M/S. EAST INDIA PHARMACEUTICAL WORKS LTD.versusCOMMISSIONER OF INCOME TAX, WEST BENGAL

             MIS. EAST INDIA PHARMACEUTICAL WORKS LTD.                               A
                                           v.
             COMMISSIONER OF INCOME TAX, WEST BENGAL

                                  MARCH,11, 1997 ..

                  [S.C. AGRAWAL AND G.B. PATTANAIK, JJ.]                             B

            Income Tax Act, 1961 : Section 37(1).

              Income ta.>:-Business expenditure--AY 1972-73--Assessee paid interest
       on overdraft amount for payment of income tax-Assessee claiined such C


-
       interest as an allowable deductfon-Assessee contended that the entire profits,
       which far exceeded the income tax liability, were deposited in the overdraft
       account-lncome tax was paid out of the overdraft account-'-/(\ shbu/d be
       presumed to have been paid really out of the profits-Co~sequen.t7y, the
       interest paid on the overdraft amount should be allowed as a deduc-
       tion-Held : High Court rightly held such interest to be not ·~n allowable D
     ' expenditure-Such ·contention not raised before the High Court or the
       Tiibunal-flence, refused to be entertained at this stage;

              The Appellant-assessee was a company having an overdraft account
       with a Bank. During the assessment year 1972-73 the assessee claimed the      E
       amount of interest paid on the overdraft amount for payment of income
     . tax· as an allowable expenditure under section 37(1) of the Income Tax Act,
       1961. The Income Tax Officer disallowed the aforesaid deduction claimed
       by the assessee. The High Court dismissed the appeal filed by the assessee.
       Hence this appeal •.
                                                                                     ,F
            On behalf of the appellant-assessee it was contended that the entire

--    profits, which far exceeded the income ta~ liability, were deposited in the
      overdraft account; that the income tax was paid out of the overdraft .
      account; that it should have been presumed that in essence and true
      character the income tax was paid out of the profits; and that consequently G
      the interest paid by the assessee on the overdrall amount should have been
      allowed as a deduction.

            On behalf of the respondent-Revenue it was contended that the
      aforesaid contention was not raised either before the High Court or before
      the Tribunal and, therefore, the appellant's contention should not be          H
                                          945
     946.                    SUPREME COURT REPORTS                   [1997] 2 S.C.R.

A     entertained.

         ,1   Dismissing the appeal, this Court

            HELD: 1. The High Court rightly held that the amount of interest
      paid by the assessee on the overdraft amount is not an allowable expendi·
B     tore under Settion 37(1) of the Income Tax Act, 1961. (950-F-G, 952-C]

           2. The contention that the assessee had deposited the entire profits,
     which far exceeded the income tax liability, in the overdraft account, that
     the tax was paid out of the said overdraft account, that it should have been
     presumed that in essence and true character the tax was paid out of the
C    profits and consequently the Interest paid by the assessee on the overdraft
     amount should have been allowed as a deduction is not acceptable. Such
     a contention was not raised either before the Tribunal or before the High
     Court and, therefore, cannot be entertained at this stage.
                                                             [948-E-G, 950-B·DJ
                                                                                       -
D          Woo/combers India Ltd. v. CIT, 134 ITR 219; Reckitt and Coleman of
     India Ltd. v. CIT, 135 ITR 698; Indian Explosives Ltd. v. CIT, 147 ITR 392
     and Alkali & Chemical Corporation of Iqdia Ltd. v. CIT, 161 ITR 820, held
      inapplicable.

              Padmavati Jaikrishna v. CIT, 166 ITR 176, relied on.
E
               Madhav Prasad Jatia v. CIT, (1979) 3 SCR 745; Manna/al Ratanlal v.
        CIT, 58 ITR 182; CIT v. Calcutta Landing & Shipping Co. Ltd., and CIT v.
    · · 11irla Cotton Spinning & Weaving Mills Ltd., 82 ITR 166, referred to.

F             CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1803 of
      1981.

          From the Judgment and Order dated 21.4.78 of the Calcutta High
     Court in I.T.R. No. 404 of 1975.                                                  -
G           Dipak Bhattacharyya, Rathin Das and N. Chakraborty for the Ap·
      pellant.

          Ranbir Chandra, C. Radha Krishna, Dhruv Mehta and B. Krishna
     Prasad for the Respondent.

