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Subba Rao J. I agree with the conclusion, but I would prefer not to express my view on the construction of cl. (iii) of Subs. (2) of s. 10 of the Indian Income-tax Act, 1922. Shah J. The Bombay Steam Navigation Company Ltd. which plied its passenger and ferry services on the Konkan coast:

and in the Bombay harbour was amalgamated with effect from June 30, 1952 with -the Scindia Steam Navigation Company Ltd.-hereinafter called "the Scindias". The scheme of amalgamation was sanctioned by the High Court of Bombay and the Scindias were authorised by the scheme to float and establish a joint stock company with the object of taking over the services on the Konkan coast and in the Bombay harbour which were originally plied by the Bombay Steam Navigation Co. Ltd. Pursuant to this authority the Bombay Steam Navigation Co. (1953), Private Ltd.-hereinafter called "the assessee Company" was incorporated on August 10, 1953. The assessee Company contracted with the Scindias on August 12, 1953 to purchase certain steamers, launches, boats, barges, buildings, furniture, fixtures and vehicles for a consideration provisionally estimated at Rs. 80 lakhs. It was provided by the agreement that the price of the assets sold will be satisfied by allotment to the Scindias of 29,900 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 will be treated by the assessee Company as a loan granted by the Scindias. The agreement by cl. 3(b) provided for payment of interest at 6% on the unpaid balance of the purchase price. clause stood as follows:
L2Sup.165-6 On final valuation of the assets transferred it was found that the assessee Company was liable to pay Rs. 81,55,000 to the Scindias. By a supplemental agreement dated September 16, 1953, the agreement was rectified and the original cl. 3(b) was substituted with retrospective effect from August 12, 1953 by the following clause:
"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 movable properties of the Transferee Company in favour of the Transferor Company.$$ In proceedings for assessment of tax for the assessment years 1955-56 and 1956-57 the Income-tax Officer, Companies Circle II (1), Bombay, disallowed the claim of the assessee Company in the computation of its profits and gains, for allowance of Rs. 2,74,610 paid by it to the Scindias in the account year ending June 30, 1954, as interest on the outstanding balance of purchase price due by it and for allowance of Rs. 2,86,823 paid as interest in the year ending June 30, 1955. The order of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner and by the Appellate Tribunal. The High Court of Bombay answered the following question submitted by the Income-tax Appellate Tribunal in the negative:

(xv) are permissible : some of these permissible allowances are of the nature of revenue outgoings, and others are of the nature of capital outgoings. Gross profits or gains must undoubtedly be of the nature of revenue receipts. But in the computation of taxable profits from the receipts of the business, not only revenue deductions but certain capital deductions are permitted to be made, e.g. deprecia- tion, sums paid to scientific research associations, expenditure of a capital nature on scientific research and other expenditure of a capital nature. By cl. (iii) of sub- s. (2), interest paid in respect of capital borrowed for the purpose of the business, profession or vocation is a permissible allowance in the computation of the profits or gains. The expression "capital" used in cl. (iii) in the context in which it occurs means money and not any other asset, -for interest is payable on capital borrowed and interest becomes payable on a loan of money and not on any other asset acquired under a contract. Interest paid need not however bear the character of a revenue outgoing. To be admissible as an allowance under cl. (iii), interest must be paid in respect of capital borrowed : interest paid, but not in respect of capital borrowed cannot be allowed. There was in the present case, in truth no capital borrowed by the assessee Company. To recapitulate the facts: the assessee Company purchased the assets required for its business from the Scindias and paid part of the consideration by allotting shares of the value of Rs. 29,99,000 leaving the balance of Rs. 51,56,000 unpaid. In cl. 3(b) of the contract as originally executed it was recited that this amount was to be treated as a loan by the Scindias to the assessee Company, but with retrospective operation the covenant was modified, and the amount due was to be treated as balance of purchase money remaining unpaid. Mr. Viswanatha Sastri argued that the assessee Company owed a debt of Rs. 51,56,000 to the Scindias, payment of which was secured by the execution of a promissory note and a charge on the assets of the assessee Company. The substance of the transaction, according to Counsel, was a loan given by the Scindias to its subsidiary-the assessee Company-for procuring the assets required for carrying on the business, even though the formal transaction did not record it as a loan, and as a contractual liability to pay a debt was incurred, the Court would be justified in regarding the transaction as one involving borrowing of the amount agreed to be paid by the assessee Company. It was said that if the assessee Company had borrowed the amount of Rs. 51,56,000 from a stranger and had paid the entire consideration to the Scindias, interest paid to the stranger would indisputably be an allowance admissible in the computation of taxable profits of the assessee Company, and there was no reason why a different principle should be applied when the Scindias in substance had made the requisite funds available to enable the assessee Company to purchase the assets. The transaction with the vendor could be regarded, it was also urged, as a composite transaction(i) a transaction of borrowing Rs. 51,56,000 from the Scindias and (ii) a transaction for payment of the entire consideration due for purchasing the assets from the Scindias.

In our judgment this is not a permissible approach in ascertaining the true nature of the transaction. The parties had agreed that assets of the value of Rs. 31,55,000 be taken over by the assessee Company from the Scindias. Out of that consideration Rs. 29,99,000 were paid by the assessee Company and the balance remained unpaid. For agreeing to deferred payment of a part of the consideration, the Scindias were to be paid interest. An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources, and a loan is only one of such sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender. If the requisite amount of consideration had been borrowed from a stranger interest paid thereon for the purpose of carrying on the business would have been regarded as a permissible allowance; but that is wholly irrelevant in considering the applicability of cl. (iii) of sub-s. (2) to the problem arising in this case. The Legislature has under