1960 (4) TMI 66 - HC - Income Tax

Summary

Issues:
Interpretation of Section 12(2) of the Indian Income-tax Act of 1922 regarding deduction of interest paid on money borrowed for purchasing shares in a company that yielded no income. Application of Section 24(1) of the Income-tax Act for setting off the loss incurred by interest paid against income from other sources.

Analysis:
The judgment by the High Court of Allahabad involved two partners in a firm who borrowed money from the firm to purchase shares in a company but did not receive any dividends on those shares during the relevant year. They paid interest to the firm for the borrowed sum, which they claimed as a deductible expenditure under Section 12(2) of the Income-tax Act to compute income from dividends. The Income-tax Appellate Tribunal denied this set-off, leading to the reference of the question to the High Court.

The court considered the case in light of a similar decision by the Bombay High Court, which allowed the set-off of the loss incurred by interest on borrowed money for investment against income from other sources under Section 24(1) of the Income-tax Act. The judges agreed with the Bombay High Court's reasoning and decision, emphasizing that the loss from interest paid could be legitimately set off against income from other heads as per the provisions of the Act.

Therefore, the High Court answered the referred question in the affirmative, stating that the assessee is entitled to deduct the interest paid on money borrowed for purchasing shares in a company that yielded no income from their other income, profits, and gains to arrive at the correct taxable income. The court awarded costs to the assessee and fixed it at Rs. 200.

In conclusion, the judgment clarified the applicability of Section 12(2) and Section 24(1) of the Income-tax Act in allowing the deduction of interest paid on borrowed money for investment purposes against income from other sources, even if the investment did not yield any income during the relevant period. The decision aligned with the interpretation by the Bombay High Court and provided a favorable outcome for the assessee in this case.