EASTERN INVESTMENTS LTD. versus COMMISSIONER OF INCOME-TAX, WEST BENGAL

Citation: [1951] 1 S.C.R. 594 · Decided: 04-05-1951 · Supreme Court of India · Bench: HARILAL JEKISUNDAS KANIA · Disposal: Appeal(s) allowed

Judgment (excerpt)

19SI 
Kumar 
Pa1hupatinath 
Malia 
and Another 
v. 
Deba ProJanna 
Mukherjee 
Patanfali 
Sastri J. 
594 
SUPREME COURT REPORTS 
[1951] 
of the mortgagee must, in that context, be understood 
with reference to the sufficiency of the right assigned 
to enable the sub-mortgagee to sue the original mort· 
gagor in his own right, so 
a~ to bring the relevant 
provisions of the Act into play as between them. The 
reservation made by their Lordships in the case of a 
sub-mortgage containing only a charge on the original 
mortgage is signification and supports this view. I do 
not consider, therefore, that there is any inconsistency 
between 
Promode 
Kumar 
Roy 
v. 
Nikhil 
Bhusan 
Mukhopadhya(') and the earlier decisions, and even if 
there be any such inconsistency it has no relevance to 
the present case. 
In the result I agree that the appeal fails and should 
be dismissed with costs. 
Appeal dismissed. 
Agent for the appellants : R. R. Biswas. 
' 
Agent for the respondent : Sukumar Ghose. 
EASTERN INVESTMENTS LTD. 
v. 
COMMISSIONER OF INCOME-TAX, 
WEST BENGAL. 
[SHRI HARILAL KANIA c. J., PATANJALI SASTRI, 
S. R. DAs and VIVIAN BosE JJ.] 
Indian 
Income-tax Act (XI ·of 1922), s. 
12(2)-Business 
expenditure-Interest on 
debentures-Reducing capital of company 
hy taking over shares and giving debentures to shareholder-Income 
of company reJucd-lnterest on Jebentures,.whether allowable. 
A private limited company formed for dealing in shares and 
securities 
had a share capital of 250 )acs of rupees of which 
shares of the face value of 50 lacs were held by A and the 
remaining shares were held by his nominee's. 
As the company 
was in need of money it was resolved, with the consent of A, to 
reduce the share capital by 50 lacs by the· oompany taking over 
the 50 lacs shares which were held by A and giving to A instead 
debentures of the face value of Rs. 50 lacs carrying interest at 
5 per. cent. per annum. 
The Income-tax Appellate Tribunal and 
(I) 76 I. A. 74. 
S.C.R. 
SUPREME COURT REPORTS 
595 
the High Court held that the interest on the debentures could 
not be allowed as business expenditure under s. 12(2) of the 
Income-tax Act, the main grounds on which this conclusion was 
arrived at. being (i) the pµrpose of the transaction was to effect. 
the conversion, (ii) the taxable income of the company was 
reduced, 
(iii) 
it was 
the same person who brought about 
the transaction, to whom .the share money was paid and who 
took the debentures, (iv) · the transaction was more in the interest 
of that person than the company, ( v) the capital of the company 
could have been reduced in other ways : 
Held by the Full Court 
(KANIA C, /. PATANJALI 
SAsTR1, 
DAs 
and BosE, JJ.) that the test for deciding whether the expenditure 
was allowable under s. 12(2) was whether the transaction was 
properly entered into as part of the company's ordinary under-
takings to facilitate the carrying on of its business for :he 
purpose of earning income, and in. the absence of fraud the High 
Court was not justified in . coming to the conclusion that the 
interest on the debentures was not allowable on the considera-
tions mentioned above. 
On the facts it was clear that the 
transaction was entered into in order to facilitate the carrying 
on of the business of the company and that it was made on the 
ground 
of 
commercial 
expediency. 
The 
interest 
on 
the 
debentures was accordingly allowable under s. 12(2). Farmer v. 
Scottish North American Trust Ltd. [1912) A. C. 118 referred to. 
CIVIL 
APPELLATE 
JuiusI>IcTION. 
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 Ip.come-tax Reference No. 11 of 1948. 
S. Mitra (S. N. Mukherjee, with him) for the 
appellant. 
M. C. Setalvad, Attorney-General for India (S. M. 
Sikri, with him) for the respondent. 
1951. 
May 4. The Judgment. of the Court was deli-
vered by 
BosE J.-This is an assessee's appeal from a judg-
ment of the High Court at Calcutta . delivered on a 
reference made to it under section 66( 1) of the Income-
tax Act. 
The question submitted for the High Court's opinion 
was as follows :-
,_10 S.C.India/67. 
19SI 
Eastern 
lnveJtment Ltd; 
v. 
Commissioner of 
Income-tax, 
We.rt Bengaf. 
Bose J. 
1951 
EaJtern 
lnveJtmenta Ltd. 
v. 
CommisJioner of 
lncome·tax, 
West Bengal. 
Bose J. 
596 
SUPREME COURT REPORTS 
[1951] 
"Whether in the circumstances o

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