Summary
A private limited company formed for dealing in shares and securities had a share capital of 250 lacs of rupees of which shares of the face value of 50 lacs were held by A and the remaining shares were held by his nominees. 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 company 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 (1) 76 I.A, 74.595 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 con- clusion was arrived at being (i) the purpose of the transac- tion 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.J. PATANJALI SASTRI, DAs and Bose, JJ.) that the test for deciding whether the ex- penditure was allowable under s. 12 (2) was whether the transaction was properly entered into as part of the compa- ny's ordinary undertakings to facilitate the carrying on of its business for the 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 commer- cial 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.See the full content of this document
Extract
Eastern Investments Ltd. VS. Commissioner Of Income-tax,west Bengal.
PETITIONER: EASTERN INVESTMENTS LTD.Vs.RESPONDENT: COMMISSIONER OF INCOME-TAX,WEST BENGAL.DATE OF JUDGMENT: 04/05/1951BENCH: BOSE, VIVIANBENCH: BOSE, VIVIANKANIA, HIRALAL J. (CJ)SASTRI, M. PATANJALIDAS, SUDHI RANJANCITATION: 1951 AIR 278 1951 SCR 594CITATOR INFO : R 1960 SC 738 (7,8)F 1961 SC1028 (7)R 1965 SC 321 (16)R 1966 SC 54 (5)F 1966 SC1053 (17)R 1966 SC1514 (11)APL 1967 SC1475 (4)RF 1977 SC2394 (6)APR 1979 SC 373 (3)RF 1979 SC1441 (21)R 1987 SC1723 (5,7)ACT: Indian Income-tax Act (XI of 1922), s. 12 (2)--Busi- ness expenditure--Interest on debentures--Reducing capital of company by taking over shares and giving debentures to shareholder--Income of company reduce...
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