Income-tax Reference No. 71 of 1978

Decided on August 12, 1981

The Judgment of the Court was delivered by

Sabyasachi Mukharji, J.:— This reference arises out of an assessment for the year 1967-68 Under s. 256(1) of the I.T Act, 1961, and the following question has been referred to this court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the short-term and fixed bank deposits could not be included in the capital computation for the purpose of working out relief under section 84 of the Income-tax Act, 1961, as it then stood, read with rule 19(4) of the Income-tax Rules, 1962?”

2. The assessee is a limited company. For this assessment year one of the claims of the assessee-company was that the bank deposits should not be excluded from the capital computation for the purpose of working out the exemption under s. 84 of the I.T Act, 1961, as it then stood. The ITO however, among other claims also, did not accept this claim. The assessee-company, being aggrieved by the aforesaid decision of the ITO, went up in appeal before the AAC. The AAC while giving relief on some other points, however, held that the short-term and fixed deposits in the bank should not have been excluded in making the capital computation for the purpose of determining the relief under s. 84 and partly allowed the assessee's appeal. The revenue being aggrieved by the order of the AAC went up in appeal before the Appellate Tribunal. It appears that there was a difference of opinion between the Accountant Member and the Judicial Member on the issue whether the short-term and fixed bank deposits could be included in the capital computation for the purpose of working out relief under s. 84 of the Act as it stood at the relevant time. The President of the Tribunal was, thereafter, moved to refer the case for hearing by one or more members of the Appellate Tribunal as required under s. 255(4) of the Act on the following points of difference:

“Whether, on the facts and in the circumstances of the case, the bank deposits should be left out of account in the computation of capital for the purpose of working out the relief under section 84 of the Act, as it then stood, read with rule 19(4) of the Income-tax Rules, 1962?”

3. The President, in his turn, referred the matter to the Vice-President, who agreed with the view of the Accountant Member. We shall have to refer to the relevant portion of the finding by the learned Judicial Member, the Accountant Member as well as the Vice-President. Following the majority decision, however, the Appellate Tribunal Bench held that the short-term and fixed bank deposits could not be included in the capital computation for the purpose of working out the relief under s. 84 as it then stood. On these facts the aforesaid question as indicated above has been referred to this court. As we have mentioned before, the question arises in the context of s. 84 of the I.T Act, 1961. Section 84, which was there for the relevant assessment year, provided, inter alia, that save as otherwise provided therein, income-tax shall not be payable by an assessee on so much of the profits and gains derived from an industrial undertaking or business or hotel to which the said section applied as did not exceed 6% per annum on the capital employed in such undertaking or business. Sub-s. (2) of s. 84 deals with certain conditions to be fulfilled in order to be entitled to relief, in the prescribed manner. Sub-section (2) of s. 84 dealt with the conditions which were required to be fulfilled in order to be eligible for this benefit. There is no dispute in this case that such conditions required by sub-s. (2) were fulfilled. We have mentioned before that 6% per annum of the capital employed in such undertaking had to be computed in the manner prescribed. Now, the manner had been prescribed by rule 19 of the I.T Rules, 1962. Rule 19 deals with the computation of capital employed in industrial undertaking or hotel. Sub-r. (1) of r. 19 stipulates that for the purpose of s. 84, the capital employed in an undertaking or hotel, to which the said section applied, should be taken as laid down in the different clauses of sub-r. (1) of r. 19. It is not necessary for our present purpose to refer to the same. Sub-rule 4, with which we are mainly concerned in this reference of rule 19, provides as follows:

“(4). Any investments the income from which is not to be taken into account in computing the profits of the business and any moneys not required for the purposes of the business, shall be left out of account, but where any investments in the beneficial ownership of the person carrying on the business are so left out of account, the sum (if any) to be deducted under sub-rule (1) in respect of borrowed money shall be computed as if the principal of the borrowed money were reduced by the value of those investments.”

