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Issues Involved:
1. Whether the interest paid on a loan taken for investment, which did not yield any income during the relevant previous year, is allowable as a deduction in computing the assessable profits under section 12(2) of the Indian Income-tax Act. Issue-wise Detailed Analysis: 1. Deductibility of Interest Paid on Loan for Investment Under Section 12(2) The core issue in this case is whether Rs. 31,500 paid as interest on a loan taken for an investment that did not yield any income during the relevant previous year is allowable as a deduction in computing the assessable profits under section 12(2) of the Indian Income-tax Act. Facts and Background: The applicant, a registered firm, took a loan on overdraft from the Hongkong Shanghai Banking Corporation Ltd. to purchase shares in Norton Brown Ltd. and Hall & Anderson Ltd. The overdraft interest amounted to Rs. 63,298, of which Rs. 31,500 was relevant to the assessment year 1948-49. The Income-tax Officer disallowed the interest deduction, stating that the loans were for acquiring shares by the partners and their family members, not for the business purpose of the assessee. Appellate Assistant Commissioner's Findings: The Appellate Assistant Commissioner allowed the deduction of Rs. 31,500, noting that the appellant purchased shares to control Hall & Anderson Ltd. and Norton Brown Ltd. Appellate Tribunal's Decision: The Tribunal concluded that the loan was for investment purposes and, under section 12(2), interest could only be claimed if the investment yielded income. Since no dividend was received, the interest was not allowable as a deduction. Legal Analysis: The judgment involved interpreting and comparing section 12(2) and section 10(2)(xv) of the Indian Income-tax Act. The court referenced various precedents, including Eastern Investments Ltd. v. Commissioner of Income-tax, which established that it is not necessary to show that the expenditure was profitable or that any profit was earned. However, the court emphasized that section 12(2) requires expenditure to be incurred solely for making or earning income, profits, or gains. Key Precedents and Judicial Interpretations: - Eastern Investments Ltd. v. Commissioner of Income-tax: The Supreme Court held that expenditure need not be profitable or result in profit, but it must be for earning income. - Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax: The Patna High Court held that section 12(2) is narrower than section 10(2)(xv), requiring expenditure solely for making or earning income. - Ormerods (India) Private Ltd. v. Commissioner of Income-tax and Chhail Behari Lal v. Commissioner of Income-tax: These cases took a broader view, allowing deductions even if no income was earned, provided the expenditure was for earning income. Court's Conclusion: The court concluded that section 12(2) requires actual income or return against which deductions can be claimed. The absence of any income or return means the expenditure cannot be deducted. The court distinguished between sections 10(2)(xv) and 12(2), noting that the former does not require earning income, while the latter does. Final Judgment: The court answered the question in the negative, holding that the interest paid on the loan taken for an investment that did not yield any income during the relevant previous year is not allowable as a deduction under section 12(2). Separate Judgment by Bose J.: Bose J. concurred, emphasizing that deductions under section 12(2) require some income from "other sources" to be assessed. Without income, no expenditure can be deducted. He referenced the Privy Council's interpretation in Commissioner of Income-tax v. Basant Rai Takhat Singh and upheld the Tribunal's finding. Summary: The High Court ruled that the interest paid on a loan taken for an investment, which did not yield any income during the relevant previous year, is not allowable as a deduction under section 12(2) of the Indian Income-tax Act. The court emphasized the necessity of actual income or return for claiming such deductions, distinguishing it from section 10(2)(xv), which has broader criteria for allowable expenditures.
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