Judgment

Bose J.- This is an assessee s appeal from a judgment of the H. C. at Calcutta delivered on a reference made to it u/s. 66 (1), Income-tax Act.

2. The question submitted for the H. C. s opinion was as follows : 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 incomes, profits or gains which are assessable under sub-s. 1 of S. 12.

3. The assessee is a private limited co. which was incorporated on 3-1-1927. It is an investment co. known as the Eastern Investments Ltd. The objects set out in the Memo. of Assocn. are to buy. sell & otherwise deal with shares, securities, bonds & so forth generally. The co. was originally formed for acquiring, holding & otherwise dealing with shares and Government securities which had previously belonged to one Lord Cable. The share capital of the Co. at the date of its incorporation was 250 lacs & consisted partly of preference shares & 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

4. Lord Cable died on 28-3-1937 leaving an estate in Great Britain as well as in India. One Geoffrey Lacy Scott was appointed Administrator of his estate in India & held these 50,000 shares in question in that capacity.

5. According to the statement of the case drawn up by the Income-tax Appellate Tribunal in its reference to the H. C., "Money was needed by the executors of Lord Cable," & accordingly the Administrator of the Estate in India reached an agreement with the co. on 9-2-1937 the terms of which were as follows :

6. The Co. agreed to reduce its share capital by Rs. 50 lacs & 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 & agreed instead to receive debentures of the face value of 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 H. C. was obtained in due course & the agreement was carried out by the parties.

7. The 5 per cent. interest paid to Scott on these debentures forms the subject-matter of the question before the Ct. The Co. claims to deduct this from its income as part of its working expenses u/s. 12 (2), 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."

8. This contention failed before the Income-tax Appellate Tribunal & also before the H. C. It was agreed all through that the expenditure was not in the nature of capital expenditure, but the view of the Income-tax Comr. is that (a) it is not expenditure incurred for the purpose of earning the income, profits & gains of the Co. & (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 & the H. C. both took that view.

9. 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 Co. or interfering with the earning of its income; (2) by this transaction the taxable income of the Co, was diminished; (3) There was complete identity of the person who- (a) brought about this transaction without disturbing the affairs of the Co., (b) to whom the share money was repaid, & (c) who took up the debentures; &(4) that the transaction was more in the interest of the shareholder Scott than that of the Co.

10. The decision of this appeal rests on the true construction of S. 19 (2). In our opinion, the law on this point has been correctl