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1959 Supreme(Pat) 68
PATNA HIGH COURT
V.Ramaswami and Kanhaiya Singh JJ.
Kameshwar Singh
Versus
Commissioner Of Income Tax
Miscellaneous Judicial Case No. 364 of 1957 ;
Decided On : JULY 01, 1959
Interest paid on money borrowed to pay tax under Sec.18A of the Income-tax Act is not an allowable deduction.
Headnote:
INCOME TAX - Deduction - Interest on money borrowed for paying tax under Sec.18A of the Indian Income-tax Act - Not an allowable deduction.
Fact of the Case:
The assessee claimed a deduction for interest paid on money borrowed to make an advance payment of income tax under Sec.18A of the Income-tax Act. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal all denied the deduction.
Finding of the Court:
The court held that the interest paid on money borrowed to pay tax under Sec.18A of the Income-tax Act is not an allowable deduction.
Issues: Whether the interest paid by the assessee on money borrowed for paying tax under Sec.18A of the Indian Income-tax Act is an allowable deduction?
Ratio Decidendi: 1. Income-tax is not a deduction before arriving at the net profits of the assessee. It is a charge upon the profits after they have been earned and not expenditure necessary to earn such profits. 2. Sec.10(4) of the Income-tax Act expressly prohibits the deduction of any sum paid on account of any cess, rate, or tax levied on the profits or gains of any business, profession, or vocation. 3. The purpose of the assessee in making an advance payment of tax under Sec.18A is to discharge the statutory obligation imposed upon the assessee by Sub-section (1) of Sec.18A, not to earn the statutory rate of interest under Sub-section (5) of Sec.18A. 4. The borrowing of money by the assessee for the payment of an advance tax was not made for any purpose of commercial expediency but for the discharge of a statutory obligation imposed upon the assessee.
Final Decision: The question of law referred to the High Court by the Income-tax Appellate Tribunal is answered in favor of the Income-tax Department and against the assessee.
V.Ramaswami, J.
1. For the assessment year 1951-52 the assessee claimed that out of the overdrafts taken by him from the Banks, he had utilised a sum of Rs. 2,00,000.00 for an advance payment of income-tax under Sec.18A of the Income-tax Act and that the interest paid on the overdraft must be allowed as an expense. The Income-tax Officer refused to allow the deduction and on appeal the order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner. The assessee took the matter on appeal to the Income-tax Appellate Tribunal. The appeal was dismissed by the Appellate Tribunal on the ground that the interest paid for borrowing money for the purpose of meeting tax liability cannot be a legitimate deduction. In these circumstances the Income-tax Appellate Tribunal has submitted the following question of law for the determination of this High Court :
"Whether the interest paid by the assessee on money borrowed for paying tax under Sec.18A of the Indian Income-tax Act is an allowable deduction?"
2. On behalf of the assessee learned counsel put forward the argument that the interest received by the assessee on the advance payment of tax under Section 18A was a taxable income and on the same reasoning the interest paid by the assessee for borrowing the amount to pay the tax was a legitimate deduction. The claim of the assessee was based upon Sec.12(2) of the Income-tax Act, which is to the following effect :
"12 (2). Such income, profits and gains shall be computed after making allowance for any exnenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains and further in the case of any income by way of dividend, for any reasonable sum paid by way of commission or remuneration to a banker or any other person realising such dividend on behalf of the assessee......".
Learned counsel for the assessee also referred in this connection to the decision of the Supreme Court in Eastern Investments Ltd. V/s. Commissioner of Income-tax, West Bengal, 1951-20 ITR 1 : (AIR 1951 SC 278), where it was observed that
"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 business."
In my opinion, the argument of learned counsel for the assessee is misconceived and cannot be accepted as correct. It is a well established proposition that the amount of income-tax paid by an assessee cannot be deducted as a business expenditure. The reason is that income-tax is not a deduction before you arrive at the net profits of the assessee. It is said in an English case that Income-tax represents "the Crowns share of the profits". It is not an, expenditure for the purpose of earning profits. It is, on the contrary, a case of application of profits after they have been earned and not expenditure necessary to earn such profits. That is the principle laid down by the House of Lords in Ashton Gas Company V/s. Attorney-General, (1906 AC 10) and at page 12 the Lord Chancellor states in the course of his speech as follows :
"My Lords, so presented the case appears to me to be perfectly clear. The fallacy has been in arguing as if you can deduct from the income-tax which you have got to pay something which alters what is the real nature of the profit. Now the profit upon which the income-tax is charged is what is left after you have paid all the necessary expenses to earn that profit. Profit is a plain English word; that is what is charged with income-tax. But if you confound what is the necessary expenditure to earn that profit with the income-tax, which is a part of the profit itself, one can understand how you get into the confusion which has induced the learned counsel at such very considerable length to point out that this is not a charge upon the profits at all. The
