- (1.) The assessees are a limited company owning house properties of considerable value. The assessment concerned is for the year 1939-40 in respect of the accounting year 1938-39. In this reference, obtained at the instance of the Commissioner of Income-tax, there are two questions raised. The are :- Question 1. - Whether in the facts and circumstances of the case the debentures have been kept alive for the purpose mentioned in Section 127, clause (3), of the Indian Companies Act. Question 2. - If the answer to the first question should be in the affirmative, whether interest was due and payable in respect of these debentures and should be treated as allowable deduction under Section 9 (1) (iv) of the Income-tax Act.
(2.) It was conceded at the outset by learned counsel for the Commissioner of Income-tax, that the answer to the first question should be in the affirmative. Therefore, consideration is required only with respect to the second question. Before stating the facts it is convenient to set out the relevant provisions of the Income-tax Act. Section 8. The tax shall be payable by an assessee under the head Interest of securities in respect of the interest receivable by him on any security : Provided that no income-tax shall be payable under this section by the assessee........ in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee........... Section 9 (1). The tax shall be payable by an assessee under the head Property in respect of the bona fide annual value of property........ subject to the following allowance, namely, (iv) Where the property is subject to a mortgage........ the amount of any interest on such mortgage.
(3.) About the year 1920 the company issued 3 series of debentures totaling Rs. 31,50,000. This reference is concerned solely with the second series. Each debenture in this series was for Rs. 500, the total amount issued was Rs. 9,00,000, bearing interest at the rate of 7% per annum. Originally they were redeemable in 1935, the date of redemption was subsequently extended to 1942, and they were covered by a trust deed dated 7th July 1920 in which they are called the second debentures. At some date, which has not been sated but which has no importance, the company purchased Rs. 7,35,000 of this series leaving Rs. 1,65,000 held by the public. The company borrowed the necessary funds to effect this purchase by means of an overdraft with the Allahabad Bank. This loan carried interest at the rate of about 3 1/2% per annum which was at all times fully paid. Having obtained the debentures the company deposited them with the bank as security for the loan. The annual amount of interest paid to the bank was about Rs. 21,000 and the annual amount of interest in respect of the deposited debentures was Rs. 51,450.;