CIVIL APPELLATE JURISDICTION Civil Appeal No. 46 of 1950. Appeal by special leave from a judgment of the High Court of Judicature at Bombay dated 23rd March, 1948, (Chagla C.J. and Tendolkar J.) in Income Tax Reference No. 16 of 1947. C. Setalvad, Attorney-General for India (Gopal Singh, with him) for the appellant. C. Chatterjee (B. Sen, with him)for the respondent. 1951. September 18. The Judgment of the Court was deliv- ered by MAHAJAN J.--The sole controversy in this appeal centres round the point as to whether or not excess profits tax is payable on the sum of Rs. 20,005 received by the respondent from Messrs Parakh Co. by way of rent for the dyeing plant let out to them during the chargeable accounting period. The respondent (Sri Lakshmi Silk Mills Ltd.) is a manu- facturer of silk cloth, and as a part of its business it installed a plant for dyeing silk yarn. During the charge- able accounting period (1st January, 1943, to 31st December, 1943) owing to difficulty in obtaining silk yarn on account of the war it could make no use of this plant and it re- mained idle for some time. On the 20th August, 1943, it was let out to Messrs E. Parakh Co. on a rent of Rs. 4,001 per month. The Excess Profits Tax Officer by his assessment order dated 11th June, 1945, included the sum of Rs. 20,005 realized as rent for five months, in the profits of the business of the respondent and held that excess profits tax was payable on this amount.
This order was confirmed on appeal by the Appellate Assistant Commissioner and on fur- ther appeal by the Income-tax Tribunal. The Tribunal, however, on being asked referred the following question of law to the High Court for its opinion Whether in the circumstances of the case, the asses- sees income of Rs. 20,005 is profits from business within the meaning of section 2 (5) of the Excess Profits Tax Act and therefore or otherwise liable to pay excess profits tax ? The High Court answered the question in the negative.
This is an appeal by special leave from this decision. It was contended on behalf of the Commissioner before the High Court that the dyeing plant was a commercial asset of the assessees business for the purpose of earning profit and if this commercial asset yielded income to him in any particular manner, it was income from the assessees busi- ness for the purpose of the Excess Profits Tax Act. It was said that it was immaterial whether a commercial asset yields income by use of the assessee himself or its being used by someone else. This contention was disposed of by the learned Chief Justice in these words - Mr. Joshi seems to be right but with this qualification that the commercial asset must be at the time it was let out in a condition to be used as a commercial asset by the assessee.
If it has ceased to be a commercial asset, if its use as a commercial asset has been discontinued, then if the assessee lets it out, he is not putting to use something which is a commercial asset at the time. Now, on the facts found by the Tribunal, it is clear that when the assessee let out this dyeing plant, it had remained idle for some time.
He could not obtain silk yarn on account of the war and therefore it was not possible to make use of it as a commercial asset as far as the assessee himself was concerned and it was only for that reason that he let it out to Messrs E. Parakh Co. I can understand the principle for which Mr. Joshi is contending that it makes no difference what an assessee does with a commercial asset belonging to him.
He may use it as he likes. So long as it yields income it is the income of his business. Var- ious cases have been cited at the Bar and I think that those cases though apparently conflicting are reconcilable if we accept this principle to be the correct principle and apply this ratio as the ratio emerging from these cases and I will state the principle and the ratio again that if an assessee derives income from a commercial asset which is capable at the time of being used as a commercial asset, then it is income from his business, whether he uses that commercial asset himself or lets it out to somebody else to be used.
But if the commercial asset is not capable of being used as such, then its being let out does not result in an income which is the income of the business. Mr. Justice Tendolkar concurred in this view and ob- served as follows -- The ratio of all these cases to my mind is that if there is a commercial asset which is capable of being worked by the assessee himself for the purpose of earning profits and the assessee instead of doing so, either voluntarily allows someone else to use it on payment of a certain sum or is compelled by law to allow it to be used in such manner, then what he receives is income from business.
But if the commercial asset has ceased to be a commercial asset in the hands of the assessee and thereafter he gets what he can out of it by letting it out to be used by others, then the rent he receives is not income from any business that he carries on. The learned Attorney-General pointed out that the nature of a commercial asset is not changed because a par- ticular person is unable to use it. The inability of the assessee to make use of it in certain circumstances does not in any way affect the nature of the asset and cause an infirmity in the asset itself.
It was contended that when the dyeing plant became idle for a short time during the chargeable accounting period it did not cease to be a com- mercial asset of the respondent for it had no other busi- ness that all the assets of the respondent including the dyeing plant were the assets of the business, that whatever income was derived by the use of these assets including the income that an asset fetched by its being let out was the business income of the assessee, and that there was no warrant in law for the proposition that a commercial asset which yields income must be used as an asset by the respondent himself before its income becomes chargeable to tax.
The learned counsel for the respondent urged that as soon as the assessee found difficulty in obtaining yarn the dyeing plant became redundant for its business and ceased to be an asset of its business and any income derived from the rent by letting out this asset was income received by the assessee from other sources and therefore was not charge- able to excess profits tax. In our opinion, the contention raised by the learned Attorney-General is sound. The High Court was in error in engrafting a proviso on the rule deduced by it from the authorities considered by it, to the effect that a commer- cial asset of a business concern which yields income must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself. We respectfully concur in the opinion of the learned Chief Justice that if the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business, but we cannot accept the view that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset is the profit of the business irrespective of the manner in which. that asset is exploited by the owner of the business.
He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. Suppose, for instance, in a manufac- turing concern the use of its plant and machinery can advan- tageously be made owing to paucity of raw materials only for six hours in a working day, and in order to get the best yield out of it, another person who has got the requisite raw materials is allowed to use it as a licensee on payment of certain consideration for three hours can it be said in such a situation with any justification that the amount realized from the licensee is not a part of the business income of the licensor.
In this case the company was incorporated purely as a manufacturing concern with the object of making profit. It installed plant and machinery for the purpose of its business, and it was open to it if at any time it found that any part of its plant for the time being could not be advantageously employed for earning profit by the company itself, to earn profit by leasing it to somebody else. It is difficult to hold that the income thus earned by the commer- cial asset is not income from the business of the company that has been solely incorporated for the purpose of doing business and earning profits. There is no material whatever for taking the view that the assessee company was incorpo- rated with any other object than of carrying on business or trade. Owning properties and letting them was not a purpose for which it was formed and that being so, the disputed income cannot be said to fall under any section of the Indian Income-tax Act other than section 10. Cases of undertakings of this nature stand on an entirely different footing and are distinguishable from cases of individuals or companies acquiring lands or buildings and making income by letting them on hire.
