Madras High Court
The Commissioner Of Income-Tax Cent.I vs M.Ethurajan on 15 July, 2004
Author: P.D.Dinakaran
Bench: P.D.Dinakaran
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 15/07/2004 CORAM THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE N.KANNADASAN T.C.(A).No.230 of 2004 The Commissioner of Income-Tax Cent.I Chennai. .. Appellant -Vs- M.Ethurajan .. Respondent PRAYER: Appeal filed under Section 260A of the Income Tax Act, 1961 against the order dated 28.10.2003 of the Income Tax Appellate Tribunal, "A" Bench, Madras, in ITA No.1824/Mds/2002 for the assessment year 1996-97. !For Appellant : Mr.J.Narayanasamy Standing Counsel for Income Tax Department ^For Respondent : -- :JUDGMENT
(Judgment of this Court was delivered by P.D.DINAKARAN,J.) The appellant is the revenue. The appeal is directed against the order dated 28.10.2003 made in I.T.A.No.1824/ Mds/2002, by the Income Tax Appellate Tribunal, "A" Bench, Madras, holding that the investment made by the respondent/assessee, according to the directions of the BIFR with the view to sustain the control over the company and to protect the shares already existed in the company, is a reasonable expenditure and is wholly and exclusively made for the purpose of earning of income, and therefore, the residuary provision under Section 57( iii) of the Income Tax Act (for brevity "the Act") is applicable to this case, as the same is not a capital expenditure, but an expenditure laid out or expended wholly and exclusively for making or earning such income.
2.1. Concisely, the impugned appeal is related to the assessment year 1996-1997. The respondent/assessee filed a return of income claiming a deduction of Rs.60,00,000/- (Rs.52,00,000/- to Sundaram Finance and Rs.8,10,000/- to Diamond Districts) being the interest paid on borrowed funds. During the assessment under Section 147 of the Act, it was found that the amount borrowed by the respondent/ assessee was loaned to Binny Ltd., which was a sick industrial company, of which the respondent/assessee was the Executive Chairman. But, the assessing officer, disallowed the interest on the said borrowed funds holding that it was not an expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income.
2.2 Aggrieved by the assessment order dated 27.3.2002, the respondent/assessee preferred an appeal, I.T.A.No.49/ 2002-2003 before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax ( Appeals), by order dated 27.8.2002, dismissed the appeal by order dated 27.8.2002 confirming the assessment order dated 27.3.2002.
2.3. Aggrieved by the order dated 27.8.2002 of the Commissioner of Income Tax (Appeals), the respondent/ assessee preferred a further appeal before the Income Tax Appellate Tribunal, 'A' Bench, Chennai. The Tribunal, by order dated 28.10.2003, held that the investment made by the respondent/assessee, according to the directions of the BIFR with the view to sustain the control over the company and to protect the shares already existed in the company, is a reasonable expenditure and is wholly and exclusively made for the purpose of earning of income, and therefore, the residuary provision under Section 57(iii) of the Income Tax Act (for brevity "the Act") is applicable to this case, as the same is not a capital expenditure, but an expenditure laid out or expended wholly and exclusively for making or earning such income.
2.4. As against the order of the Tribunal dated 28.10.2003, the appellant/revenue had preferred the present appeal on the following substantial questions of law:
(i) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the amount of interest free loan given to Binny & Co. Ltd.
by the assessee can be termed as amount expended for earning income from other sources? and
(ii) Whether in the facts and circumstances of the case, the Tribunal was right in holding that deduction under Section 57(iii) of the Act should be allowed of the interest paid on funds borrowed and given as interest free loan?
3. Heard Mr.J.Narayanaswamy, learned counsel for the appellant/ revenue.
4. Both the substantial questions of law raised by the appellant/ revenue boil down to the question whether the interest paid by the respondent/assessee on the borrowals, namely Rs.60,00,000/- should be treated as an expenditure (not being in the nature of capital expenditure), but laid out or expended wholly and exclusively for the purpose of earning such income for the purpose of deduction under Section 57( iii) of the Act?
5. At this juncture, it is apt to refer Section 57(iii) of the Act, which reads as under:
"Section 57: The income chargeable under the head 'income from other sources' shall be computed after making the following deductions, namely:
(i) to (ii) ...
(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."
(emphasis supplied)
6. It is not in dispute that the respondent/assessee was a major shareholder of Binny & Co. Ltd., which was referred to by the BIFR as a Sick industry, and the respondent/assessee borrowed moneys from Sundaram Finance and Diamond Districts and invested the same in Binny & Co. Ltd., to rehabilitate the said company under the BIFR scheme and to earn dividend therefrom, but however, the respondent/ assessee did not receive any dividend from the Company. Hence, the respondent/ assessee claimed deduction of a sum of Rs.60,00,000/- as interest paid on the said borrowals under Section 57(iii) of the Act.
7. Where the assessee borrowed moneys for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year, but did not receive any dividend on the shares purchased with those moneys, whether the interest on such moneys borrowed are admissible under Section 57(iii) of the Act in computing income from other sources came for the consideration of the Full Bench of the Apex Court in C.I.T. v. RAJENDRA PRASAD MOODY, [1978] Vol.115 ITR 519, wherein the Full Bench held that the interest on moneys borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under Section 57(iii) of the Act.
8. The plain and natural construction of the language of Section 57(iii) of the Act, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What Section 57(iii) of the Act requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction: it does not say that the expenditure shall be deductible only if any income is made or earned, vide C.I.T. v. RAJENDRA PRASAD MOODY, referred supra.
9. In view of the above well settled principle of law, we are satisfied that the substantial question of law raised by the counsel for the appellant/revenue is liable to be rejected. Hence, finding no reason to interfere with the order of the Tribunal dated 28.10.2003, this appeal is dismissed.
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