# 19SI Kumar Pa1hupatinath Malia and Another v. Deba ProJanna Mukherjee Patanfali

- **Citation:** [1951] 1 S.C.R. 594
- **Court:** Supreme Court of India
- **Decided:** 1951
- **Bench:** SHRI HARILAL KANIA c. J, Patanjali Sastri, S. R. DAs, VIVIAN BosE
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/19si-kumar-pa1hupatinath-malia-and-another-v-deba-projanna-mukherjee-patanfali-116
- **Pages:** 9

## Headnote

Indian
Income-tax Act (XI ·of 1922), s.
12(2)-Business
expenditure-Interest on
debentures-Reducing capital of company
hy taking over shares and giving debentures to shareholder-Income
of company reJucd-lnterest on Jebentures,.whether allowable.
A private limited company formed for dealing in shares and
securities
had a share capital of 250 )acs of rupees of which
shares of the face value of 50 lacs were held by A and the
remaining shares were held by his nominee's.
As the company
was in need of money it was resolved, with the consent of A, to
reduce the share capital by 50 lacs by the· oompany taking over
the 50 lacs shares which were held by A and giving to A instead
debentures of the face value of Rs. 50 lacs carrying interest at
5 per. cent. per annum.
The Income-tax Appellate Tribunal and
(I) 76 I. A. 74.
S.C.R.
SUPREME COURT REPORTS
595
the High Court held that the interest on the debentures could
not be allowed as business expenditure under s. 12(2) of the
Income-tax Act, the main grounds on which this conclusion was
arrived at. being (i) the pμrpose of the transaction was to effect.
the conversion, (ii) the taxable income of the company was
reduced,
(iii)
it was
the same person who brought about
the transaction, to whom .the share money was paid and who
took the debentures, (iv) · the transaction was more in the interest
of that person than the company, ( v) the capital of the company
could have been reduced in other ways :
Held by the Full Court
(KANIA C, /. PATANJALI
SAsTR1,
DAs
and BosE, JJ.) that the test for deciding whether the expenditure
was allowable under s. 12(2) was whether the transaction was
properly entered into as part of the company's ordinary undertakings to facilitate the carrying on of its business for :he
purpose of earning income, and in. the absence of fraud the High
Court was not justified in . coming to the conclusion that the
interest on the debentures was not allowable on the considerations mentioned above.
On the facts it was clear that the
transaction was entered into in order to facilitate the carrying
on of the business of the company and that it was made on the
ground
of
commercial
expediency.
The
interest
on
the
debentures was accordingly allowable under s. 12(2). Farmer v.
Scottish North American Trust Ltd. [1912) A. C. 118 referred to.
CIVIL
APPELLATE
JuiusI>IcTION.
Civil
Appeal
No. 89 of 1950.
Appeal against the . Judgment and
Order dated 5th . July, 1949, of the High Court of
Judicature at Calcutta (G. N. Das and Mukherjee JJ.)
in Ip.come-tax Reference No. 11 of 1948.
S. Mitra (S. N. Mukherjee, with him) for the
appellant.
M. C. Setalvad, Attorney-General for India (S. M.
Sikri, with him) for the respondent.
1951.
May 4. The Judgment. of the Court was delivered by
BosE J.-This is an assessee's appeal from a judgment of the High Court at Calcutta . delivered on a
reference made to it under section 66( 1) of the Incometax Act.
The question submitted for the High Court's opinion
was as follows :-
,_10 S.C.India/67.
19SI
Eastern
lnveJtment Ltd;
v.
Commissioner of
Income-tax,
We.rt Bengaf.
Bose J.
1951
EaJtern
lnveJtmenta Ltd.
v.
CommisJioner of
lncome·tax,
West Bengal.
Bose J.
596
SUPREME COURT REPORTS
[1951]
"Whether in the circumstances of this case, the
interest paid by the assessee on debentures was incurred solely for the purpose of making or earning such
income, profits or gains which are assessable under
sub.section ( 1) of section 12."
The assessce is a private limited company which was
incorporated on 3rd January, 1927.