These latter cases may legitimately fall under the specific provisions of section 9 or section 12, though the High Courts in this country are by no means unanimous on this subject but for the purpose of this case it is unnecessary to resolve that conflict. It may be observed that no general principle can be laid down which is applicable to all cases, and each case has to be decided on its own circumstances. Decisions of the Eng- lish courts given under the Finance Acts, the scheme of which is different from the Indian Income-tax statutes, are not always very helpful in dealing with matters arising under the Indian law and analogies and inferences drawn from those decisions are at times misleading. We, however, are in respectful agreement with the observations of Lord President Strathclyde in Sutherland v. The Commissioners of Inland Revenue(1) that if a commercial asset is susceptible of being put to a variety of different uses in which gain might be acquired, whichever of these uses it was put to by the appellant, the profit earned was a user of the asset of the same business.
A mere substituted use of the commercial asset does not change or alter the nature of that asset. Whatever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income being immaterial. Mr. Chatterjee for the respondent stressed the point that as the dyeing plant in the present case could not be made use of by the assessee in its manufacturing business owing to the non-availability of yarn, it ceased to be a commercial asset of the business of the assessee and became redundant to that business and that being so, any income earned by this asset which had ceased to be a commercial asset was not an income of the business but must be held to have been derived from a source other than business and fell within the ambit of section 12 of the Indian Income tax Act, and on this income excess profits tax was not payable.
He contended that the facts of this case were analogous to the case of Inland Revenue Commissioners v. lies(2) and it should be similarly decided. In that case the taxpayer carried on the business of sand and gravel merchant on certain land and at the same time he granted licences to three firms to enter his land and win gravel for themselves in return for which he received from them a royalty for each cubic yard of gravel taken away. It was held that the royalties were not part of the profits of the business because, in granting the licences, the taxpayer was exploit- ing his rights of ownership in the land and was not carrying on his business of a sand and gravel merchant.
The income was held taxable as an income from an investment and did not fall under Schedule D which concerns profits earned from a trade. Mr. Chatterjee also laid emphasis on the observations of Lord (1) (1918) 12 Tax Cas. 63. (2) 1947 1 A.E.R. 798. Greene M.R. in Croft v. Sywell Aerodrome Ltd. (1), wherein the learned Master of the Rolls observed as fol- lows I cannot myself see that a person who leases the land to others, or grants licences to others to come upon it, is doing anything more than exploiting his own rights of property, even if the tenant or licensee is, by the terms of the lease or licence, entitled himself to carry on a trade on the land.
It was urged that what the assessee was doing in this case was exploiting his rights of property by letting the dyeing plant to other persons precisely in the same manner as the owner of land in the case cited above was exploiting his own rights to property by granting a licence to another to come on his land. The argument, in our opinion, though attractive, is fallacious. The analogy between the case of land and of a dyeing plant for the purpose of taxing stat- utes is inappropriate.
The distinction becomes apparent from the following passage which occurs in Atkinson J.s judgment in I less case(2) -- Then it was suggested by counsel for the Crown that the case was like the Desoutter case(3), where it was held that, if you make use of a patent in your business and also receive royalties from the use of the patent by others licensed to use it, those royalties cannot be regarded as receipts from an investment. In other words, the door has to be either open or shut. A patent is either an investment or it is not. The suggestion was that freehold land is in the same position, and if you carry on business on part of it, whatever you do with the rest by way of licensing or letting cannot be regarded as producing income from investment. That, however, is dead in the teeth of the judgment in the Broadway Car Co. case(4). The same argument was tried there, but Tucker L.J. said he thought the Desoutter case(3) had very little to do with it, as there was a great difference between land (1) 1942 1 A.E.R. 110. (3) 1946 1
 E.R. 58. (2) 1947 1 A.E.R. 798 (4) 1946 2
 E.R. 609. and a patent, and he did not think the Desoutter case(1) threw any light on the matter A patent is quite different from freehold land. These observations appositely apply to the case of a company incorporated for the purpose of doing business and earning profit by the process of manufacture. Letting out a part of its machinery in a certain situation in order to make the business advantageous as a whole does not alter the nature of the income. The case of an owner of land letting out his land and carrying on exploitation of part of that land by selling gravel out of it, as at present advised, in our opinion, would fall under section 9 of the Indian In- come-tax Act, as income earned, no matter by whatever meth- od, from land, and specifically dealt with by that section. The observations therefore made in I less case(2) can have no apposite application to the case of a manufacturing concern letting out a part of its machinery temporarily which it cannot advantageously use itself. Mr. Chatterjee also laid stress on the decision of the Court of Appeal in Inland Revenue Commissioners v. Broadway Car Co. Ltd.(3). In this case the company carried on the business of motor car agents and repairers on land held on lease from 1935 to 1956 at an annual rent of pound 750. By 1940 the companys business had dwindled under war condi- tions to such an extent that no more than one third of the land was required.
 In those circumstances the remainder was sublet for fourteen years at an annual rent of pound 1,150. The general commissioners of income-tax decided that the difference of pound 400 between the outgoing of pound 750 for the land retained and the incoming of pound 1,150 for the land disposed of was income received from an invest- ment, and, the business not being one within the special categories mentioned in the Finance Act, 1939, that pound 400 was not taxable.
 It was held that the word investment must be construed in the ordinary, popular sense of the word as used by businessmen and not as a (1) 1946 1 A.E.R.58. (3) 1946 2 A.E.R. 609. (2) 1947 1 A.E.R. 798. term of art having a defined or technical meaning and that it was impossible to say that the commissioners had erred in law in coming to the conclusion that the transaction result- ed in an investment. Scott L.J. in delivering his judgment laid emphasis on the point that after the business of the company had dwindled, it partitioned part of the land from the rest and sublet it by installing a heating apparatus for the sub-lessee.
 It was found that war conditions had reduced the companys business to very small proportions and they cut their loss by going out of business in respect of the major part of their land and put it out of their power for 14 years to resume business there. In this situation it was observed that in that case they were dealing with part of the property of the company which had come redundant and was sublet purely to produce income--a transaction. quite apart from the ordinary business activities of the company.
 It was pointed out that the question whether a particular source of income was income or not must be decided, as it could be, according to ordinary commonsense principles. The short question to decide in this case is whether on the facts found, it could be said reasonably that the dyeing plant had become redundant for its business as a silk manu- facturing concern, simply by the circumstance that for the time being it could not be used by it personally for the purpose of dyeing silk yarn owing to the non-availability of yarn. It is difficult to conceive that the company would not have immediately started dyeing yarn as soon as it became available. Instead of dyeing yarn, another person was allowed to dye jute (we are told), the assessee company making income out of its use as a commercial asset.
 DECISION ??

