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

CIVIL APPEAL No. 1803/1981Supreme Court[1997] 2 S.C.R. 94511 March 1997Bench: 2 JudgesAuthor: S.C. AGRAWAL, G.B. PATTANAIK EAST INDIA PHARMACEUTICAL WORKS LTD. A8 pages
AI SummaryDismissed

What were the facts?

The assessee, East India Pharmaceutical Works Ltd., for assessment year 1972-73, claimed interest paid on an overdraft used for paying income tax as a deductible business expenditure under Section 37(1) of the Income Tax Act, 1961. The Income Tax Officer disallowed the deduction. The Appellate Authority and the Income Tax Appellate Tribunal also rejected the claim, holding that borrowing for tax payment is not for business purposes. The High Court, to which a reference was made, agreed with the Tribunal and held that payment of income tax is not for the purpose of business. The assessee appealed to the Supreme Court, raising a new contention that profits deposited in the overdraft account exceeded the tax liability, implying tax was paid from profits.

What did the Supreme Court hold?

The Supreme Court held that the High Court was correct in its conclusion that the interest paid by the assessee on the overdraft amount used for paying income tax is not an allowable expenditure under Section 37(1) of the Income Tax Act, 1961. The Court found that the payment of income tax itself is not considered an expenditure for the purpose of business. The Court also refused to entertain the assessee's new contention that profits deposited in the overdraft account implied tax was paid from profits, as this argument was not raised before the lower authorities (Tribunal and High Court). The Court relied on the principle that meeting income tax liability is a personal obligation and not for the purpose of earning income, citing Padmavati Jaikrishna v. CIT. The appeal was dismissed.

What were the issues?

1. Whether the payment of interest on money borrowed for the payment of income tax is an expenditure laid out wholly and exclusively for the purpose of business as contemplated by Section 37(1) of the Income Tax Act, 1961? Assessee's contention: The assessee argued that the entire profits, which significantly exceeded the income tax liability, were deposited in the overdraft account. Since income tax was paid from this account, it should be presumed that the tax was effectively paid from the profits. Consequently, the interest paid on the overdraft amount should be allowed as a deduction. Revenue's contention: The Revenue contended that the assessee's argument regarding profits being deposited in the overdraft account and tax being paid from profits was not raised before the High Court or the Tribunal. Therefore, it should not be entertained at this stage.

Which sections of the Income-tax Act were involved?

Section 37(1),Section 261,Section 256(1),Section 256(2),Section 10(2)(iii),Section 57(iii)

AI-generated summary — verify with the full judgment below

- -- 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 Inc

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