It is an investment
company known as the
Eastern Investments
Limited. The objects set out in the memorandum of
association are
to buy, sell and
otherwise deal with
shares, securities, bonds and so forth generally. The
company was originally formed for acquiring, holding
and otherwise .dealing with shares and Government
securities which had previously belonged to one Lord
Cable. The share capital of the company at the elate
of its incorporation was 250 lacs and c

## Text

19SI
Kumar
Pa1hupatinath
Malia
and Another
v.
Deba ProJanna
Mukherjee
Patanfali
Sastri J.
594
SUPREME COURT REPORTS
[1951]
of the mortgagee must, in that context, be understood
with reference to the sufficiency of the right assigned
to enable the sub-mortgagee to sue the original mort·
gagor in his own right, so
a~ to bring the relevant
provisions of the Act into play as between them. The
reservation made by their Lordships in the case of a
sub-mortgage containing only a charge on the original
mortgage is signification and supports this view. I do
not consider, therefore, that there is any inconsistency
between
Promode
Kumar
Roy
v.
Nikhil
Bhusan
Mukhopadhya(') and the earlier decisions, and even if
there be any such inconsistency it has no relevance to
the present case.
In the result I agree that the appeal fails and should
be dismissed with costs.
Appeal dismissed.
Agent for the appellants : R. R. Biswas.
'
Agent for the respondent : Sukumar Ghose.
EASTERN INVESTMENTS LTD.
v.
COMMISSIONER OF INCOME-TAX,
WEST BENGAL.
[SHRI HARILAL KANIA c. J., PATANJALI SASTRI,
S. R. DAs and VIVIAN BosE JJ.]
Indian
Income-tax Act (XI ·of 1922), s.
12(2)-Business
expenditure-Interest on
debentures-Reducing capital of company
hy taking over shares and giving debentures to shareholder-Income
of company reJucd-lnterest on Jebentures,.whether allowable.
A private limited company formed for dealing in shares and
securities
had a share capital of 250 )acs of rupees of which
shares of the face value of 50 lacs were held by A and the
remaining shares were held by his nominee's.
As the company
was in need of money it was resolved, with the consent of A, to
reduce the share capital by 50 lacs by the· oompany taking over
the 50 lacs shares which were held by A and giving to A instead
debentures of the face value of Rs. 50 lacs carrying interest at
5 per. cent. per annum.
The Income-tax Appellate Tribunal and
(I) 76 I. A. 74.
S.C.R.
SUPREME COURT REPORTS
595
the High Court held that the interest on the debentures could
not be allowed as business expenditure under s. 12(2) of the
Income-tax Act, the main grounds on which this conclusion was
arrived at. being (i) the pμrpose of the transaction was to effect.
the conversion, (ii) the taxable income of the company was
reduced,
(iii)
it was
the same person who brought about
the transaction, to whom .the share money was paid and who
took the debentures, (iv) · the transaction was more in the interest
of that person than the company, ( v) the capital of the company
could have been reduced in other ways :
Held by the Full Court
(KANIA C, /. PATANJALI
SAsTR1,
DAs
and BosE, JJ.) that the test for deciding whether the expenditure
was allowable under s. 12(2) was whether the transaction was
properly entered into as part of the company's ordinary undertakings to facilitate the carrying on of its business for :he
purpose of earning income, and in. the absence of fraud the High
Court was not justified in . coming to the conclusion that the
interest on the debentures was not allowable on the considerations mentioned above.
On the facts it was clear that the
transaction was entered into in order to facilitate the carrying
on of the business of the company and that it was made on the
ground
of
commercial
expediency.
The
interest
on
the
debentures was accordingly allowable under s. 12(2). Farmer v.
Scottish North American Trust Ltd. [1912) A. C. 118 referred to.
CIVIL
APPELLATE
JuiusI>IcTION.
Civil
Appeal
No. 89 of 1950.
Appeal against the . Judgment and
Order dated 5th . July, 1949, of the High Court of
Judicature at Calcutta (G. N. Das and Mukherjee JJ.)
in Ip.come-tax Reference No. 11 of 1948.
S. Mitra (S. N. Mukherjee, with him) for the
appellant.
M. C. Setalvad, Attorney-General for India (S. M.
Sikri, with him) for the respondent.
1951.
May 4. The Judgment. of the Court was delivered by
BosE J.-This is an assessee's appeal from a judgment of the High Court at Calcutta . delivered on a
reference made to it under section 66( 1) of the Incometax Act.