The argument, in our opinion, though attractive, is fallacious. The analogy between the case of land and of a dyeing plant for the purpose of taxing stat- utes is inappropriate.

The observations therefore made in I less case(2) can have no apposite application to the case of a manufacturing concern letting out a part of its machinery temporarily which it cannot advantageously use itself.

I can understand the principle for which Mr. Joshi is contending that it makes no difference what an assessee does with a commercial asset belonging to him.
He may use it as he likes. So long as it yields income it is the income of his business.

if an assessee derives income from a commercial asset which is capable at the time of being used as a commercial asset, then it is income from his business, whether he uses that commercial asset himself or lets it out to somebody else to be used.

if the commercial asset has ceased to be a commercial asset in the hands of the assessee and thereafter he gets what he can out of it by letting it out to be used by others, then the rent he receives is not income from any business that he carries on.

it was observed that in that case they were dealing with part of the property of the company which had come redundant and was sublet purely to produce income--a transaction. quite apart from the ordinary business activities of the company.

The yield of income by a commercial asset is the profit of the business irrespective of the manner in which. that asset is exploited by the owner of the business.

It is difficult to hold that the income thus earned by the commer- cial asset is not income from the business of the company that has been solely incorporated for the purpose of doing business and earning profits.

In our opinion, the contention raised by the learned Attorney-General is sound.

The yield of income by a commercial asset is the profit of the business irrespective of the manner in which. that asset is exploited by the owner of the business.

He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else.

In this case the company was incorporated purely as a manufacturing concern with the object of making profit.

These latter cases may legitimately fall under the specific provisions of section 9 or section 12

if a commercial asset is susceptible of being put to a variety of different uses in which gain might be acquired, whichever of these uses it was put to by the appellant, the profit earned was a user of the asset of the same business.

A mere substituted use of the commercial asset does not change or alter the nature of that asset. Whatever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income being immaterial

The Excess Profits Tax Officer by his assessment order dated 11th June, 1945, included the sum of Rs. 20,005 realized as rent for five months, in the profits of the business of the respondent and held that excess profits tax was payable on this amount

The High Court answered the question in the negative

If it has ceased to be a commercial asset, if its use as a commercial asset has been discontinued, then if the assessee lets it out, he is not putting to use something which is a commercial asset at the time

The analogy between the case of land and of a dyeing plant for the purpose of taxing stat- utes is inappropriate

In other words, the door has to be either open or shut.

