Orissa High Court
Commissioner Of Income-Tax vs Gopal Ch. Patnaik on 19 November, 1975
JUDGMENT R.N. Misra, J.
1. These are two references made under Section 256(1) of the Income-tax Act, 1961 (hereinafter reference to as "the Act"), by the Income-tax Appellate Tribunal on an application of the revenue and the following question has been sent for opinion of the court;
"Whether, on the facts and in the circumstances of the case, the interest on monies borrowed for purchase of shares should be allowed as a deduction even though shares had not yielded any dividend in the relevant accounting year ?"
2. The relevant years of assessment are 1965-66 and 1966-67. Assessee, an individual, purchased equity shares in M/s. Kalinga Tubes Ltd. by borrowing from M/s. Kalinga Foundation Trust and the Central Government of India. During the two years, assessee had to pay interest of Rs. 29,915 and Rs. 4,462, respectively, on the loans and claimed deduction thereof in respect of the respective assessment proceedings. The Income-tax Officer disallowed the claim on the ground that in the years of assessment, the shares purchased by the assessee yielded no dividend. The disallowance was upheld by the Appellate Assistant Commissioner in the assessee's appeals. In further appeal to the Tribunal, the assessee reiterated his challenge against the liability. The Tribunal allowed the claim of deduction holding that regardless of the fact whether the shares yielded dividend or not, payment of interest was allowable as a deduction.
3. Learned standing counsel for the revenue claims that the view taken by the Tribunal is contrary to the provisions of the statute. According to learned standing counsel, Section 14 of the Act gives the classification of income under six heads, namely :
A. Salaries. B. Interest on securities. C. Income from house property. D. Profits and gains of business or profession. E. Capital gains. F. Income from other sources. 4. Specific provision has been made in Chapter IV regarding computation of income from the different heads. In fact Chapter IV is divided into six sub-heads beginning from Section 15. Under head A relating to salaries,
sections 15 to 17 come while under head B relating to interest on securities, sections 18 to 21 are grouped. Similarly, sections 22 to 27 relate to the third head C dealing with income from house property. Sections 28 to 44B relate to the fourth head D relating to profits and gains of business or profession. Sections 45 to 55A deal with head "E" relating to capital gains and the last head F deals with income from other sources and Sections 56 to 59 make provision for it. It is claimed that under each of the heads, admissible deductions have been separately indicated. "Dividend income" would come under the residuary head F. Therefore, unless interest as a deduction is admissible under Section 57 of the Act, the assessee's claim cannot be sustained.:
Section 57 6f the Act provides :
"The income chargeable under the head ' Income from other sources ' shall be computed after making the following deductions, namely:--
(i) in the case of dividends, any reasonable sum paid by way of commission" or remuneration to a banker or any other person for the purpose of realising such dividend on behalf of the assessee;
(ii) in the case of income of the nature referred to in Clauses (ii) and (iii) of Sub-section (2) of Section 56, deductions, so far as may be, in accordance with the provisions of Sub-clause (ii) of Clause (a) and Clause (c) of Section 30, Section 31, and Sub-sections (1), (1A) and (2) of Section 32 and subject to the provisions of Sections, 34 and 38 ;
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income."
5. It is argued that as the claim of the assessee is not covered by Section 57, deduction had been rightly rejected at the assessment stage and the Tribunal went wrong in accepting the claim. ' Reliance is placed on two decisions on behalf of the revenue in support of its contention. The first i3 the case of Kameshwar Singh v. Commssioner of Income-tax [1957] 32 ITR 377 (Pat). Assessee in that case had claimed deduction of interest on loans taken for payment of call moneys on shares of companies which are found to be new and which had not declared dividends. The scope of Section 12(2) of the Income-tax Act, 3922, arose for consideration of the Patna High Court. Section 1-2(2) provided thus :
"Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains and further in the case of any income by way of dividend, for any reasonable sum paid by way of commission or remuneration to a banker or any other person realising such dividend on behalf of the assessee, provided that no allowance shall be made on account of-
(a) any personal expenses of the assessee, or
(b) any interest chargeable under this Act which is payable without the taxable territories, not being interest on a loan issued for public subscription before the 1st day of April, 1938, or not being interest on which tax has been paid or from which tax has been deducted under Section 18, or
(c) any payment which is chargeable under the head 'Salaries' if it is payable without the taxable territories and tax has not been paid thereon nor deducted therefrom under Section 18."
6. The court referred to a decision of the Supreme Court in the case of Eastern Investments Ltd, v. Commissioner of Income-tax [1951] 20 ITR 1 (SC) and ultimately concluded by saying--See [1957] 32 ITR 377, 389, 390 (Pat):
"In the Supreme Court case [1951] 20 ITR 1 (SC), the interest was paid by the company on the money borrowed by it and utilised for investment which earned income, and, as such, it was held that although the loan was taken on an overdraft, as it was utilised for investments on which the company earned income, the interest paid by the company on such loan was a permissible deduction under Section 12(2) of the Act. In the present case, however, the position is different. The Tribunal has found that the income-tax, either Central or Provincial, being personal liability, was not an expenditure incurred for earning any income. Similar was the position in law with regard to the payment of interest on overdrafts taken for payment of land revenue and cess.