The question submitted for the High Court's opinion
was as follows :-
,_10 S.C.India/67.
19SI
Eastern
lnveJtment Ltd;
v.
Commissioner of
Income-tax,
We.rt Bengaf.
Bose J.
1951
EaJtern
lnveJtmenta Ltd.
v.
CommisJioner of
lncome·tax,
West Bengal.
Bose J.
596
SUPREME COURT REPORTS
[1951]
"Whether in the circumstances of this case, the
interest paid by the assessee on debentures was incurred solely for the purpose of making or earning such
income, profits or gains which are assessable under
sub.section ( 1) of section 12."
The assessce is a private limited company which was
incorporated on 3rd January, 1927.
It is an investment
company known as the
Eastern Investments
Limited. The objects set out in the memorandum of
association are
to buy, sell and
otherwise deal with
shares, securities, bonds and so forth generally. The
company was originally formed for acquiring, holding
and otherwise .dealing with shares and Government
securities which had previously belonged to one Lord
Cable. The share capital of the company at the elate
of its incorporation was 250 lacs and consisted partly
of preference shares and partly of ordinary shares. Of
these Lord Cable held the majority including the
50,000 ordinary shares of the face value of Rs. 50,00,000
with which we are here concerned.
The rest of the
share capital was held by the nominees of the late Lord
Cable.
Lord Cable died on the 28th of March, 1937, leaving
an estate in Great Britain as well as in India.
One
Geoffrey Lacy
Scott was
appointed administrator of
his estate in India and held these 50,000 shares in
question in that capacity.
According to the statement of the case drawn up by
the Income-tax Appellate Tribunal in its reference to
the High Coun, "money was needed by the executors
of Lord Cable", and accordingly the administrator of
the estate in India reached an agreement with the
company on 9th February, 1937, the terms of which
were as follows :-
The company agreed to reduce its share capital by
Rs. 50 lacs and to do it by taking over from Scott the
50,000 shares mentioned above which. stood in Lord
Cable's name at the rate of Rs. 100 a share. Scott on
his part agreed to forego cash payment and agreed
instead to receive debentures of the face value of
S.C.R.
SUPREME COURT REPORTS
597
Rs. 50 lacs carrying interest at 5 per cent. per annum
"redeemable at the option of the registered holder at
any time". The sanction of the Calcutta _ High Court .
was obtained in due course and the agreement was
earned out by the parties.
The 5 per cent. interest paid to Scott on these debentures forms the subject-matter of the question before
the Court. The company claims to deduct this from its
income as part of its working expenses .under section
12(2) of the Income-tax Act, that is to say, to use the
words of the section, as
"expenditure (not being in the nature of capital
expenditure) incurred solely for the purpose ·of making
or earning such income, profits or gains."
This contention failed before the Income-tax Appellate Tribunal and also before the High Court. It was
agreed all through that the expenditure was not in
the nature of capital expenditure, but the view of the
Income-tax Commissioner is that (a) it is not expenditure incurred for the purpose of earning the income,
profits and gains of the company and (b) that even if
it is, it is at any rate not expenditure incurred solely
for that purpose. In general, the Income-tax Appellate
Tribunal and the High Court both took that view.
The grounds on which these conclusions were based
may be summarised as follows :
( 1) the purpose of the agreement was to effect the
conversion without in any way disturbing the holding
of the investments of the company or interfering with
the earning of its income ;
(2)
by
this
transaction
the
taxable
of
the
company was diminished ;
(3) There was complete identity of the person
who-
(a) - brought about this transaction without disturbing the affairs of the company,
(b) to whom the share money was repaid, and
( c) who took up the debentures ;
1951
Eatern
Investments Ltd.
v.
Commissioner of
income-ta;)(!,
We8t Bengal.
Bose J.
1951
Ea!.lern
Investment.t Ltd.
v.
Commi.tsioner of
inco1ne-tax,
W e!.t Bengal·
Bose J.
598
SUPREME COURT REPORTS
[1951]
and (4) that the transaction was more in the interest
of the shareholder Scott than that of the company.
The decision of this appeal rests on the true construction of section 12(2).
