Decided on March 10,1961



P.B.MUKHARJI, J. - (1.) THIS income-tax reference under s. 66(1) of the IT Act raises the following question of law for the decision : "Whether, on the facts and in the circumstances of the case, Rs. 31,500 paid by the applicant as interest on the loan taken for an investment and which investment did not yield any income during the relevant previous year was allowable as a deduction in computing the assessable profits ?"
(2.) BEFORE proceeding to decide the question, it will be appropriate to give a brief account of the relevant facts. The applicant is a registered firm with four partners and the assessment year in question is 1948-49, the relevant previous year being 2004 R. N. The bone of contention relates to the payment of interest on an overdraft. The applicant firm took a loan on overdraft from the Hongkong Shanghai Banking Corporation Ltd., during the year 2003 R. N., in the name of Madanlal Sohanlal H. A. A/c., meaning thereby Hall and Anderson Ltd. account. The overdraft was utilised for purchasing shares of the value of Rs. 1,40,625 in the names of the partners of the applicant firm in two companies, Norton Brown Ltd. and Hall and Anderson Ltd. Norton Brown Ltd. are the managing agent of Hall and Anderson Ltd. On this overdraft a sum of Rs. 63,298 was paid as interest during the previous year relevant to this assessment. The essential point of significance in this case is that on the investment no income or dividend was received at all during the relevant previous year. The applicant claimed Rs. 63,298 so paid as interest as a deduction in computing the profits. The ITO disallowed it on the ground that "it represents interest on loan taken for the purpose of acquiring shares by the partners and members of their family. As such the loans cannot be treated as one for the purpose of the business of the assessee." On appeal to the AAC, it was found by the said AAC that Rs. 63,298 represented payment of interest for two years, i.e., 2003 and 2004 R. N., that Rs. 31,500 related to the accounting year 2004 R. N., and that the assessee was entitled to deduct only Rs. 31,500 and granted relief accordingly. It was found as a fact by the AAC that the "appellant in order to have control over the business of Hall and Anderson Ltd. jointly purchased with some other partners the entire share of the company as well Norton Brown Ltd.'s shares". The assessee in this case is a registered firm by the name of Madanlal Sohanlal. The ITO thereupon appealed to the Appellate Tribunal contending (1) that as the shares were acquired mainly with a view to control the companies, it could not be said that the expenditure was incurred solely for earning dividend and (2) as there was no receipt by way of dividend the interest paid could not be said to have been incurred for the purpose of making or earning the income. The assessee contended that as the assessee firm jointly held with four other parties only 2,76,640 shares out six lakhs shares of Hall and Anderson Ltd., it could not be said that the purchase was to obtain the controlling interest or control over the company. The Tribunal found that in company matters a large block of shares, as in this case, did, on occasions, confer such a majority as to amount almost to a control and came to the conclusion that the amount had been admittedly borrowed for the purpose of investment and as such interest on the loan could be claimed only under s. 12(2) of the IT Act, but as no dividend was received during the year, interest paid or payable on the amount borrowed for the purpose of investment could not be allowed as an expenditure. The Tribunal, therefore, set aside the order of the AAC. It will be apparent from the above statement of facts that the decision in this case will involve an interpretation and comparison of s. 12(2) and s. 10(2) (xv) of the It Act. The points is controversial and, as usual with almost every section of the It Act, there are conflicting decisions of the Courts. A brief reference to them will, therefore, be essential and inevitable.
(3.) THE earliest decision relevant on the point is Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1,4, 5. It was a decision on s. 12(2) of the IT Act and although the appeal was allowed by the Supreme Court, Bose J. at page 598 expressed the view that the law on the point of true construction of s. 12(2) of the IT Act was correctly summarised in the judgment of the High Court. Bose J. at page 598 of the SCR laid down four principles as "relevant". One such principle was "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". This principle was supported by reference to two English decisions, one being Moore vs. Stewarts and Lloyds Ltd(supra). and the other in Usher's case (supra). On the basis, it is contended on behalf of the assessee that although on the facts of this case no income whatever or no dividend whatever has been earned or made, the making or earning of a dividend or income is not necessary to come within s. 12(2) of the IT Act. Therefore, it is contended that the Tribunal was wrong. This argument of the assessee would have been unanswerable but for the fact that the principle which the Supreme Court was laying down for the construction of s. 12(2) has to be r/w the observation which the Supreme Court made in that very case at page 601, where Bose J. observed as follows : "This being an investment company, if it borrowed money and utilised the same for its investments on which it earned income, the interest paid by it on the loans will clearly be a permissible deduction under s. 12(2) of the IT Act." ;

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