4. As mentioned hereinbefore there was a difference of opinion between the Members of the Tribunal. It will, therefore, be material to refer to the relevant portions of the order of the three different Members of the Tribunal. The Judicial Member of the Tribunal after setting out the facts in the context observed that he was taken through the assessee's annual report for the year and it was pointed out from the balance-sheet of that year that provision had been made there to the extent of Rs. 38,45,740 for tax payment and in that year, as advance tax, only Rs. 9,78,326 had been paid in fact. It was submitted that the deposits with which we were concerned and with which the Judicial Member was concerned were really for a short period of three months and six months and the amounts were, it was emphasised by the Judicial Member, really necessary for payment of tax dues. It was sought to be explained that rather than keeping the amount in the till of the assessee with all its attendant risks, the assessee deposited the amount only for short fixed periods. The question that was put was: how then could the amounts so deposited be taken as capital withdrawn or not employed in the business? Emphasis was also laid on the fact that in working out the average profits of the business, the ITO had included these amounts also. The attention of the Tribunal was drawn to the fact that in the profit and loss account interest received from the banks on such deposits was also included. It was contended that in the circumstances it was not to be taken that these deposit amounts were not necessary or employed in the business. On behalf of the assessee, it was urged that by depositing the amount with the banks, the assessee had only made it over for safe custody for a short period and avoided the necessity of taking upon itself the risk of keeping the money in its own chest.

5. The Judicial Member found considerable force in the contentions urged on behalf of the assessee. He was of the view that s. 84 applied only to the capital employed in the business. Rule 19(4) enjoined to leave out of account only investments the income from which was not to be taken into account in computing the profits of the business and any moneys not required for the purposes of the business. According to the Judicial Member, there could not be any doubt that at least before these amounts were deposited in the bank, these amounts formed part of the circulating capital of the business. This aspect of the matter has to be determined because a great deal of emphasis was laid before us, on behalf of the assessee, upon this aspect of the finding of the learned Judicial Member of the Tribunal, a finding with which specifically neither the Accountant Member nor the Vice-President of the Tribunal has expressed any disagreement. The interest earned from the banks on their investments was taken into account in the profit and loss account, according to the facts found by the Judicial Member. The Judicial Member noted that on the face of the provisions made in the balance-sheet for the payment of tax and dividends, he was not prepared to say that those were amounts not required for the purpose of the business. He was sure that, if instead of depositing the amounts in the bank the assessee had kept the same in its own till without using the same in any way, no argument could reasonably have been raised that the money was not being employed in or required for by the business. If that was so, then according to him, it could not be contended otherwise simply for the reason that instead of keeping it itself, it deposited the amount with the bank for safe custody and for earning interest also thereon at the same time. At the end of the earlier year, the amount in fixed deposit was Rs. 2,83,950 and at the close of this year the amount in such deposit was nil. That itself, according to the Judicial Member, was an indication enough that those deposits had been withdrawn during the year and employed for the purposes of the business. Though the short-term deposits in the earlier year was Rs. 15 lakhs and at the end of the year it had risen to Rs. 35 lakhs, the very fact that the deposits were for a short-term with liberty of withdrawal on a week's notice, according to the Judicial Member, shows that far from these moneys being withdrawn from the business, they were only kept ready for use for such provisions as had been made in the balance-sheet. He was, therefore, unable to accept the contention of the revenue and he was of opinion that in view of the conditions mentioned in r. 19(4) of the Rules, the assessee was entitled to the relief as claimed.

6. It is now necessary to refer to the relevant portion of the order of the Accountant Member, wherein he set out the relevant portion of the contentions and observed: “It is also found that the moneys represented by the bank deposits were required for the purpose of the business.” Then he referred to certain decisions of different courts and observed as follows:

“Viewed in this context it is found that the income from investment in bank deposits was not taken into account in computing the profits of the business but was separately assessed under the head ‘Other sources’ as already described above. It is also found that the investments in bank deposits was for the purpose of keeping the moneys in bank till such time as the company was called upon to make the tax payments for the purpose for which the moneys were kept in the bank deposits, that is, in other words, the moneys were not required for purposes of the business. It is, therefore, not open to us to embark upon whether if the assessee-company had, instead of keeping the money in bank, kept it with itself it would have been entitled to the amount being included in the computation of capital for the purpose of working out the exemption under section 84 and, therefore, simply because it did not do so, exemption on this basis should not be denied. Sub-rule (4) of rule 19 of the Income-tax Rules, 1962, clearly provides that any investments the income from which is not to be taken into account in computing the profits of the business and any moneys not required for the purposes of the business shall be left out of account in the computation of capital employed in an industrial undertaking for the purpose of working out the exemption under section 84. In view of this specific provision I am of the view that the investment in bank deposits, the income of which was not taken into account in computing the profits of the business but was separately assessed under the head ‘Other sources’ and which represented moneys (not?) required for the purpose of the business should be left out of account in the computation of capital for the purpose of working out the exemption under section 84. On this point, therefore, with very great respect to my learned brother, the Judicial Member, I am unable to agree with him.”