H_        · The Judgment of the Court was delivered by
·C
      EAST INDIA PHARMACEUTICAL WORKS LTD. v. C.l.T. [PATTANAIK, J.]         947

       PATIANAIK, J. This appeal by grant of certificate under Section 261           A
 of the Income Tax Act. 1961 (hereinafter referred to as the Act) by the
 High Court of Calcutta is directed against the judgment and order of the
 Calcutta High Court dated 21.4.1978 in Tax Reference No. 404/75. On an
 application being filed before the Income Tax Appellate Tribunal under
 Section 256(1~ of the Act the Tribunal referred the following question for          B
 being·answered by the High Court :-

              "Whether, on the facts and in the circumstances of the case,
           the Tribunal was right in holding that the payment of interest of
           Rs. 28,488 on money borrowed for payment of income-tax was not
           an expenditure laid out wholly and exclusively for the purpose of         C
           business as contemplated by sub-section (1) of Section 37 of the
           Income-tax Act, 1961?''


          The assessee is a company having an over-draft account with a Bank.
   During the assessment year 1972-73 the assessee claimed a sum of rupees           D
   28,488 as an allowable expenditure under Section 37(1) of the Act, the said
   amount representing the interest which the assessee had to pay on the
   over-draft amount, the said over- draft having been made for the payment
   of income tax. The Income Tax Officer dis-allowed the aforesaid deduction
   claimed by the assessee as he was of the opinion that the payment of
   income tax cannot be held to be the payment for the purpose of business.          E
   Being aggrieved by the said order the assessee preferred an appeal and the
   Appellate Authority agreeing with the assessing officer came to hold that
   the over-draft utilised for payment of tax cannot be said to be for the
   business purposes of the company. In coming to the aforesaid conclusion
   the Appellate Authority relied upon the decision of the Calcutta High             F
   Court in the case of Mannalal Ratanlal v. Commissioner of Income-tax, 58
   I.T.R. 182. The assessee then carried the matter in second appeal before
   the Tribunal. Before the Tribunai it was contended by the assessee that the
   tax liability being to the tune of couple of lakhs, if the said liability would
   not have been discharged then the entire business of the assessee would
   have been crippled and, therefore, discharge of such liability from the           G
   over-draft account would be held to be an expense for business purpose.
   The Tribunal, however, relying upon the decisions of the Calcutta High
   Court in Mannalal Ratanlal v. Commissioner of Income Tax, 58 I.T.R. 182
   and Commissioner of Income-Tax v. Calcutta Landing & Shipping Co. Ltd.,
·. 77 I.T.R. 575, came to hold that the interest on money borrowed for               H
                                                                                      y
                                                                                          '
    948                   SUPREME COURT REPORTS                    f1997] 2 S.C.R.
A   payment of fax cannot be considered to be an allowable deduction in
    computing business profits. Having dismissed the assessee's second appeal
    the Tribunal on an application being made referred the question for being
    answered by the High Court, as already stated. The High Court of Calcutta
    by the impugned judgment came to the conclusion that an expenditure
    cannot be allowed as a business expenditure under Section 37(1) of the Act
B   unless it was incurred or laid out directly or indirectly by an asscssee wholly
    and exclusively for the purpose of his business. It also came. to the con-
    clusion that the payment of income-tax will. not fall within the scope of
    expn;ssion "for the purpose of business". Rel~ng upon the judgment of this
    Court in Birla Cotton Spinning & Weaving Mills Ltd. 82 ITR 166, it came
C   to hold that the amount paid as income-tax is not an expenditure, not even
    a business expenditure and, therefore, the interest paid by a trader on the
    money borrowed for the payment of income-tax cannot be held to be a
    business expirnditure on any commercial principle, not even on the ground
    of commercial expediency .. It also further held that the payment of income
D   tax or the interest on the borrowed money for the payment of income-tax
    is not at all related with the purpose and object of the business and no
    element of trade in its commercial sense is involved in it. With this
    conclusion the High Court answered the question posed in the affirmative
    and in favour of the Revenue and against the assessee and thus this appeal.

E         Mr. Deepak Bhattacharvya, learned counsel appearing for the appel-
   lant argued with vehemence that the assessee having deposited the entire
   profi!s..in the over-draft account and the amount thus deposited in the
   over-draft account being much more compared to the income-tax liability
   and the tax paid, it should have been presumed that in c:ssencc and true
F  character   the taxes were paid out of the profits of the relevant year and
   not out of the over-draft account for the running of the business. Conse-
   quently the intP-rest paid by the assessee on the over-draft account rclatable
   to the payment of income-tax should have been allowed as an admissible
   deduction in the computation of the assessee's business income. In support
   of this contention the learned counsel appearing for the appellant relied
G upon the decisions of the Calcutta High Court in Woo/combers of India
   Ltd. v. Commissioner of Income-tax (Central), Calcutta, 134 ITR 219, Reckitt
   and .Colman of India Ltd. v. Commissioner of Income Tax, 135 !TR 698,
   Indiqn .Explosives Ltd. v. Commissioner of Income-tax, West Bengal-II,
   Calcutta, 147 !TR 392, and Alkali & Chemical Corporation of India Ltd. v.
H . Commissioner of Income Tax, 161 ITR 820. The learned counsel also
        EAST INDIA PHARMACEUTICAL WORKS LTD. v. C.l.T. (PATTANAIK, J.]    949

