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Issues Involved:
1. Whether interest paid on borrowed capital for purchasing shares that did not yield dividend income can be set off against other income under section 24(1) of the Income-tax Act. Issue-wise Detailed Analysis: 1. Nature of Investment and Borrowing: The assessee, a private limited company, purchased shares in Gannon Dunkerley & Co. Ltd. for approximately Rs. 52 lakhs, borrowing Rs. 36 lakhs from the Empire of India Life Assurance Co. Ltd. These shares were pledged as security for the loan. Additional unsecured loans amounted to Rs. 13.5 lakhs. The Tribunal found that the investment was not a business venture but served the interests of some interested parties. The Tribunal held that if income from the shares was included in the assessee's assessment, the interest paid should be allowed as a deduction. The Tribunal stated, "We are unable to understand the stand taken by the Department that as dividend income is deemed to have accrued to the assessee, interest cannot be allowed." 2. Tribunal's Findings: The Tribunal concluded that the investment in shares was capital investment, and there could be no question of ascertaining a minus income from that source. It observed, "If any dividend income is included in the appellant's assessment, the interest should be allowed against such dividend income." The Tribunal also noted that the assessee did not have sufficient capital to possess the shares, indicating that the shares were held for the convenience of a third party. 3. Legal Question: The primary legal question referred to the High Court was: "Whether on the facts and in the circumstances of the case, interest paid on moneys borrowed for the purchase of shares in Gannon Dunkerley & Co. Ltd., which did not yield any dividend income, could be set off against other income under section 24(1) of the Income-tax Act?" 4. Arguments Presented: The assessee's counsel argued that under section 24(1), losses under any head of income should be set off against other heads of income. They relied on section 12(2), which allows for deductions of expenditure incurred solely for earning income, profits, or gains, even if no income was actually earned. The counsel cited the Supreme Court's observation in Eastern Investment Co. Ltd. v. Commissioner of Income-tax, which stated, "It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned." 5. Department's Stand: The Department contended that the purpose of the borrowing was not to earn income but to serve the convenience of interested parties. They argued that the Tribunal's findings were conclusive and that the interest payment could not be set off against other income as the shares did not yield any dividend income. 6. High Court's Analysis: The High Court analyzed the Tribunal's findings and the legal provisions. It noted that the Tribunal had mixed up the concept of the purpose of the purchase of shares with the motive behind the purchase. The Court emphasized that under section 12(2), the purpose of the expenditure should be to earn income, profits, or gains, regardless of whether income was actually earned. The Court stated, "There is considerable force in the argument presented on behalf of the assessee." 7. Conclusion: The High Court concluded that the Tribunal had erred in its interpretation by giving overriding effect to the motive behind the purchase rather than the purpose. The Court held that the interest paid on borrowed capital for purchasing shares, even if they did not yield dividend income, could be set off against other income under section 24(1). The Court answered the question in the affirmative and directed the Commissioner to pay the costs. Judgment: The High Court answered the question in the affirmative, allowing the interest paid on borrowed capital for the purchase of shares to be set off against other income under section 24(1) of the Income-tax Act. The Commissioner was directed to pay the costs.
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