7. There being a difference of opinion, the matter was referred to the Vice-President, as we have mentioned before. After setting out the rival contentions, the Vice-President observed as follows:

“It is an admitted fact that the interest earned by the assessee has not protested against the same before any of the income-tax authorities nor before the Tribunal (sic). This necessarily shows that making deposits in banks is not the ‘business’ of the assessee. Moreover, under section 84 of the I.T Act, 1961, tax shall not be payable by an assessee on so much of the profits and gains derived from any industrial undertaking as does not exceed 6 per cent per annum of the capital employed in such undertaking. This clearly indicates that the assessee has been distinguished by that section from the industrial undertaking. An assessee may have an industrial undertaking as also another trade or business activity or source of income but such trade, business activity or source of income is not entitled to any exemption under section 84 of the Income-tax Act, 1961.”

8. Then he referred to certain decisions and concluded by saying as follows:

“10. The assessee in the instant case has income from an industrial undertaking and is also carrying on a trade, business or an adventure in the nature of a trade by earning profits on bank deposits. The income from such bank deposits has been brought to tax under the head ‘Other sources’. Thus, although the assessee is the owner of both the industrial undertaking as also the other trade, business or adventure in the nature of a trade, yet it is not the entire capital investment of the assessee which has to be computed under section 84 or under rule 19(4) but only that part of the capital which is actually employed in the industrial undertaking. Similarly, for the purpose of the said section and the said rule, we have no concern with any other business activities which may be intimately connected with the industrial undertaking or which are incidental or ancillary to the industrial undertaking.

11. The term ‘capital’ as understood by a businessman in ordinary parlance represents the excess of assets over his liabilities. In that view of the matter all bank deposits and cash balances have necessarily to be included in the assets of the business. However, for the purpose of finding out the capital employed under section 84 of the Income-tax Act, 1961, all assets have not to be taken into account. An asset might be owned by the assessee, yet the said asset might (not?) be employed in the industrial undertaking. For instance, a residential house which is occupied by the proprietor of the business is not an asset employed in the industrial undertaking. Although an industrial undertaking as such is not a separate unit of assessment, yet section 84 contemplates a difference between an assessee and an industrial undertaking. Thus, it is only the business assets which will go to increase the capital employed, whereas an asset which is not a business asset and which has not been acquired by the assessee in its ordinary line of business, cannot go to enhance the capital employed in the business. In the instant case earning interest income by making deposits in bank does not call for any exemption under section 84 because that section is solely concerned with income of industrial undertaking.”

9. In those circumstances, the Bench decision was given on this point against the assessee and the question, mentioned hereinbefore, has been referred to this court.

10. We may incidentally point out that in the question, as printed in the paper book, there appears to be certain typographical errors and we have corrected the question in the manner, as we have indicated before, so as to give the true purport of the question.

11. Therefore, the material question with which we are concerned in this case really amounts to the applicability of r. 19(4) of the I.T Rules, which we have set out hereinbefore. There is no dispute, as it appears from the facts, that the amount involved was capital employed in the industrial undertaking. Indeed, there is a categorical finding of the learned Judicial Member that the amounts in deposit with the bank were part of the circulating capital and had been withdrawn to meet the tax liability which was not immediately necessary. On this finding of a basic fact, there is no divergence of opinion, though we have set out the views expressed by the learned Accountant Member as well as by the Vice-President of the Tribunal. It further appears that before the Tribunal a statement was handed over which is referred to in the rectified order of the Tribunal, as to the details of the amounts. So the Tribunal noted that in para. 6 of the order of the Vice-President, the following should be added:

“Shri Venkataratnam, however, placed before me the details of sundry creditors aggregating to Rs. 46,15,936.”