In our opinion, the law on
this point has been correctly summarised in the judgment of the High Court. The following principles are
relevant:
(a) though the question must be
decided on the
facts of each case, the final conclusion is one of law :
Indian Radio &
Cable Communications Ltd. v. The
Commissioner
of
Income-tar, Bombay(')
and
Thta
Hydro-Electric Agencies Ltd. v. The Commissioner of
Income-tar, Bombay(2) ;
(b) it is not necessary to show that the expenditure
was a profitable one or that in fact
any
profit was
earned : Moore v. Stewart
&
Lloyds(') and· Usher's
case(')2;
( c) it is enough to show that the money was expended "not of necessity and with a view to a direct
and immediate benefit to the
trade,
but voluntarily
and on the ground of commercial expediency, and
in
order indirectly to facilitate the carrying
on
of the
busin.ess" : British Insulated & Helsby Cables Ltd. v.
Atherton(") ; and
( d) beyond · that no hard and fast rule
can
be
laid down to explain what
is meant by
the
word
"solely".
A case somewhat similar to the present is Parmer
v. Scottish North American Trust Ltd. (
0
) where it was
held that interest paid on
an
overdraft required for
p11rchasing shares (the shares purchased being retained
as security for the overdraft) was
an outgoing which
could be deducted from the receipts
to ascertain the
taxable profits
and
gains which were earned
by
them. In our opinion, the present case falls within
these principles.
(1) 1937 I.T.R. 270 P.C.
(3) 6 Tax caSes SOI
(5) 1926 A.C. 205 at 221 and 235
(2) 1937 1.T.R. 202 P.C'.
(4) 1915 A.C. 433
(6) 1912 A.C.118
S.C.R.
SUPREME COURT REPORTS
One of the points which weighed with the Incometax Appellate Tribunal· and the High Court was that
though the conversion did not in any way disturb the
holding of the investments of the company or interfere
with the earning of its income ; it had
the effect of
diminishing its taxable income.
In our judgment, this
is not a proper consideration when the
transaction is
not challenged on the ground of. fraud.
In the present
case there is not even an allegation of fraud.
The next point on which some stress was placed
was that there was complete identity of person between
the person whose shares were sold and the person who
took the debentures and that the transaction resulted
.in considerable benefit to him.
In the absence of a
suggestion fraud this is not relevant at all for giving
effect to the provisions of section 12(2) of the Incoriietax Act.
Most commercial
transactions
are
entered
into for the mutual benefit of both sides, or at any
rate each side hopes to gain something for 'itself.
The
test for present purposes is not whether the other
party benefited, nor indeed whether this was a prudent transaction which resulted in ultimate gain to
the appellant, but whether it was properly entered into
as a part of
the
appellant's
legitimate
commercial
undertaking in order indirectly to facilitate the carrying on of its business.
The High Court doubted whether
the transaction
could be brought within the functions of an investment company and found it difficult
to
reconcile it
with the objects set out in the Memorandum of Association.
But we sec
no such
difficulty.
Clause S
empowers a reduction of capital of
the company and
clause 3(3) empowers the company to borrow or raise
money by the issue of
debentures.
The
matter
is
clearly "writ in the
bond".
Morever,
we
do
not
think that this inquiry is relevant, for we are dealing
with a question of income-tax and
not
judging the
legality or propriety of
the
transaction on an application to reduce the capital of the company. The only
question is whether this was done
in
the
ordinary
course of business for the purposes
we
have already
1951
EaJtern
Investments Ltd.
v.
Commi5sioner of
income-I°"•
West Bengal.
Bose J.
1951
Ea:1ter:1
Investment8 Ltd.
v.
CommiJstoner of
incom~-tax,
West Bengal.
Bose J.
600
SUPREME COURT REPORTS
[1951]
pointed out, however mistaken the directors and shareholders of the company may have been.
Therefore, as stated by the
Income-tax
Appellate
Tribunal in its statement of the case, the executors of
Lord Cable's estate needed money.
In the next place,
. the transaction was
brought
about
"at instance of
the holder of the majority
of
ordinary shares", and
also that the shares were originally held by Lord Cable
and his
nominees.
It seems
evident therefore that
Scott could have compelled the company to pay him
. cash for the shares.
He seems to have had the whip
hand.