Mr. Mazumdar, however, strenuously urged that as far as the interest paid on overdrafts for call money for purchasing of shares was concerned, this deduction should have been allowed under Section 12(2) of the Act. The Appellate Assistant Commissioner has found that the assessee paid the call money of shares in companies which were new and which had not declared dividends, and, as such, there was no income to the assessee whatsoever from these sources, and, therefore, if there was no such income that has any inseparable connection with the interest payment, no deduction for interest was permissible. He, therefore, found that the interest paid on borrowed money for purposes of investment in shares was not expense solely incurred for the purposes of making or earning the income and was, on the other hand, capital expenditure for acquiring an investment, and, as such, the deduction claimed by the assessee on this account was disallowed."
7. This position was sustained by the Patna High Court. The other case relied upon by the revenue is that of the Calcutta High Court in Madanlal Sohanlal v. Commissioner of Income-tax [1963] 47 ITR 1 (Cal). The learned judges referred to the very same decision of the Supreme Court which was relied upon in the Patna decision. They also took into account two decisions of the Bombay and Allahabad High Courts reported in [1959] 36 ITR 329 (Bom) (Ormerods (India.) Private Ltd. v. Commissioner of Income-tax) and [1960] 39 ITR 696 (All) (Chhail Behari Lal v. Commissioner of Income-tax) respectively taking the contrary view, but ultimately agreed with the Patna decision that, unless dividend was earned, deduction was not admissible.
8. In the Bombay case [1959] 36 ITR 329, 334 (Bom) it was observed in the following way :
"Sub-section (2) (of Section 12) does not say that the deduction is permissible when any income has been earned or profits or gains made. All that it speaks of is that the expenditure must have been laid out solely for the purpose of earning income. There is nothing in the language of the section to suggest that the purpose needs to be fulfilled nor is it necessary that the purpose should fructify into any benefit to the assessee by way of return in the shape of income."
9. In the Allahabad decision [1960] 39 ITR 696, 700 (All), though no independent reasons were given, the following conclusion was adopted by the Division Bench :
"Since the reasons which led us to take the view have already been mentioned in detail in the judgment of the Bombay High Court, we do not consider it necessary to express them again in this judgment and we think it is enough for us to say that, with respect, we agree with the reasons as well as the decision of the Bombay High Court in the case cited above."
10. In the case of Appa Rao v. Commissioner of Income-tax [1962] 46 ITR 511 (Mad) a Bench of the Madras High Court examined the self-same question. The court took into account the view of the Patna High Court and the opinion expressed by the Bombay and Allahabad High Courts and came to the conclusion that interest paid on capital borrowed for purchase of shares can be deducted from other income falling under section 12 of the Indian Income-tax Act, 1922, even though there was no dividend income from the shares.
11. The matter arose for consideration in the case of Commissioner of Income-tax v. Dr. Fida Hussain G. Abbasi [1969] 71 ITR 314, 317 (MP), before the Madhya Pradesh High Court. Dixit C.J., speaking for the Bench, observed:
"In our opinion, all that Section 12(2) requires is that the expenditure should be incurred solely for the purpose of earning income or making profits or gains, that it is not required that it should be fruitful and that interest found to have been paid on money borrowed for investing in shares in a company is a legitimate deduction under Section 12(2) of the Act."
12. The self-same question came up again before the Allahabad High Court for consideration in the case of Seth Banarsi Das Gupta v. Commissioner of Income-tax [1971] 81 ITR 170 (All). Oak C.J., delivering the judgment for the Bench, preferred to follow the Bombay view as approved earlier by the Allahabad High Court.
13. Learned standing counsel wanted to distinguish these cases taking a contrary view by saying that the scheme under the 1961 Act is different. We have not been able to appreciate the submissions of the learned standing counsel on this score. Essentially, Section 6 of the 1922 Act corresponds to Section 14 of the new Act in the same manner as Sections 7, 8, 9, 10, 11 and 12 made provisions in relation to these six heads under the new Act. The various sub-heads appearing in Chapter IV of the Act made detailed provisions. Essentially, therefore, there does not appear to be any distinction. We are of the view that the decisions referred to above are available to be relied upon in interpreting the corresponding position under the new Act. Section 12(2) of the 1922 Act in essence corresponds to the provisions of Section 57(iii) of the new Act. We are of the view that the reasonings given in the Bombay decision referred to above which have been followed by the Allahabad, Madhya Pradesh and Madras High Courts in the cases referred to above represent the correct state of law and, therefore, even if no profit is earned from the shares by way of dividend, the deduction of interest paid on the loans invested for acquisition of shares is deductible as an expense.
14. Our answer to the question referred, therefore, shall be :
On the facts and in the circumstances of the case, the interest on moneys borrowed for purchase of shares should be allowed as a deduction even though the shares had not yielded any dividend in the relevant accounting years.
15. We make no order as to costs.
Panda, J.
16. I agree.