    urged that these decisions having been allowed to be operative for more A
    than 14 years, the principle of stare decisis should be made applicable and,
    therefore, it must be held that the High Court committed error in not
    accepting the assessee's contention. The learned counsel also placed before
    us a schedule appended to the assessment 'order to indicate that the
    amount of receipts deposited in the over-draft account was much more B
    compared to the tax paid, for the purpose of raising the presumption that


-
    the said payment was out of the profit, in the light of the observations made'
    by the Calcutta High Court in the four decisions referred to supra, the
    learned counsel appearing for the Revenue on the other hand contended
    that this contention as raised by the counsel for the assessee had infact not
    been raised either before the High Court or before the Tribunal and, as C
    such this question never arose out of the order of the Tribunal. According
    to the learned counsel for the Revenue the question referred to by the
    Tribunal to the High Court under Section 256(1) of the Act was merely
    rclatable to an interpretation of Section 37(1) of the Act and whether the
    interest paid on the money borrowed for payment of income-tax can be D
    held to be an expenditure allowable in computing the income-tax under
    Section 37(1) of the Act. The learned counsel further urged that in view
    of the decision of this Court in the case of Madhav Prasad Jatia v.
    Commissioner of Income Tax, U.P., Lucknow, (1979] 3 SCR 745 as well as
    the decision of this Court in the case of Smt. Padmavati Jaikrishna v. Addi. E
    Commissioner of Income-Tax, Gujarat, 166 ITR 176 no deduction can be
    claimed by an assessee in respect of the interest on borrowed capital made
    for discharge of the income-tax liability. According to the learned counsel
    the liability for payment of income-tax is a personal one and payment
    thereof is not to earn income but to meet the statutory liability and,
    therefore, the expenditure thus incurred cannot be held to be wholly and F
    exclusively for the purpose of earning income within the ambit of Section
    57(iii) of the Act.

          Having considered the rival submissions at the bar though we find
    considerable force in the arguments advanced by the learned counsel
    appearing for the appellant but in the facts and circumstances of the G
    present case, on going through the order of the Tribunal as well as the
    question referred tci by the Tribunal for being answered by the High Court
    and the arguments advanced before the Tribunal as well as in- the High
    Court by the counsel appearing for the assessee, it is not possible for us to
    hold that any such contention, as was advanced before· this Court by the H
    950                  SUPREME COURT REPORTS                 [1997] 2 S.C.R.

A assessee had in fact been advanced either before the Tribunal or before
  the High. Court. The question whether a presumption can be drawn that
  the taxes were paid out of the profits of the relevant year and not out of
  the over-draft account for the running of the business as was drawn in
  Woolcombers's case (supra) by the Calcutta High Court and was followed
  in 3 other cases of the same High Court, would essentially depend upon
B the fact as to whether the entire profits had· been pumped into the over-
  draft account, whether such profits were more than the tax amount paid
  for the relevant year and all other germane factors. But when the assessee
  never advanced the contention either before the Tribunal or before the
  High Court and the amplitude of the question posed before the High Court
C does not bring within its sweep the contention as is advanced by Mr.
  Bhattacharyya, learned counsel in this Court, it would not be appropriate
  for this Court to look into the additional papers produced by the assessee
  for entertaining the contention and answering the same. It is true that the
  Calcutta High Court in Woo/combers case (supra) came to the conclusion
  that where profits were sufficient to meet the advance tax liability and
D profits were deposited into the overdraft account of the assessee then it
  should be presumed that the taxes were paid out of the profits of the year
  and not out of the overdraft account for the running of the business. But
   to raise the presumption in that particular case there were sufficient ·
   materials and the assessee had urged the contention before the High Court.
E The aforesaid decision has been followed in the case of Reckitt (supra)
  where without any further discussion the Woo/comber's case has been
   followed. But it may be noticed that the question posed in Reckitt's case
   was directly to the effect as to where the entire trading receipts deposited
   by the as~essee in the overdraft account and the tax was paid out of the
   overdraft account whether the interest paid by the assessee for payment of
F tax out of the overdraft account is an allowable deduction. In Indian
  Explosives Ltd. case (supra) the aforesaid two decisions of the Calcutta
   High Court had been followed and the question that had been posed was
   to the effect whether the interest on an overdraft account paid towards the '
   amount drawn for discharging the tax liability could be an allowable
   expenditu.te and, therefore, the High Court answered in favour of the
G assessee and against the Revenue. It may be noticed that in the aforesaid
   case the Court did not express any opinion on the question whether the
   interest paid on money borrowed for payment of tax was allowable as
   business expenditure. To the same effect is the decision of the Calcutta
   High Court in Alkali Chemical Corporation of India Ltd. (supra). It may be
H noticed that in the present case even before the Tribunal what was argued