The respondent (Sri Lakshmi Silk Mills Ltd.) is a manu- facturer of silk cloth, and as a part of its business it installed a plant for dyeing silk yarn

During the charge- able accounting period (1st January, 1943, to 31st December, 1943) owing to difficulty in obtaining silk yarn on account of the war it could make no use of this plant and it re- mained idle for some time.

On the 20th August, 1943, it was let out to Messrs E. Parakh Co. on a rent of Rs. 4,001 per month.

This is an appeal by special leave from this decision.

The High Court answered the question in the negative.

He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else.

It is difficult to conceive that the company would not have immediately started dyeing yarn as soon as it became available.

Instead of dyeing yarn, another person was allowed to dye jute (we are told), the assessee company making income out of its use as a commercial asset.

The respondent (Sri Lakshmi Silk Mills Ltd.) is a manu- facturer of silk cloth, and as a part of its business it installed a plant for dyeing silk yarn.

The Excess Profits Tax Officer by his assessment order dated 11th June, 1945, included the sum of Rs. 20,005 realized as rent for five months, in the profits of the business of the respondent and held that excess profits tax was payable on this amount.

This order was confirmed on appeal by the Appellate Assistant Commissioner and on fur- ther appeal by the Income-tax Tribunal.

If it has ceased to be a commercial asset, if its use as a commercial asset has been discontinued, then if the assessee lets it out, he is not putting to use something which is a commercial asset at the time.

Now, on the facts found by the Tribunal, it is clear that when the assessee let out this dyeing plant, it had remained idle for some time

He could not obtain silk yarn on account of the war and therefore it was not possible to make use of it as a commercial asset as far as the assessee himself was concerned and it was only for that reason that he let it out to Messrs E.

So long as it yields income it is the income of his business.

if the commercial asset is not capable of being used as such, then its being let out does not result in an income which is the income of the business.

There is no material whatever for taking the view that the assessee company was incorpo- rated with any other object than of carrying on business or trade.

A mere substituted use of the commercial asset does not change or alter the nature of that asset.

Whatever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income being immaterial.

The analogy between the case of land and of a dyeing plant for the purpose of taxing stat- utes is inappropriate.

On the 20th August, 1943, it was let out to Messrs E.

Parakh Co. on a rent of Rs. 4,001 per month.

It was said that it was immaterial whether a commercial asset yields income by use of the assessee himself or its being used by someone else.

I can understand the principle for which Mr. Joshi is contending that it makes no difference what an assessee does with a commercial asset belonging to him.

The learned Attorney-General pointed out that the nature of a commercial asset is not changed because a par- ticular person is unable to use it.

The inability of the assessee to make use of it in certain circumstances does not in any way affect the nature of the asset and cause an infirmity in the asset itself.

In our opinion, the contention raised by the learned Attorney-General is sound.

In this case the company was incorporated purely as a manufacturing concern with the object of making profit.

It is difficult to hold that the income thus earned by the commer- cial asset is not income from the business of the company that has been solely incorporated for the purpose of doing business and earning profits.

It may be observed that no general principle can be laid down which is applicable to all cases, and each case has to be decided on its own circumstances.

We, however, are in respectful agreement with the observations of Lord President Strathclyde in Sutherland v.

He contended that the facts of this case were analogous to the case of Inland Revenue Commissioners v. lies(2) and it should be similarly decided.

It was held that the royalties were not part of the profits of the business because, in granting the licences, the taxpayer was exploit- ing his rights of ownership in the land and was not carrying on his business of a sand and gravel merchant

The income was held taxable as an income from an investment and did not fall under Schedule D which concerns profits earned from a trade.

The argument, in our opinion, though attractive, is fallacious.

In other words, the door has to be either open or shut.

A patent is either an investment or it is not.

The suggestion was that freehold land is in the same position, and if you carry on business on part of it, whatever you do with the rest by way of licensing or letting cannot be regarded as producing income from investment.

That, however, is dead in the teeth of the judgment in the Broadway Car Co. case(4).

These observations appositely apply to the case of a company incorporated for the purpose of doing business and earning profit by the process of manufacture.

Letting out a part of its machinery in a certain situation in order to make the business advantageous as a whole does not alter the nature of the income.

The observations therefore made in I less case(2) can have no apposite application to the case of a manufacturing concern letting out a part of its machinery temporarily which it cannot advantageously use itself.

Scott L.J. in delivering his judgment laid emphasis on the point that after the business of the company had dwindled, it partitioned part of the land from the rest and sublet it by installing a heating apparatus for the sub-lessee.

It was pointed out that the question whether a particular source of income was income or not must be decided, as it could be, according to ordinary commonsense principles.

During the charge- able accounting period (1st January, 1943, to 31st December, 1943) owing to difficulty in obtaining silk yarn on account of the war it could make no use of this plant and it re- mained idle for some time.

This is an appeal by special leave from this decision.

Owning properties and letting them was not a purpose for which it was formed and that being so, the disputed income cannot be said to fall under any section of the Indian Income-tax Act other than section 10.

Cases of undertakings of this nature stand on an entirely different footing and are distinguishable from cases of individuals or companies acquiring lands or buildings and making income by letting them on hire.

It was found that war conditions had reduced the companys business to very small proportions and they cut their loss by going out of business in respect of the major part of their land and put it out of their power for 14 years to resume business there.

Instead of dyeing yarn, another person was allowed to dye jute (we are told), the assessee company making income out of its use as a commercial asset.