12. In order to discuss the ingredients of r. 19(4) of the I.T Rules, we have first to consider whether this amount could be considered to be investments. It was contended on behalf of the assessee that investments were different from normal deposits. In this connection reference was made to the balance-sheet required to be maintained under the Companies Act. In Sch. VI of the Companies Act, the form setting out a copy of the balance-sheet contains “investments” on the assets side. There is another column, namely, “Current Assets, Loans and Advances”. In that column, item 7(b) includes bank balances and cl. (a) of the same includes cash balance with any scheduled bank and cl. (b) with others. In the note, it is provided as follows:

“In regard to bank balances, particulars to be given separately of—

(a) the balances lying with scheduled banks on current accounts, call accounts and deposit accounts;

(b) the names of the banker other than scheduled banks and the balances lying with each such banker on current accounts, call accounts and deposit accounts and the maximum amount outstanding at any time during the year from each such banker; and

(c) the nature of interest, if any, of any of the directors or his relative (or the managing agents/secretaries and treasurers or any associate of the latter) in each of the bankers (other than scheduled banks) referred to in (b) above.”

13. Investment, under the item “Investment” in the said Schedule, normally means investment in Govt. securities, investment in shares, debentures, etc., immovable properties, investment in capital of partnership firms. These normally are treated as investments in the balance-sheet of the companies.

14. In this connection reliance was placed on the observation made in the case of Price v. Newton, [1905] 2 Ch 55 (Ch D). There, it was held that the money on deposit with a testator's bankers, and subject to more than twenty-four hours' notice of withdrawal, would not pass under a bequest of “ready money”, nor, in the absence of special indication, under a bequest of “pecuniary investments”. Mr. Justice Farwell had noted that this was a will of a solicitor and he had used the expression “pecuniary investments”. Mr. Justice Farwell had observed at page 58 as follows:

“The question is, is that sum a ‘pecuniary investment’ so that it passes under the specific gift in favour of the brother's sons and daughters? In my opinion it is not a pecuniary investment, but falls into residue. I think that no one in ordinary parlance speaking of money which he puts on deposit account at his bankers at a short call like this—ten days—taking the usual banker's interest, which is 1 per cent below bank rate, would treat himself as making an investment, or as investing in a mode which could be intended by him as an investment to be continued after his death by his trustees ‘in its present state of investment’ within the meaning of those words. It is a little difficult to dogmatise about matters of this sort, and I quite feel the force of the observation that people do use the words ‘invest’ and ‘investment’ nowadays in very odd collocations. On the other hand, the rules of court distinguish between money on deposit and money invested; and certainly Kindersley V.C in Wilks v. Groom, [1856] 3 Drew 584, when he was speaking of the cases in which a trustee is not liable for not investing moneys in his hands, distinguished between cases where he does not improperly omit to invest, where he does not mix the money with other moneys, and where he deposits the money with bankers on a separate account. In the same way, in Perpetual Executors and Trustees Association of Australia v. Swan, [1898] AC 763, 768 (PC), Lord Macnaghten, in dealing with a Colonial statute authorising money belonging to a trustee company to be placed with bankers on deposit on certain conditions, makes a statement which I take to be a general statement applying to ordinary men of business as well as to Colonial legislators. He says: the framers of the Act knew perfectly well the difference between depositing moneys with a bank and investing moneys on securities. The distinction, to my mind, is really plain. The money which is deposited with your banker awaits investment; the fact that it earns interest does not make it an investment. It is immaterial that it produces interest by being put on deposit. I think there is great force in the observation made by Mr. Upjohn that the fact that it earns interest cannot make it an investment, because it is quite within recent times—there may be some banks which do it even now—that banks have allowed interest on current accounts if they exceed a certain amount. The result is that in my opinion this sum falls into residue.”

15. It appears that the expression “investment”, normally and in the commercial world, is not treated as synonymous with either bank deposits or short-term deposits and where, as in this, case, the expression “investment” is not denned in the Act, we should proceed on the basis of the commonsense point of view.

