Sabyasachi Mukharji, J. - (1.) This is a reference under Section 66(1) of the Indian I.T. Act, 1922. The reference relates to the assessment years 1957-58 and 1958-59 the relevant accounting years being the English calendar years 1956 and 1957, respectively. The assessee is a public limited company. The assessee was dealing exclusively in shares of joint stock companies. For the said purpose, the assessee had entered into certain contracts with the well-known firm of share brokers, viz., M/s. Sohanlal Pachesia. During the material period, the assessee had purchased the following shares of Rohtas Industries Ltd., under three separate contracts: (a) 53,000 shares under contract No. 3091, dated 10th April, 1956, at Rs. 22-6-0 per share. (b) 53,600 shares under contract No. 3092, dated 10th April, 1956, at Rs. 22-7-0, and (c) 1,06,000 shares under contract No. 420, dated 23rd May, 1956, at Rs. 13/23 per share.
(2.) First above two items of shares were to be delivered in the middle of July, 1956. The shares contracted under the last item were to be delivered by the 23rd August, 1956. The shares under the first two items were delivered piece-meal and the total delivery was completed by the 11th July, 1956. These were billed at Rs. 23.13. By the company's letter dated 20th August, 1956, addressed to the share-brokers, it was suggested that the amount paid in excess, viz., Rs. 1,49,897, in respect of the first two contracts should be treated as advance payments towards the last contract and to this the broker agreed. At the same time, the assessee by its letter written on the same day pointed out that the delivery of the shares under the last mentioned contract would be taken not on 23rd August, 1956, as originally agreed to, but within the period of 9 months, that is to say, before 23rd May, 1957, and the assessee agreed to pay interest at Rs. 6% per annum on value of the shares from the 23rd August, 1956, to 23rd May, 1957. The reason for postponing the delivery was, it was stated, lack of funds. The interest was calculated at Rs. 51,435 in the assessment year 1957-58 and Rs. 54,575 in the assessment year 1958-59. The assessee claimed the aforesaid amounts as deduction in the respective income-tax assessments. The claim was disallowed by the ITO in 1957-58 for the following grounds, (i) that there was no resolution of the board of directors for payment of interest; (ii) that the value of the shares under contract, that is, the last mentioned contract, were adjusted in the books of accounts; and (iii) that the shares were not shown as the stock-in-trade and as such the payments of interest did not relate to any item of asset or liability of the relevant previous year for that assessment year; and (iv) there was no loan in existence in the relevant previous year which could be said to have been taken for the purpose of purchase of the shares. For similar reasons the ITO disallowed the assessee's claim for interest for the assessment year 1958-59. There was an appeal before the AAC. The AAC held that the ITO was justified in disallowing the claim on account of interest in both these years. The AAC further held that the interest paid was mainly an amount paid in advance by way of inducement to the broker for acquiring the shares in question but not interest paid on money borrowed. In his order relating to the assessment year 1958-59, the AAC, however, observed that the payment of both the amounts of interest constituted part of the purchase price of the shares but since the assessee-company's claim for loss resulting from valuation of the shares held as closing stock at the ruling market rate had been disallowed in these assessments, the finding that the amounts of interest constituted the cost of the shares to the company would not in any way affect the resulting profit disclosed in the share accounts of the company and, therefore, would have no effect so far as the computation of the company's assessable profits or gains are concerned.
(3.) There was a further appeal by the assessee-company to the Tribunal. It was contended before the Tribunal on behalf of the assessee-company that it was incorrect to state that there was no resolution passed by the board of directors authorising the payment of interest in question and to insist that the value of the shares proposed to be purchased should have been adjusted in the books of account and shown as part of stock-in-trade. It was further argued on behalf of the assessee that the nature of the transaction was not properly appreciated. It was urged on behalf of the assessee-company that the company had no available funds to take delivery of the shares on the stipulated date that it had agreed to pay the interest in question to the firm of share brokers as an inducement because the rate of purchase mentioned in the contract was found to be advantageous in view of the rising market and the fulfilment of the contract on a deferred date, even at the cost of paying the interest in question, was found profitable by the company. In the premises, it was urged that the payment of interest was definitely for the purpose of the company's business. On behalf of the revenue, it was argued that the arrangement for deferred delivery did not relate to the creation of any debt in favour of the share-brokers and, therefore, payment of interest did not constitute an expenditure laid out wholly and exclusively for the purpose of the company's business. The Tribunal rejected the revenue's point of view on the ground that the shares in question were stock-in-trade of the assessee-company and it was an arrangement with the share-brokers by which the company was assured of its supply of the stock-in-trade at an advantageous price. The Tribunal further accepted the plea of the assessee-company that but for the arrangements for deferred payment the assessee-company would have been saddled with claim for damages for non-fulfilment of the contract. The Tribunal found that in a rising market the assessee-company would have otherwise lost a good slice of its profit. The Tribunal also found that the adjustment of the value of the shares in its books as purchased and showing the same as closing stock would not have been justified by the facts of the case because, according to the Tribunal, title to these shares had not passed from the brokers to the company during the relevant accounting period". The board of directors of the assessee-company had passed the necessary resolution on 18th May, 1957, ratifying the arrangements made between the assessee-company and the share-brokers. The Tribunal, therefore, came to the conclusion that the payments claimed to have been made to the brokers represented expenditure incurred for the purpose of the business and should be viewed in the larger context of business necessity. The Tribunal, therefore, allowed the assessee's claim. On an application being made under Section 66(1) of the Indian I.T. Act, 1922, the following question has been referred to this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sums of Rs. 51,435 and Rs. 54,575 which were payable in respect of the previous years to the assessment years 1957-58 and 1958-59, respectively, as interest by the assessee-company to the share-brokers were allowable as revenue expenditure against the business income earned by the company during those years ?";