Letting out a part of its machinery in a certain situation in order to make the business advantageous as a whole does not alter the nature of the income.

the question whether a particular source of income was income or not must be decided, as it could be, according to ordinary commonsense principles.

the nature of a commercial asset is not changed because a par- ticular person is unable to use it.

The inability of the assessee to make use of it in certain circumstances does not in any way affect the nature of the asset and cause an infirmity in the asset itself.

Cases of undertakings of this nature stand on an entirely different footing and are distinguishable from cases of individuals or companies acquiring lands or buildings and making income by letting them on hire.

A mere substituted use of the commercial asset does not change or alter the nature of that asset.

Whatever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income being immaterial.

if the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business

These latter cases may legitimately fall under the specific provisions of section 9 or section 12


CIVIL APPELLATE JURISDICTION. Civil Appeal No. 89 of 1950. Appeal against the Judgment and Order dated 5th July, 1949, of the High Court of Judicature at Calcutta (G. N. Das and Mukherjee JJ.) in Income-tax Reference No. 11 of 1948. Mitra (S. N. Mukherjee, with him) for the appellant. C. Setalvad, Attorney-General for India (S.M. Sikri, with him) for the respondent. 1951. May 4.
The Judgment of the Court was delivered by Boss J.--This is an assessees appeal from a judgment of the High Court at Calcutta delivered on a reference made to it under section 66(1 )of the Incometax Act. The question submitted for the High CourtS 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 income, profits or gains which are assessable under sub-section (1) of section 12.
The assessee is a private limited company which was incor- porated on 3rd January, 1927. It is an investment company known as the Eastern Investments Limited. The objects set out in the memorandum of association are to buy, sell and otherwise deal with shares, securities, bonds and so forth generally. The company was originally formed for acquiring, holding and otherwise dealing with shares and Government securities which had previously belonged to one Lord Cable. The share capital of the company at the date of its incorpo- ration was 250 lacs and consisted partly of preference shares and 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. Lord Cable died on the 28th of March, 1937, leaving an estate in Great Britain as well as in India. One Geoffrey Lacy Scott was appointed administrator of his estate in India and held these 50,000 shares in question in that capacity. According to the statement of the case drawn up by the Income-tax Appellate Tribunal in its. reference to the High Court, money was needed by the executors of Lord Cable, and accordingly the administrator of the estate in India reached an agreement with the company on 9th February, 1937, the terms of which were as follows - The company agreed to reduce its share capital by Rs. 50 lacs and to do it by taking over from Scott the 50,000 shares mentioned above which stood in Lord Cables name at the rate of Rs. 100 a share.
Scott on his part agreed to forego cash payment and 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 High Court was obtained in due course and the agreement was carried out by the parties.
The 5 per cent. interest paid to Scott on these deben- tures forms the subject-matter of the question before the Court. The company claims to deduct this from its income as part of its working expenses under section 12 (2) of the Income-tax Act, that is to say, to use the words of the section, as expenditure (not being in the nature of capital expend- iture) incurred solely for the purpose of making or earning such income, profits or gains.
This contention failed before the Income-tax Appellate Tribunal and also before the High Court. It was agreed all through that the expenditure was not in the nature of capi- tal expenditure, but the view of the Income-tax Commissioner is that (a) it is not expenditure incurred for the purpose of earning the income, profits and gains of the company and (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 and the High Court both took that view. 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 company or interfering with the earning of its income (2) by this transaction the taxable income of the compa- ny was diminished
 There was complete identity of the person who -- (a) brought about this transaction without disturbing the affairs of the company, (b) to whom the share money was repaid. and (c) who took up the debentures and (4) that the transaction was more in the interest of the shareholder Scott than that of the company.
 The decision of this appeal rests on the true construc- tion of section 12 (2). In our Opinion, the law on this point has been correctly summarised in the judgment of the High Court. The following principles are relevant (a) though the question must be decided on the facts of each case, the final conclusion is one of law Indian Radio Cable Communications Ltd. v. The Commissioner of Income- tax, Bombay(1) and Tara Hydro-Electric Agencies Ltd. v. The Commissioner of Income-tax, Bombay(2) (b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned Moore v. Stewart Lloyds(3) and Ushers case(4) (c) 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 British Insulated Helsby Cables Ltd. v. Atherton(5) and (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word solely A case somewhat similar to the present is Farmer v. Scottish North American Trust Ltd. (6) where it was held that interest paid on an overdraft required for purchasing shares (the shares purchased being retained as security for the overdraft) was an outgoing which could be deducted from the receipts to ascertain the taxable profits and gains Which were earned by them.