16. In that view of the matter, we are of the opinion that the amount would not be investments as such. Therefore, the first limb of r. 19(4) is not fulfilled, and even if they are investments, these amounts would not by themselves become ineligible for being included in the capital computation, unless it could be shown that income in respect thereof was not taken into consideration in computing the profits of the business. It is true that the interest income was assessed as income under other heads but the computation of income under other heads does not, in our opinion, make it nevertheless income or the profit of the business. In a total computation of the income of the business which had only the business of a new industrial undertaking and when there was no other enterprise carried on by the company, that would not make the amount ineligible for being taken into account in the computation. In this connection, reliance may be placed on the observation made in the case of CIT v. Cocanada Radhaswami Bank Ltd., [1965] 57 ITR 306 (SC). There, the asses-see-company carried on banking business and also held securities as part of the trading assets of the business. For the assessment year. 1949-50, it incurred a loss of Rs. 64,400 under the head “Business” and earned Rs. 8,488 as interest on securities and the net loss amounted to Rs. 55,912. For the three succeeding assessment years, the ITO allowed this loss to be set off against the income under the head “Business” but refused to set it off against the income computed under the head “Interest on securities”. It was held by the Supreme Court that the assessee was entitled to set off the loss of Rs. 55,912 brought forward from the assessment year 1949-50 against the entire income including the interest on securities in the succeeding years. Under s. 24(2) of the Indian I.T Act, 1922, income from securities which formed part of the assessee's trading assets was part of its income from business and, therefore, the loss incurred in the business in the earlier year could be set off against the income from securities also in the succeeding years. The scheme of the Indian I.T Act was that income-tax was one tax. Section 6 of the Indian I.T Act, 1922, classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. Though for the purpose of computation of the income, interest on securities was a separately classified income by way of interest from securities, it did not cease to be a part of the income from business if the securities were a part of the trading assets. Whether a particular income was part of the income from a business would fall to be decided not on the basis of the provisions of s. 6 but on commercial principles. In this connection, the Supreme Court observed as follows (p. 309):

“The answer to this question depends upon the scope of section 6 of the Act. Section 6 of the Act classified taxable income under the following several heads: (i) salaries; (ii) interest on securities; (iii) income from property; (iv) profits and gains of business, profession or vocation; (v) income from other sources; and (vi) capital gains. The scheme of the Act is that income-tax is one tax. Section 6 only classifies the taxable income under the different heads for the purpose of computation of the net income of the assessee. Though for the purpose of computation of the income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of the income from business if the securities are part of the trading assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of section 6 but on commercial principles. To put it in other words, did the securities in the present case which yielded the income, form part of the trading assets of the assessee? The Tribunal and the High Court found that they were the assessee's trading assets and the income therefrom was, therefore, the income of the business. If it was the income of the business, section 24(2) of the Act was immediately attracted. If the income from the securities was the income from its business, the loss could, in terms of that section, be set off against that income.”

17. In the instant case, we have noted the fact that these amounts were deposited with the bank in order to make a payment of the income-tax. Therefore, in our opinion, the basic fact remains that these amounts, though deposited in the bank, could not (sic) be treated as trading assets of the assessee. In this connection, reference might be made to the observation of the Supreme Court in the case of Rajapalayam Mills Ltd. v. CIT, [1978] 115 ITR 777.

18. Learned advocate for the assessee further contended that in any event user of money for the payment of income-tax would be for the purpose of business. He, in this connection, emphasised the significant difference between the expression “for the purpose of business” and the expression “for the purpose of earning the income”. In this connection, reference was made to the observations of the Supreme Court in the case of CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140, where at p. 150, the Supreme Court observed as follows:

“The aforesaid discussion leads to the following result: The expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. In the present case, the company, as a statutory agent of the deceased owners of the shares, paid the sums payable by the legal representatives of the deceased shareholders. The payments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues the revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of the business. It is manifest that the amounts in question were paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. We, therefore, hold that the estate duty paid by the respondent was not an allowable deduction under section 10(2)(xv) of the Act. We answer the question in the negative. The order of the High Court is wrong and is set aside.”

19. Therefore, relying on the aforesaid principle it was contended that the payment of taxes was for the purpose of business though the payment may not be allowable and in this connection he drew our attention to s. 40, cl. (a)(ii) of the I.T Act, 1961. He contended that this exclusionary clause was needed to exclude the payment of income-tax from the deductions, which would have been eligible under the provisions of the Act. Therefore, if money was kept for the payment of tax liability of the business as also for a payment of bonus to the workers, then it could not be contended that it was not for the purpose of business. The second limb, therefore, is also not fulfilled in this case, that is to say, this could not be described as money not required for the purpose of the business. As we have mentioned before, the learned Accountant Member has tried to suggest in his order that the fact of deposit indicated that there was no necessity of this fund for the business. We are unable to accept that this was the proper approach to the fact. It is true that it was not required for an immediate payment. Immediate payment does not necessarily mean that the money is to be kept for meeting the liability of the business, that it was required for the business or that the money was withdrawn for the purpose of the business.

