BOMBAY STEAM NAVIGATION CO. (1953) PRIVATE LTD. vs. COMMISSIONER OF INCOME-TAX, BOMBAY

CIVIL APPEAL No. 1023/1963Supreme Court[1965] 1 S.C.R. 77021 October 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI BOMBAY STEAM NAVIGATION CO.10 pages
AI SummaryAllowed

What were the facts?

The assessee, Bombay Steam Navigation Co. (1953) Private Ltd., was incorporated to take over passenger and ferry services. It purchased assets from Scindia Steam Navigation Company, paying part of the consideration by allotting shares and leaving a balance unpaid. The purchase agreement stipulated 6% annual interest on this unpaid balance. The assessee claimed this interest as a deduction for assessment years 1955-56 and 1956-57. The Income-Tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal disallowed the claim. The Bombay High Court affirmed this view, answering a reference question in the negative. The assessee appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the interest paid by the assessee was a permissible deduction under Section 10(2)(xv). The Court reasoned that an agreement to pay the balance of consideration due does not necessarily create a loan. While a loan results in a debt, not every debt involves a loan. Therefore, the unpaid balance did not amount to capital borrowed, and the interest could not be allowed under Section 10(2)(iii). However, the Court found that the transaction of acquiring the assets was closely related to the commencement and carrying on of the business. The interest paid on the remaining due amount was considered expended for the purpose of the business, which was carried on during the relevant accounting years. The Court distinguished the case from situations where liabilities arise before business commencement, noting that the assessee was formed and entered into the agreement before interest was paid. The Court did not explicitly decide on the applicability of Section 10(1) as the issue was resolved under Section 10(2)(xv).

What were the issues?

1. Whether the interest paid by the assessee on the unpaid balance of the purchase price of assets acquired for its business is allowable as a deduction under Section 10(2)(iii) of the Income Tax Act, 1922, as interest on borrowed capital. 2. Whether the interest paid is allowable as a deduction under Section 10(2)(xv) of the Income Tax Act, 1922, as an expenditure laid out or expended wholly and exclusively for the purpose of the business. 3. Whether the interest paid is allowable as a deduction in the computation of profits and gains under Section 10(1) of the Income Tax Act, 1922. Assessee's contentions: The assessee argued that the interest paid was a permissible allowance under Section 10(2)(iii) or Section 10(2)(xv). Alternatively, it contended that the interest was a necessary outgoing for the business and thus allowable under Section 10(1). Revenue's contentions: The revenue contended that the unpaid balance did not constitute 'capital borrowed' for the purpose of Section 10(2)(iii). It also argued that expenditure whose source was a liability incurred before the actual commencement of business could not be a permissible outgoing under Section 10(2)(xv).

Which sections of the Income-tax Act were involved?

Section 10(2)(iii),Section 10(2)(xv),Section 10(1),Section 66A(2)

AI-generated summary — verify with the full judgment below

770 BOMBAY STEAM NAVIGATION CO. (1953) PRIVATE LID. A v. COMMISSIONER OF INCOME-TAX, BOMBAY October 21, 1964 (K. SUBBA RAO,_ J. c. SHAH ANDS. M. SlKRI JJ.)

Income Tax Act, 1922 (11 of 1922), s. 10(2) (iii)-lntemt paid on unpaid balance of purchase price of assets acquired for a business-Whether such unpaid balance amounts to a loan-There/we whether interest allow- able as a deduc1ion on borrowed capi1a/--Or whether allowable as a deduc- tion under s. 10(2) (xv). · The assessec company was incorporaled with the object of taking over certain passenger and ferry services on lhe Konkan Coast. The assessee company purchased the assets required for its business fl'om the Scindia Steam Navigation Company and paid part of the consideration by allotting its own fully paid shares, leaving the balance unpaid.

It was provided in the contract of purchase that interest at 6 per cent per annum would be paid to the Scindia Company on any unpaid balance until the whole of ii was fully paid.

The Income Tax authorities disallowed the claim of the assessee com- pany in the computation of its profits and gains for deduclion of such inleresl paid to the Scindia Steam Navigation Compa

The order continues below.

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