 In our opinion, the present case falls within these principles. (1) 1937 I.T.R. 270 P.C. (2) 1937 I.T.R. 202 P.C. (3) 6 Tax Cases 501. (4) 1915 A.C. 433. (5) 1926 A.C. 205 at 221 and 235. (6) 1912 A.C. 118. One of the points which weighed with the Incometax Appellate Tribunal and the High Court was that though the conversion did not in any way disturb the holding of the investments of the company or interfere with the earning of its income, it had the effect of diminishing its taxable income. In our judgment, this is not a proper consideration when the transaction is not challenged on the ground of fraud. In the present case there is not even an allegation of fraud. The next point on which some stress was placed was that there was complete identity of person between the person whose shares were sold and the person who took the deben- tures and that the transaction resulted in considerable benefit to him. In the absence of a suggestion of fraud this is not relevant at all for giving effect to the provisions of section 12(2) of the Incometax Act.
 Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself. The test for present purposes is not whether the other party benefitted, nor indeed whether this was a pru- dent transaction which resulted in ultimate gain to the appellant, but whether it was properly entered into as apart of the appellants legitimate commercial undertakings in order indirectly to facilitate the carrying on of its busi- ness. The High Court doubted whether the transaction could be brought within the functions of an investment company and found it difficult to reconcile it with the objects set out in the Memorandum of Association. But we see no such diffi- culty.
 Clause 5 empowers a reduction of capital of the company and clause 8(3) empowers the company to borrow or raise money by the issue of debentures. The matter is clear- ly writ in the bond. Moreover, we do not think that this inquiry is relevant, for we are dealing with a question of income-tax and not judging the legality or propriety of the transaction on an application to reduce the capital of the company.
 The only question is whether this was done in the ordinary course of business for the purposes we have already pointed out, however mistaken the directors and shareholders of the company may have been. Therefore, as stated by the Income-tax Appellate Tribu- nal in its statement of the case, the executors of Lord Cables estate needed money. In the next place, the transac- tion was brought about at the instance of the holder of the majority of ordinary shares, and also that the shares were originally held by Lord Cable and his nominees. It seems evident therefore that Scott could have compelled the company to pay him cash for the shares.
 He seems to have had the whip hand. Instead of doing that he entered into an arrangement which, while giving him the necessary facili- ties, appears to have satisfied the company by allowing it to retain its investments without a precipitate liquidation of a large portion thereof. It does not matter whether the company was right in this view or wrong, and in any event we are in no position to judge of the soundness of its decision because we have not all the materials before us. It has to be remembered that considerations of this kind go deeper than the apparent profit or loss on an isolated transaction standing by itself.
 It is not enough to say that the 50,000 shares which were cancelled earned in the following year only 31/2 per cent. interest as against 5 per cent. on the debentures because we do not know to what extent the hold- ings of the company would have been disturbed if this had not been done. What we do know is what the Income-tax Appel- late Tribunal has stated, namely, that-- the change brought about had been so designed that the investments of the company were not to be disturbed and as a consequence the income accrued was in no way to be affected. This has only to be stated to show the commercial nature of the transaction from the companys point of view.
 The High Court considered that the capital of the compa- ny could have been reduced in other ways. But that again is not the point. There are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under section 12(2) of the Income-tax Act.
It was argued on behalf of the respondent (basing the same on paragraph 7 of the appellants application to the High Court dated 5th April, 1947) that the company had at the time sufficient liquid resources to effect the reduction of capital desired and so it was not necessary to resort to this process. But that again is not the point. The company chose to do it this way, and as there was not even a sugges- tion of fraud, the only question is whether it was gone through as an ordinary commercial proposition. But we doubt if that is what paragraph 7 meant because in paragraph 4 of the application to the High Court dated 11th February, 1944, the petitioner stated that the money on hand and at short notice was only Rs. 8,94,379. That is a good deal short of 50 lacs. However, we need not enter into this in detail. On a full review of the facts it is clear that this transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the company and was made on the ground of commercial expediency.
 It therefore falls within the purview of section 12(2) of the Income-tax Act, 1922 before its amendment in 1939. This being an investment company, if it borrowed money and utilised the same for its investments on which it earned income, the interest paid by it on the loans will clearly be a permissible deduction under section 12(2) of the Income- tax Act. Whether the loan is taken on an overdraft, or is a fixed deposit or on a debenture makes no difference in law. The only argument urged against allowing this deduction to be made is that the person who took the debentures was the party who sold the ordinary shares.
 It cannot be disputed that if the debentures were held by a third party, the interest payable on the same would be an allowable deduction in calculating the total income of the assessee company. What difference does it make if the holder of the debentures is a shareholder ?
 DECISION ??