20. On behalf of the revenue learned advocate drew our attention to the observations in the case of Mannalal Ratanlal v. Commissioner Of Income-Tax, Calcutta., [1965] 58 ITR 84 (Cal). He referred to the decision in the case of Industrial Gases Ltd. v. CIT at p. 317 of the same volume. There the facts were different. There the activities of the assessee with regard to the manufacturing business and commercial dealings were found to be carried on as two completely separate units for which separate sets of account books were maintained. In those circumstances, the court observed that there should be a distinction between the assessee and the industrial undertaking and the income of the assessee, as such, which was not the income of the industrial undertaking, could not be lumped up in order to merit consideration of the applicability of s. 15C of the Indian I.T Act, 1922, which dealt with the same provision as in s. 84 of the present Act. In this connection reliance was also placed on the observations in the case of Commissioner Of Income-Tax v. Indian Oxygen Ltd., [1978] 113 ITR 109 (Cal). Learned advocate drew our attention to the observations of Lord Simonds referred to in the said judgment in the case of IRC v. Terence Byron Ltd., [1945] 1 All ER 636 (HL). Both the facts and the ultimate finding of the court in that case as well as the aforesaid observations of Lord Simonds in the aforesaid case, in our opinion, read in the context of the instant case, cannot help the revenue's contentions.

21. Reliance was also placed on the decision in the case of Mannalal Ratanlal v. Commissioner Of Income-Tax, Calcutta., [1965] 58 ITR 84 (Cal). Learned advocate drew our attention to the observations of the Division Bench at p. 88, where the Division Bench observed as follows:

“We may, in this connection, refer to a decision of the Patna High Court in Maharajadhiraj Sir. Kameshwar Singh v. Commissioner of Income-tax, [1961] 42 ITR 774. It has said 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 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. The Patna High Court has held in this case that interest on money borrowed for payment of tax is not a legitimate deduction in computing business profits. The borrowing of money by an assessee for the payment of advance tax is not made for any purpose of commercial expediency but for the discharge of a statutory obligation imposed upon him under section 18A of the Income-tax Act. The interest paid by the assessee, the Patna High Court is of the opinion, on money borrowed by him for payment of advance tax cannot be deducted under the provisions of section 12(2) of the Income-tax Act. We express our respectful agreement with this view. In our judgment, income-tax is not part of an expenditure of an assessee. Therefore, the interest that is paid by the assessee on any sum borrowed by him for payment of income-tax is not deductible from his net income. In other words, when the tax is not an allowable expenditure no expenditure in relation to the tax can also be allowed. An expenditure to become liable must be, in our opinion, incurred in the earning of the income or profit.”

22. Here we are not concerned with an expenditure that was for the purpose of earning profit. We are concerned with an amount that was required for the purpose of the business, not for the earning of profit. In that view of the matter, the ratio of the said decisions would not be applicable to the facts of the case.

23. Learned advocate for the revenue also referred us to the fact that the assessee had sought to raise two questions but only one question was referred. He has further contended that whether a particular asset was used for the purpose of the business and as such entitled to exemption under sub-r. (4) of r. 19 of the I.T Rules was a question of fact. In the premises, according to him, no question of fact was referred to this court within the framework of the instant case. It is true, if certain basic facts are found by the Tribunal, then unless those findings of facts are challeng ed either as being perverse or being based on no evidence, this court is not competent to reappraise the facts in a reference under s. 256(1) of the I.T Act, 1961. In this case, there is no controversy as to the basic facts found. The controversy is whether, on these facts, the amounts could be said to be, firstly, investment in terms of sub-r. (4) of r. 19 and, secondly, on these facts it can be said that the amounts were not required for the purpose of the business of the undertaking. These were assessed under a separate head “Income from other sources”. There is no finding that there was any separate business carried on by the assessee or that the assessee had any other unit apart from and distinct from the new industrial undertaking. In the premises, the conclusion arrived at on these basic facts, in our opinion, would be a question of law and would be within the ambit of the present question referred to us.

24. In the aforesaid view of the matter, for the reasons mentioned above, we answer the question referred to this court in the negative and in favour of the assessee. In the facts and circumstances of the case, the parties will pay and bear their own costs.

C.K Banerji, J.:— I agree.