JUDGMENT
Ajoy Nath Ray, J.
1. Three assessment years are involved in this appeal under Section 260A which we have entertained. Those are assessment years 1991-92, 1992-93 and 1993-94. The facts which give rise to the appeals are briefly as follows.
2. The assessee-partnership firm, got into a joint venture collaboration agreement with a company of U. S. S. R., at a time just before the disintegration of the United Soviet Russia.
3. The agreement was in writing and the basic terms of the agreement were, that a company would be floated by the two parties, and capital would be contributed by the assessee to the extent of 60 per cent. and the Russian party to the extent of 40 per cent.
4. The proposed share capital which the parties had envisaged in the beginning was about Rs. 5.27 crores.
5. However, soon thereafter they reduced their target to about Rs. 3.68 crores.
6. Between March 31, 1990, and December 21, 1990, the assessee-firm contributed to the joint venture company, viz., Tropical Fruits International Ltd., sums of the aggregate amount of Rs. 2.21 crores approximately.
7. After having obtained due permission from the Reserve Bank of India and the Controller of Capital Issues, upon certain conditions, the Russian party was also allowed to remit an amount of Rs. 147.44 lakhs, provided it did not charge any interest thereon.
8. The said sum was remitted.
9. If everything went well and may be if Russia had remained one solid unit all throughout, the shares would have been issued as contemplated, converting the entire contribution of Rs. 2.21 crores by the assessee and Rs. 1.47 crores by the Russian party into share capital.
10. As it happened, however, intimation was given from Russia that the issuance of shares should be postponed as matters had become uncertain there. The parties entered into a lot of correspondence thereafter. The net upshot of events proved that the Russian collaborator was unable to contribute to the share capital of Tropical Fruits in excess of Rs. 38 crores.
11. The corresponding 60 per cent. of this was matched by the assessee-com-pany and that would be approximately Rs. 54 crores.
12. It would be seen from the above that although the application money forwarded by the assessee was Rs. 2.21 crores, only 54 crores out of this became actually converted into share capital.
13. Tropical Fruits did good business thereafter. It is clear from the records that the assessee even got its own product exported through Tropical Fruits at much profit.
14. The Russian party requested for return of its unconverted money, but it was asked for in driblets.
15. The records show that at first they asked for return of Rs. 4 crores, and thereafter the rest was asked for.
16. The records before us also show that as and when money went back from the unconverted application money to Russia (i.e., part of the 40 per cent.) the assessee-firm also took back the corresponding 60 per cent. from its contributed application money. If anything, the assessee took back its part 60 per cent. even before the part 40 per cent. was sent over to Russia.
17. In these circumstances, a point arose in the assessee’s tax returns, as to whether the funds which the assessee had borrowed, for the purpose of advancing to the joint venture, and which borrowed funds were attracting interest, would come within the scope of the assessee being entitled to claim a deduction for interest paid by it, on such borrowings, as deductions of a revenue nature in regard to its returns of taxable profit.
18. The assessee’s case has been that it was compelled to maintain a 60 : 40 application money funds balance for the issuance of share capital it was also improper, according to the assessee, and according to the spirit of the joint venture, to take back the application money just because the Russian party had asked for time for conversion of its contribution money into share capital. The assessee kept its pace exactly in though time with its Russian “partner”, or collaborator, and took back the application money in the 60 : 40 ratio as and when the money went back to Russia also.
19. It was submitted that the capital contributed was out of borrowed funds raised by the assessee-firm for its own business purpose. The blocking of the application money without charging any interest from Tropical Fruits was as per the agreement and understanding between the assessee and its Russian associate. There was no fraud or underhand diversion of funds involved.
20. In these circumstances, the Tribunal came to the conclusion that nothing had been brought on record to show why the assessee-firm should have kept its money blocked with Tropical Fruits without charging any interest. Since the partners of the assessee were interested in Tropical Fruits, interest on borrowed capital was disallowed to the extent it lay with Tropical Fruits without earning any interest there.
21. At the time of admission of the appeal we were deeply surprised to note that the Tribunal had opined that nothing had been brought on record by the assessee to show and explain why Tropical Fruits International Ltd. had not paid any interest on the application money and yet why the assessee had itself paid interest on borrowed funds which it had advanced by way of application money. There were numerous papers before the Tribunal. It was the duty of the Tribunal to consider the case of the assessee being compelled to keep its application money blocked, because its associate was being so compelled to keep its money blocked without conversion into share capital because of the State’s internal problems.
