle beyond applying those authorities to the facts of this case.

Reference answered in favour of the Department. Costs awarded against the assessee. Hearing fee Rs. 250/-.

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Kameshwar Singh, Darbhanga v. Commissioner Of Income-Tax, Patna Opposite Party.

Ramaswami, C.J:— For the assessment year 1951-1952 the assessee claimed that out of the overdrafts taken by him from the Banks, he bad utilised a sum of Rs. 2,00,000/- for an advance payment of income-tax kinder Section 18-A 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 an appeal to the Income-tax Appellate Tribunal.

2. 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 borrowed for paying tax under Section 18-A of the Indian Income-tax Act is an allowable deduction?”

3. 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 S. 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 he 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, 1951-20 ITR 1 : (AIR 1951 SC 278), 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 can not 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 I said in an English case that Income-tax represents “the Crown's 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 Company v. Attorney-General, (1906 AC 10) 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 Finley, J. in Allen v. Farquharson Brothers and Co., (1932) 17 Tax Cas 59 at p. 63. An identical principle has been expressly embodied in Section 10(4) of the Income-tax Act, which states as follows:

“Nothing in cl. (ix) or cl. (xv) of sub-s. (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 or the basis of any such profits or gains;…….”

In view of the statutory provisions it follows as a necessary corollarv that a deduction of interest on money borrowed for Government of tax is not a legitimate deduction, and the claim put forward on behalf of the assessee for deducting such interest cannot be allowed.

4. There is also another point of view from which the question can be approached. It is true that under sub-section (5) of Section 18-A 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 18-A is not to earn the statutory rate of interest under sub-s. (5) of S. 18A; on the contrary, the object of the assessee in making the advance payment is to discharge the statutory obligation imposed upon the assessee by sub-s. (1) of S. 18A, which is to the following effect:

“18A. (1)(a) In the case of income in respect of which provision is not made under S. 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 supertax shall be calculated at the rates in force for the financial year in which he is required to pay the lax, 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 S. 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 supertax 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 this total world income; x x x”.

It is manifest that the receipt of interest by the assessee under S. 18A, sub-s. (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, I 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.

5. This view is borne out by a decision of the Bombay High Court in Aruna Mills, Ltd., Ahmedabad v. Commissioner of Income-tax, Bombay, 1957-31 ITR 153 : (AIR 1956 Bom 756), where it is pointed out that the interest which an assessee has to pay under sub-s. (7) of S. 18A for having under-estimated the tax payable by him by way of advance tax and the interest payable to him by the Government under sub-s. (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-s. (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 S. 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, Bombay, North Cutch and Saurashtra, 1956-29 ITR 543 : (AIR 1956 Bom 41), 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.

6. 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 S. 12(2). It might be that the assessee's 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.

7. 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, Kameshwar Singh v. Commissioner of Income-tax, B. and O., (1957) 32 ITR 377 at p. 387 : (AIR 1957 Pat 400 at p. 403).

8. 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 S. 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 cost of this reference.

9. Hearing fee Rs. 250/-.

10. Kanhaiya Singh, J.:— I agree.

HC/R.G.D

11. Reference answered in favour of Department.

Kameshwar Singh, Darbhanga v. Commissioner Of Income-Tax, Patna Opposite Party.

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Kameshwar Singh, Darbhanga v. Commissioner Of Income-Tax, Patna Opposite Party.

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