CALICO DYEING AND PRINTING WORKS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee firm carried en the business of bleaching, dyeing and printing cloth in a factory at Tardeo. In the year of account, which corresponds to assessment year 1952 -53, the assessee firm borrowed money in order to extend its business. It purchased a plot of land and erected additional plant and machinery and on this borrowed capital it paid interest and claimed this interest as a permissible deduction under Section 10(2)(iii). The claim of the assessee was rejected on the ground that the plant and machinery were not used for the business in the year of account. The question that arises for our consideration is whether, in order to entitle an assessee to claim interest paid on borrowed capital, it is necessary that the asset which comes into existence by reason of the use of the capital must be used in the year of account.

(2.) BEFORE we look at the authorities, it would, perhaps be best to turn to the section itself and the deduction which is permissible under Section 10(2)(iii) is in respect of "capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid". Now it will be noticed that the Sub -Section makes no distinction between capital borrowed in order to acquire a revenue asset and capital borrowed to acquire a capital asset. All that the section requires is that the assessee must borrow the capital and the purpose of the borrowing must be the business which is carried on by the assessee in the year of account. The capital must be borrowed for the purpose of no other business except the business which is being assessed. Now, when we look at the other sub -clauses of Section 10(2), it is clear that the underlying idea of these sub clauses is that the particular deduction claimed must be in relation to the -business which is referred to in Sub -Section (1) of Section 10, that is, the business in respect of which tax is payable by an assessee. What is suggested by Mr. Joshi is that, in order that sub -clause (iii) should have any application, the particular asset which has come into existence by reason of the borrowed capital must be used in the year of account and inasmuch as building, plant and machinery have not been used in the year of account, the interest paid on capital for erecting the plant and machinery cannot be a permissible deduction in the year of account. Mr. Joshi says that a businessman may borrow Rs. 10 lakhs in order to extend his business and the extended business may not start operating for five or ten years. In the opinion of Mr. Joshi, it would be impossible to contend that, although the capital is not being used for any profit -making activity of the business, still the assessee should be entitled to claim interest paid on that amount. Now, in putting forward this contention, Mr. Joshi is practically re -writing the section. Mr. Joshi wants us to read the section as if it was worded "in respect of capital borrowed for the purposes of the business, profession or vocation provided the asset which has come into , existence as a result of the borrowed capital is used in the year of account"., In our opinion, there is no warrant for this suggestion. We are prepared to agree with Mr. Joshi that, looking to the whole scheme of Sub -Section (2), the capital which is borrowed must be used in the year of account. If the capital is used in the year of account and the use is for the purpose of the business, then it is immaterial whether the user of the capital actually yields profit or not. What sub -clause (iii) emphasizes is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. Mr. Mehta gave one or two illustrations which conclusively go to show that the construction placed by Mr. Joshi would be entirely unworkable. Assuming that an assessee wants to purchase stock -in -trade and he borrows capital, he purchases the stock -in -trade with the borrowed capital, but the stock -in -trade is not used for the purposes of his business in the year of account. Therefore, the assessee would never be able to claim interest paid by him on the capital as a permissible deduction because in the year of account he would pay interest and the stock -in -trade would not be used and in the next year the stock -in -trade would be used but he had paid 710 interest which he can claim in that year. Now the answer which Mr. Joshi gives is rather ingenious. He suggests that, if the capital is used for the purpose of acquiring a stock -in -trade or a revenue asset, then interest paid on the capital may be a permissible deduction although the revenue asset may not be used in the year of account. But, according to him, the position is different if the capital is used for the purchase of a capital asset. In the case of a purchase of a capital asset, the capital asset must be used before interest can be allowed on the borrowed capital. Here again Mr. Joshi is adding words to the section which the section does not I contain. Mr. Joshi draws a distinction between capital borrowed for the purpose of acquiring a capital asset and capital borrowed for acquiring a revenue asset. There is no warrant for drawing this distinction. Unlike Section 10(2)(xv) which expressly excludes an expense of a capital nature, the Legislature has made no distinction in Section 10(2)(iii) between capital borrowed for a revenue and a capital purpose. An assessee is entitled to claim interest paid on borrowed capital provided it is for the purpose of the business irrespective of what may be the result of using the capital which he has borrowed.

(3.) THE second English case is also instructive and that is Vallambrosa Rubber Co. Ltd. v. Farmer, (1910) 5 TC 529. There a rubber company had an estate one -seventh of which only produced rubber in the year of account and the other six -sevenths was in processes of cultivation. The company claimed expenditure for superintendence of the whole estate as a permissible deduction and the Court of Session, Scotland, considered this question and the Lord President (who ultimately became Lord Justice) in a forceful judgment points out at page 534 that the argument advanced by Counsel for the Crown that nothing ever could be deducted as an expense unless that expense was purely and solely referable to a profit which was reaped within the year was a startling proposition and that proposition was only to be stilted to be defeated by its own absurdity; and the learned Lord President lightly poses the question in all these cases of deductions that "the rules framed in England" and the sections in our Act, "are only guides because the real point is what are the profits and gains of the business." Therefore, if a businessman borrows money to consolidate or improve his business and pays interest on it, can it ever be said from the commercial point of view that his profits can be ascertained without deducting the interest paid by him on borrowed capital ?