The decision of this appeal rests on the true construc- tion of section 12 (2).

In our Opinion, the law on this point has been correctly summarised in the judgment of the High Court.

Clause 5 empowers a reduction of capital of the company and clause 8(3) empowers the company to borrow or raise money by the issue of debentures.

The 5 per cent. interest paid to Scott on these deben- tures forms the subject-matter of the question before the Court.

This has only to be stated to show the commercial nature of the transaction from the companys point of view.

The decision of this appeal rests on the true construc- tion of section 12 (2)

The following principles are relevant (a) though the question must be decided on the facts of each case, the final conclusion is one of law

(b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned

(d) beyond that no hard and fast rule can be laid down to explain what is meant by the word solely

In our opinion, the present case falls within these principles.

Clause 5 empowers a reduction of capital of the company and clause 8(3) empowers the company to borrow or raise money by the issue of debentures. The matter is clear- ly writ in the bond.

The only question is whether this was done in the ordinary course of business for the purposes we have already pointed out, however mistaken the directors and shareholders of the company may have been.

The High Court considered that the capital of the compa- ny could have been reduced in other ways. But that again is not the point.

On a full review of the facts it is clear that this transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the company and was made on the ground of commercial expediency

Whether the loan is taken on an overdraft, or is a fixed deposit or on a debenture makes no difference in law

Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself

we do not think that this inquiry is relevant, for we are dealing with a question of income-tax and not judging the legality or propriety of the transaction on an application to reduce the capital of the company

What difference does it make if the holder of the debentures is a shareholder ?

The assessee is a private limited company which was incor- porated on 3rd January, 1927.

It is an investment company known as the Eastern Investments Limited. The objects set out in the memorandum of association are to buy, sell and otherwise deal with shares, securities, bonds and so forth generally

The company was originally formed for acquiring, holding and otherwise dealing with shares and Government securities which had previously belonged to one Lord Cable.

In our Opinion, the law on this point has been correctly summarised in the judgment of the High Court.

This is an assessees appeal from a judgment of the High Court at Calcutta delivered on a reference made to it under section 66(1 )of the Incometax Act.

In general, the Income-tax Appellate Tribunal and the High Court both took that view.

The decision of this appeal rests on the true construc- tion of section 12 (2).

The following principles are relevant (a) though the question must be decided on the facts of each case, the final conclusion is one of law

(b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned

and (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word solely

In our opinion, the present case falls within these principles.

On a full review of the facts it is clear that this transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the company and was made on the ground of commercial expediency.

It therefore falls within the purview of section 12(2) of the Income-tax Act, 1922 before its amendment in 1939.

Whether the loan is taken on an overdraft, or is a fixed deposit or on a debenture makes no difference in law.

It is an investment company known as the Eastern Investments Limited.

The objects set out in the memorandum of association are to buy, sell and otherwise deal with shares, securities, bonds and so forth generally.

The company was originally formed for acquiring, holding and otherwise dealing with shares and Government securities which had previously belonged to one Lord Cable.

Scott on his part agreed to forego cash payment and 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 High Court was obtained in due course and the agreement was carried out by the parties.

The 5 per cent. interest paid to Scott on these deben- tures forms the subject-matter of the question before the Court.

This contention failed before the Income-tax Appellate Tribunal and also before the High Court.

In our judgment, this is not a proper consideration when the transaction is not challenged on the ground of fraud.

In the present case there is not even an allegation of fraud.

Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself.

The High Court doubted whether the transaction could be brought within the functions of an investment company and found it difficult to reconcile it with the objects set out in the Memorandum of Association.

Clause 5 empowers a reduction of capital of the company and clause 8(3) empowers the company to borrow or raise money by the issue of debentures.

The matter is clear- ly writ in the bond.

Moreover, we do not think that this inquiry is relevant, for we are dealing with a question of income-tax and not judging the legality or propriety of the transaction on an application to reduce the capital of the company.

The only question is whether this was done in the ordinary course of business for the purposes we have already pointed out, however mistaken the directors and shareholders of the company may have been.

Therefore, as stated by the Income-tax Appellate Tribu- nal in its statement of the case, the executors of Lord Cables estate needed money.

In the next place, the transac- tion was brought about at the instance of the holder of the majority of ordinary shares, and also that the shares were originally held by Lord Cable and his nominees.

It does not matter whether the company was right in this view or wrong, and in any event we are in no position to judge of the soundness of its decision because we have not all the materials before us.

It has to be remembered that considerations of this kind go deeper than the apparent profit or loss on an isolated transaction standing by itself.

This has only to be stated to show the commercial nature of the transaction from the companys point of view.

The company chose to do it this way, and as there was not even a sugges- tion of fraud, the only question is whether it was gone through as an ordinary commercial proposition.

The only argument urged against allowing this deduction to be made is that the person who took the debentures was the party who sold the ordinary shares

It cannot be disputed that if the debentures were held by a third party, the interest payable on the same would be an allowable deduction in calculating the total income of the assessee company.

What difference does it make if the holder of the debentures is a shareholder ?

The share capital of the company at the date of its incorpo- ration was 250 lacs and consisted partly of preference shares and 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.

Lord Cable died on the 28th of March, 1937, leaving an estate in Great Britain as well as in India.

One Geoffrey Lacy Scott was appointed administrator of his estate in India and held these 50,000 shares in question in that capacity.

Indian Radio Cable Communications Ltd. v. The Commissioner of Income- tax, Bombay(1) and Tara Hydro-Electric Agencies Ltd. v. The Commissioner of Income-tax, Bombay(2)

Moore v. Stewart Lloyds(3) and Ushers case(4)

It seems evident therefore that Scott could have compelled the company to pay him cash for the shares.
 He seems to have had the whip hand.

The High Court considered that the capital of the compa- ny could have been reduced in other ways. But that again is not the point.

But we doubt if that is what paragraph 7 meant because in paragraph 4 of the application to the High Court dated 11th February, 1944, the petitioner stated that the money on hand and at short notice was only Rs. 8,94,379.

That is a good deal short of 50 lacs. However, we need not enter into this in detail.

This has only to be stated to show the commercial nature of the transaction from the companys point of view.

it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned Moore v. Stewart Lloyds(3) and Ushers case(4)

Clause 5 empowers a reduction of capital of the company and clause 8(3) empowers the company to borrow or raise money by the issue of debentures. The matter is clear- ly writ in the bond.

the Income-tax Appel- late Tribunal has stated, namely, that-- the change brought about had been so designed that the investments of the company were not to be disturbed and as a consequence the income accrued was in no way to be affected.