                              •
   EASTINDIA PHARMACEUTICAL WORKS LTD. v. C.I.T. [PATTANAIK, J.] 951

on behalf of the assessee is that the amount of interest paid to the Bank A
represents an expenditure laid out or expended wholly and exclusively for
the purpose of business. In furtherance of this contention it has also been
urged before the Tribunal that non- payment of the taxes which were to
the tune of lakhs would have entirely crippled the business of the assessee
and could have altered the structure of the assessee's business and even
the very existence of the company would have been threatened and, there- B
fore, the expenditure thus incurred should have been held to be an expen-
diture for carrying on the business and thus allowable under Section 37(1)
of the Act which contention, however, was rejected by the Tribunal relying
upon the decision of this Court in Padmawati (supra). In Padmawati's case
this Court held that meeting the liabitity of income tax was a personal one C
and the dominant purpose for paying annuity deposit was not to earn
income but to meet the statutory liability of making the deposit. It was
further held that the expenditure thus made was not wholly and exclusively
for the purpose of earning income and consequently the interest which was
paid to discharge the aforesaid tax liability was not allowable under Section
57(iii) of the Income Tax Act, 1961. In Madhav Prasad's (supra) this Court D
also came to conclusion that in order to enable an assessee to claim
deduction in respect of the interest on borrowed capital under Section
10(2) (iii) of the Income Tax Act, 1922 three conditions are required to be
satisfied; namely,

      (1) That money must have been borrowed by the assessee;                E

      (2) that it must have been borrowed for the purpose of business; and

      (3) that the assessee must have paid interest on the said amount and
claimed it as a deduction.                                                   F

      It was further held that the payment made by the assessee by drawing
a cheque on the overdraft account was a borrowing which was made to
meet her personal obligation and not the obligation of the business and as
such expenditure incurred by the assessee by way of payment of interest
thereon was not for carrying on business and consequently said expenditure   G
could not be regarded as business expenditure. In the aforesaid case the
overdraft in question had been made by the assessee to discharge her
personal obligation in pursuance to a promise made by her to donate a
sum of Rs. 10 lakhs for starting an Engineering College and the question
of payment of income-tax liability did not arise in that case. The case,     H
    952                  SUPREME COURT REPORTS                   [1997] 2 S.C.R~Y

A   therefore, is not of any direct assistance to the present case. But the
    principle laid down therein, namely, if capital is borrowed to meet the
    personal obligation of the assessee and not for the obligation of the
    business then the expenditure cannot be regarded as a business expendi-
    ture would apply. As had been already noticed in Padmawati's case (supra)
B   this Court had affirmatively held that meeting the liability for income tax
    was a personal liability and such expenditure can never be held to be wholly
    and exclusively for the purpose of earning income.

          In the aforesaid premises and in view of the question that arose out
    of the order of the Tribunal and which was referred by°the Tribunal to the
C   High Court for being answered we find no error in the answer given by the
    High Court. It may further be stated that even before the High Court the
    assessee had not taken any step to get the question referred in ~he light of
    the contentions which were advanced in this Court by filing an application
    under Section 256(2) of the Act. In this view of the matter notwithstanding
    the fact that we find considerable force in the question of law urged by Mr.
D   Bhattacharyya, learned counsel appearing for the appellant but on the
    materials on record and on the amplitude of the question which had been
    referred to the High Court we find it difficult to entertain and decide the
    contention raised by the learned counsel for the appellant. Further we do
    not find any error in the answer given by the High Court to the question
E   posed before it and, therefore, the appeal is devoid of merit and the same
    is accordingly dismissed. But in the circumstances there will be no order
    as to costs.

    v.s.s.                                                   Appeal dismissed.