JUDGMENT Desai, J.
1. The question raised on this reference relates to the payments of Rs. 2,74,610 and Rs. 2,86,823, which the assessee had made in the assessment years 1955-56 and 1956-57 and which it had claimed as deductions under the Indian Income-tax Act.
2. The assessee company was incorporated on the 10th of August, 1953. Under a scheme of amalgamation, which was approved of by this court, an incorporate company known as "the Bombay Steam Navigation Co. Ltd." was amalgamated with the Scindia Steam Navigation Company Limited with effect from the 30th of June, 1952. This scheme of amalgamation had provided that the Scindia Steam Navigation Company Ltd. would be entitled to float and establish a joint stock company with the object of taking over the passenger services on the Konkan coast and the ferry services in the Bombay harbour, which were formerly carried on by the Bombay Steam Navigation Company Limited. It was pursuant to this object that the assessee company was floated and incorporated on the 10th of August, 1953, as already stated.
3. On the 12th of August, 1953 under an agreement entered into by the assessee company with the Scindia Steam Navigation Company Limited, the assessee took over the assets as described in the schedule to the agreement for a price, which was provisionally stated at Rs. 80 lakhs and was to be finally determined on the valuation of the said assets. The said price was to be paid and satisfied by the issue and allotment of 29,990 shares credited as fully paid up of the face value of Rs. 100 each in the share capital of the assessee company and the balance was to be treated as a loan granted by the transferor company secured by a promissory note duly executed by the transferee company in favour of the transferor company and until it was repaid in full it was to carry interest at 6% per annum (simple). Payment was further secured by hypothecation of all moveable properties of the transferee company in favour of the transferor company. On the 16th of September, 1953, a supplemental agreement was entered into between the assessee company and the Scindia Steam Navigation Company Limited for the purpose of altering clause 3(b) of the original agreement, which related to the payment of the balance of the purchase price, and substituting it by a new clause. It was stated in this agreement that the intention of the parties in laying down clause 3(b) of the original agreement was that the balance remaining unpaid of the value of the assets and the property of the transferor to be transferred to the transferee, was to be subsequently paid by the transferee company to the transferor company at the agreed rate of interest and it was not the intention of the parties to make the transaction appear as a loan granted by the transferor company to the transferee company. Clause 3(b) of the original agreement, however, did not properly reflect the intention of the parties thereto and, therefore, a substitution in clause 3(b) of the original agreement was being made in order to reflect the proper intention of the parties. The substituted clause 3(b) was as follows :
"The balance shall be paid by the transferee company to the transferor company on completion of the transfer referred to in clause 2 above and until it is repaid in full the said balance or so much thereof as for the time being remains unpaid shall carry interest of 6% per annum (simple) and shall further be secured by hypothecation of all moveable properties of the transferee company in favour of the transferor company."
4. Under these agreements, for the period ending 30th June, 1954, the assessee company paid an amount of Rs. 2,74,610 to the Scindia Steam Navigation Company Limited as interest on the outstanding balance and for the following year ending 30th June, 1955, it similarly paid by way of interest an amount of Rs. 2,86,823. In the assessments for the assessments years 1955-56 and 1956-57 these amounts were claimed as deductions by the assessee company. The deductions were claimed on three alternative grounds, viz., under section 10(2)(iii), section 10(2)(xv) or under section 10(1) of the Indian Income-tax Act. The claim was negatived by the income-tax authorities and also by the Tribunal. On an application of the assessee under section 66(1) the Tribunal has drawn up a statement of the case and referred the following question to this court :
"Whether on the facts and in the circumstances of the case the said sum of Rs. 2,74,610 and Rs. 2,86,823 being the interest paid by the assessee is allowable as a deduction under the Income-tax Act under any of the sections, 10(2)(iii), 10(2)(xv) or 10(1) ?"
5. Under section 10(2)(iii) the amount of interest paid in respect of the capital borrowed for the purpose of the business is allowed as a deduction. In the present case, there has clearly been no case of borrowing in view of the position clarified by the supplemental agreement between the parties. Interest in the present case has been paid by the assessee company on the unpaid balance of the purchase price of the assets which it had purchased from the Scindia Steam Navigation Co. Ltd. It has been held by this court in Metro Theatre, Bombay Ltd. v. Commissioner of Income-tax that the mere purchase of capital asset on a long term credit with a stipulation to pay interest on the reduced balance does not amount to the borrowing of capital within the meaning of section 10(2)(iii). In view of the said decision the claim for the deduction under section 10(2)(iii) cannot, in our opinion, be sustained.
6. Neither is the claim sustainable under section 10(2)(xv). For a deduction to come under section 10(2)(xv) it must be : "any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid our or expended wholly and exclusively for the purpose of such business, profession or vocation." The price laid for the acquisition of a capital asset is undoubtedly a capital expenditure. The amount of payment which is required to be made by way of interest on the purchase price of the capital asset, if the price is not paid in full in time, is again an amount paid towards the acquisition of the capital asset and in the nature of a capital expenditure. The interest, which the assessee has paid on the balance of the price of the capital asset purchased by it is, therefore, expenditure of a capital nature and does not come under section 10(2)(xv).
7. Mr. Palkhivala has argued that the payment made by the assessee by way of interest is not for the acquisition of the capital assets but for the maintaining of the capital assets in the business of the assessee, because unless the payment of interest was made, the capital assets, being in hypothecation with the Scindias, would have been proceeded against by them and this taken out of the assessee's business. Mr. Palkhivala says that there is authority for the proposition that the expenses incurred for the maintaining of the capital assets in business in a revenue expenditure coming within section 10(2)(xv). In our opinion the interest paid in the present case by the assessee was not any such expenses for the maintaining of the capital asset in business. It was a payment in addition to the purchase price, which the assessee was required to make for the delay in the payment of the purchase price of the assets and, therefore, was of the nature of a payment made in the acquisition of the assets and not maintaining it. The circumstance that, in the event of default of the payment of the balance of the purchase price, the assets would have been proceeded against under the hypothecation clause will not make the payment of the price of the capital asset a revenue expenditure for the purpose of maintaining the capital asset.
8. The claim under section 10(1) also, in our opinion, is a futile claim. Mr. Palkhivala has urged that profits and gains under section 10(1) are profits and gains as understood in a commercial sense and any expenses and deductions which will be properly regarded in the commercial sense as expenses incurred for the purpose of earning the profits or gains will be deductible under section 10(1) even if there may not be a specific provision for such a deduction under section 10(2). That may be quite all right, but deductions, which can be claimed on this basis under section 10(1) have got to be deductions, which are in the nature of revenue deductions. Money, which has been paid in the present case for the acquisition of capital assets, cannot go to revenue account and there will be no question of allowing this payment as by way of deductions in computing the profits and gains of the business even under section 10(1). The claim for the deduction under section 10(1) also is, therefore unsustainable.
9. In the result, therefore, our answer to the question referred to us is in the negative. The assessee will pay the costs of the department.
Question answered in the negative.