22. Finding the Tribunal’s order wholly lacking in explicit reasons, and taking note of the principal arguments made by the assessee, we formulated a question of perversity. The question as formulated by us is set out below :
“Whether the Tribunal was justified in confirming the disallowance of interest in the sum of Rs. 5,48,046 on sums borrowed by the assessee and being paid/payable by the assessee, in respect of investment in the joint venture company, namely, Tropical Fruits International Limited, the venture being along with the USSR Government company, in view of the moneys in the joint venture company being kept interest-free, considering that in the facts and circumstances of the case, and upon the documents before the Tribunal, such disallowance is perverse in law, the interest-free idling of the moneys in the joint venture company being far too well explained by the assessee, in connection with the disintegration of the USSR, and the other partner in the joint venture company being unable to contribute to share capital as originally envisaged?”
23. The above question is for the first of the said three assessment years, and as regards the two subsequent ones, only the money figure will be different, and those will be Rs. 21,62,160 for the assessment year 1992-93 and Rs. 13,52,160 for the assessment year 1993-94.
24. The only section which we need consider for our purposes is Section 36, Sub-section (1)(iii), of the Income-tax Act, 1961, and that runs as follows :
“36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28–…
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession.”
25. In case it appears that in the above facts and circumstances of the case the monies lying with Tropical Fruits, belonging to the assessee, intended to be, but yet unconverted into share capital had been borrowed by the assessee for the purposes of the assessee’s business, then and in that event it would be the bounden duty of the Tribunal to permit deductions.
26. We have formulated the above question on the supposition that if the facts and circumstances as enumerated above are considered, and the well-settled law in regard to what is and what is not a borrowing for business purposes is applied, then there can be but one conclusion in the facts and circumstances of this case.
27. Had we had any doubts about the possibility of the Tribunal deciding in any other manner than we are about to decide the case, we could not have allowed the appeal on a point of perversity.
28. The cases regarding what is borrowing, and what is not, for business purposes, are numerous and well-known. Many of those were cited before us, by Mr. Poddar and certain additional cases were also cited by Mr. Som.
29. If points of law were involved about any doubtful nature of the interpretation of the phrase “business purposes” in the facts and circumstances of this case we would have to formulate other and different questions of law too.
30. We have not made any such formulation. We have proceeded on the simple and ordinary legal basis, which must be assumed to have been known to the Tribunal, that a business purpose is for the carrying on of the business, and such purpose in capacity as a businessman; the expenses must not be of a private or domestic nature; there must be no dishonesty and no underhand attempts involved at motivated diversion of funds so as to get an otherwise unwarranted deduction of interest on borrowed funds.
31. This is the simple law and nobody could have any dispute with these basic propositions.
32. After hearing both the sides carefully and at length we are of the final opinion that the facts and circumstances of this case disclose a state of affairs where only one conclusion was possible to be drawn by any reasonable authority.
33. The assessee lost before the Assessing Officer, won before the Commissioner of Income-tax (Appeals) and lost again before the Tribunal, which failed to take note of any of the material facts.
34. When an authority draws a conclusion which cannot be drawn by any reasonable person or authority on the disclosed state of facts, then a perverse decision is entered and a perverse decision is wrong in law.
35. It is in this way that we have felt compelled to interfere under Section 260A.
36. In an old English case of Edwards (H.M. Inspector of Taxes) v. Bairstow and Harrison the House of Lords decision being reported at [1955] 28 ITR 579 ; [1955] 36 TC 207, there are many interesting formulations to be found, as to what constitutes perversity.
37. Some of the formulations are extracted and the case is also approved by our Supreme Court in Mehta Parikh and Co. v. CIT [1956] 30 ITR 181 (see specially pages 188 and 189). It suffices for our purpose to extract from Bairstow and Harrison’s case [1955] 28 ITR 579 (HL) a question of Lord Atkin which was quoted in the judgment of Lord Radcliffe. That short and single line would be found at page 228 of the reports, i.e., [1955] 36 Tax Cases, and it is stated there that Atkin L. J. (as his Lordship then was) recognised that “there may be a state of facts which can only lead to one conclusion of law.”
38. The law here being well-settled, as to what is borrowing for business purposes, the facts as given above, in our opinion, could only lead to one conclusion of law, which is that the borrowings by the assessee kept as application money in Tropical Fruits were for use of the money for the assessee’s business and thus the only conclusion of law would be that the interest thereon was deductible as revenue expense by the assessee.
39. As such the question is answered in favour of the assessee in respect of each of the three assessment years.
40. The order of the Tribunal is set aside for each of the said assessment years and the order of the Commissioner of Income-tax (Appeals) is restored.
41. We would have allowed costs to the assessee in this case but in view of the excellent arguments and fair stand taken by learned counsel on both the sides, we are of the opinion that there should be no order as to costs in this appeal.
42. This is a combined judgment in respect of three matters, viz., I. T. A. No. 76 of 2002,1. T. A. No. 77 of 2002 and I. T. A. No. 78 of 2002, and we answer the questions in favour of the assessee for all the three assessment years.
43. Let authenticated copies of the judgment and the order be issued to the parties.
Ms. Indira Banerjee, J.
44. I agree.