In our opinion, the present case falls within these principles.

In the present case there is not even an allegation of fraud.

It seems evident therefore that Scott could have compelled the company to pay him cash for the shares.
 He seems to have had the whip hand.

beyond that no hard and fast rule can be laid down to explain what is meant by the word solely

In our judgment, this is not a proper consideration when the transaction is not challenged on the ground of fraud.

In the absence of a suggestion of fraud this is not relevant at all for giving effect to the provisions of section 12(2) of the Incometax Act.

Whether the loan is taken on an overdraft, or is a fixed deposit or on a debenture makes no difference in law.

Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself.

It has to be remembered that considerations of this kind go deeper than the apparent profit or loss on an isolated transaction standing by itself.


ORIGINAL JURISDICTION. Petition No. 308 of 1951. Application under article 32 of the Constitution for a writ in the nature of habeas corpus praying for the release of the petitioner from detention. J. Umrigar (amicus curiae), for the petitioner. M. Sikri, Advocate-General of the Punjab, (Jindra Lal, with him) for the respondent. 1951. December 10. The Judgment of the Court was deliv- ered by PATANJALI SASTRI C.J.--This is a petition under article 32 of the Constitution praying for the release of the peti- tioner from his alleged unlawful detention.
We accepted the petition and, at the conclusion of the hearing, ordered the petitioner to be released., We now proceed to give the reasons for our order. The petitioner was arrested and detained under an order dated 1st March, 1950, made by the District Magistrate, Amritsar, under section3(1) of the Preventive Detention Act, 1950 (hereinafter referred to as the Act ) and the grounds of detention were communicated to the petitioner as required by section7 of the Act on 15th March, 1950.
The petitioner challenged the validity of the order on various grounds but, while the petition was pending after this Court issued a rule nisi to the respondent, the petitioner was served on 6th August with another detention order dated 30th July,1951 1, purporting to be made by the Governor of Punjab under sub-section(1) of section 3 and section 4 of the Act as amended by the Preventive Detention (Amendment) Act, 1951, and he was served with fresh grounds of detention on 16th August, 1951.
Thereupon the petitioner filed a supplementary petition impugning the validity of the said order on the ground, inter alia, that it directed the detention of the petitioner up to 31st March, 1952, the date on which the Act itself was to expire and that this was contrary to the provisions of the Act as amended. On behalf of the respondent, the Advocate-General of Punjab urged that the said order was not intended to be a fresh order of detention but was passed only with a view to limiting the period of detention till 31st March, 1952, as it had been held in some cases that an order of detention for an indefinite period was bad.
The order runs as follows - WHEREAS the Governor of Punjab is satisfied with respect to the person known as Makhan Singh Tarsikka, son of Gujjar Singh, Jat, of Tarsikka, Police Station Jandiala, Amritsar District, that with a view to preventing him from acting in a manner prejudicial to the security of the State, it is necessary to make the following order Now, THEREFORE, in exercise of the powers conferred by sub-section (1) of section 3 and section 4 of the Preventive Detention Act, 1950 (Act IV of 1950), as amended by the Preventive Detention (Amendment) Act, 1951 (Act IV of 1951), the Governor of Punjab hereby directs that the said Makhan Singh Tarsikka be committed to the custody of the InspectorGeneral of Prisons, Punjab, and detained in any jail of the State till 31st March, 1952, subject to such conditions as to mainte- nance, discipline and punishment for breaches of discipline as have been specified by a general order or as contained in the Punjab Communist Detenu Rules, 1950.
It will be seen that the terms of the order make it clear that it was intended to operate as a fresh order for the detention of the petitioner and this view is strengthened by the fact that the order was followed by the service of a fresh set of grounds on the petitioner as required by sec- tion 7 of the Act a proceeding which would be wholly unnec- essary if no fresh order of detention was intended. Indeed, it was suggested on behalf of the petitioner that the said order followed by service of fresh grounds only four days before the date fixed for the hearing of the petition by this Court was a deliberate move by the respondent to cir- cumvent the objections raised by the petitioner to the validity of the earlier order of 1st March, 1950, and thus render the proceeding infructuous.
However that may be, we are clearly of opinion that the order dated 30th July, 1951. must be regarded as a fresh order made for the petitioners detention in superession of the earlier order and the ques- tion is whether it was illegal in that it straightaway directed that the petitioner be detained till 31st March, 1952, which was the date of the expiry of the Act. Whatever might be the position under the Act before its amendment in February, 1951, it is clear that the Act as amended requires that every.case of detention should be placed before an Advisory Board constituted under the Act (section 9) and provides that if the Board reports that there is sufficient cause for the detention the appropriate Government may confirm the detention order and continue the detention of the person concerned for such period as it thinks fit (section 11).
It is, therefore, plain that it is only after the Advisory Board, to which the case has been referred, reports that the detention is justified, the Government should determine what the period of deten- tion should be and not before. The fixing of the period of detention in the initial order itself in the present case was, therefore, contrary to the scheme of the Act and cannot be supported. The learned Advocate-General, however, urged that in view of the provision in section 11 (2) that if the Advisory Board reports that there is no sufficient cause for the detention, the person concerned would be released forth- with, the direction in the order dated 30th July, 1951, that the petitioner should be detained till 31st March, 1952, could be ignored as mere surplusage.
DECISION ??