Instead of
doing
that he
entered into
an
arrangement which,
while giving him the necessary
facilities,
appears to have satisfied the company by
allowing it to retain its investments without
a precipitate liquidation of a large portion thereof.
It docs
not matter whether the company
was right in this
view or wrong, and in any event we arc in no position
to judge of the soundness of its decision because we
have not all the materials before us.
It has
to be
remembered that considerations of this kind go deeper
than the apparent profit or loss on an isolated transaction standing by itself.
It is not enough to say that
the 50,000 shares which were cancelled earned in the
following year only 3! per cent. 'interest as against
5 per cent. on the debentures because we do not kno'l!I"
to what extent the holdings of
the
company would
have been disturbed if this had not been done.
What
we do know is what the Income-tax Appellate Tribunal
has stated, namely, that-
"the change brought about had been
so designed
that the investments of the company were not to be
disturbed and as a consequence the income accrued
was in no way to be affected."
This has only to be stated to show the commercial
nature of the transaction from the company's point of
view.
The High Court considered that the capital of the
company could have been reduced in other ways.
But
that again is not point.
There arc usually many
S.C.R.
SUPREME COURT REPORTS
601
ways in which a given thing can be brought about in
business
circles but it is not for the Court to decide
which of them should have been employed when the
Court is deciding a question under section 12(2) of the
Income-tax Act.
It was argued on behalf of the respondent (basing
the same on paragraph 7 of the appellant's application
to the High Court dated 5th April, 1947)
that the
company had at the time sufficient liquid resources to
effect the reduction of capital desired and
so it was
not · necessary to resort to this process.
But that again
is not the point The company chose to do it this
way, and as there was not even a suggestion of fraud,
the only question is whether it was gone through as
an ordinary commercial proposition. But we doubt
if that is what paragraph 7 meant because in paragraph
4 of the application to the High Court dated 11th
February, 1944,
the petitioner stated
that the money
on hand and at short notice was only Rs. 8,94,379.
That is a good deal short of 50 lacs. However, we need
not enter into this in detail.
On a full review of the facts it is clear that this
transaction was
voluntarily
entered
into in order
indirectly to facilitate the carrying on of the business
of the company and was made on the ground of commercial
expediency.
It
therefore
falls
within
the
purview of section 12(2) of the Income-tax Act, 1922
before its amendment in 1939.
This being an investment company, if it borrowed
money and utilised the
same for its investments on.
which it earned income, the interest paid by it on the
loans will clearly be a permissible deduction under
section 12(2) of the Income-tax Act. Whether the loan
is taken on an overdraft, or is a fixed deposit or on a
debenture makes no difference in law. The only argument urged against allowing this deduction to be made
is that the person who took the debentures was
the
party who
sold the ordinary
shares.
It cannot be
disputed that if the debentures were held by a thinl
party, the interest payable on the same would be an
L/N2S.C.L.
1951
Ea$tern
lnvestm~nts Ltd1
v.
CommiS$ioner of
income-tax,
W eJt Bengal.
BO$C J,
1951
Eal tern
/nreltment!Ltd.
v.
Commissioner of
income-ta;;,
We.1t Bengal.
Bose J.
602
SUPREME COURT REPORTS
[1951]
allowable deduction in calculating the total income of
the assessee company. What difference does it make
if the holder of the debentures is a shareholder ? There
appears to be none in principle in view of the fact that
no suggestion of fraud is made in respect of the transaction which is carried out between the company and
the Administrator and
which has been
sanctioned bv
the Court. If the debentures had been paid for in casi1
by the same party, no objection could have been taken
to allowing
the interest
amount to be deducted.
In
principle, there appears to us no difference, if instead
of paying in cash the payment of the price is in the
shape of giving over shares of the company, when the
transaction is
not challenged
on the ground of fraud
and is approved by the Court in the re-organisation of
the capital of the company.
In our opinion, therefore,
the ground on which the Income-tax Appellate Tribunal
and the High Court disallowed the claim of the
assessee is not sound.
In our opinion, the High Court has failed to appreciate the true position and the question submitted for
its opinion should be answered in the· affirmative. The
appeal is
therefore allowed.
The respondent will pay
the costs . of the appeal in this Court and
of the
reference in the High Court.
Appeal allorued
Agent for the appellant : P. K. Chatterjee.
Agent for respondent : P. A. Mehta.