1977 (9) TMI 1 - SC - Income Tax

The assessee agreed to buy share from a bank, but did not take delivery of the shares even after paying the price. The dividends were held by the bank for the assessee s benefit, whether the interest charged on purchase price and the damages for the failure to take delivery of shares are allowable expenditure- appeal of assessee is allowed in part

Issues Involved:
1. Deduction of interest payment of Rs. 2,04,744.
2. Deduction of damages amounting to Rs. 1,05,000.
3. Inclusion of dividend income of Rs. 95,664 in the total income of the assessee.

Detailed Analysis:

1. Deduction of Interest Payment of Rs. 2,04,744:
The primary issue was whether the assessee was entitled to deduct the interest paid for acquiring shares worth Rs. 44,14,990 under section 12(2) of the Indian Income-tax Act, 1922. The assessee argued that the interest amount of Rs. 2,04,744 paid on the borrowed sum should be deductible as it was incurred solely for the purpose of earning income, specifically dividends and bonuses from the shares.

The Tribunal and the High Court had previously rejected this claim, stating that there was no transfer of equitable title in the shares to the assessee, and the interest paid was of a capital nature. However, the Supreme Court found that the question of equitable transfer was not necessary to decide the issue of interest deduction. Instead, the Court focused on the scope and ambit of section 12(2) of the Act.

The Court referred to the case of Eastern Investments Ltd. v. Commissioner of Income-tax [1951] 20 ITR 1 (SC), where it was held that interest paid on borrowed capital used for investments was a permissible deduction under section 12(2). The Court concluded that the interest of Rs. 2,04,744 paid by the appellant was incurred solely for the purpose of earning income, fulfilling the conditions of section 12(2), and thus was a permissible deduction.

2. Deduction of Damages Amounting to Rs. 1,05,000:
The second issue was whether the damages of Rs. 1,05,000 paid by the assessee to the Bharat Bank for not taking delivery of the shares were deductible as business expenditure. The Tribunal and the High Court had disallowed this deduction, reasoning that the assessee's main business was not dealing in shares, and the damages paid were due to the assessee's own default, thus constituting a capital expenditure rather than a revenue one.

The Supreme Court agreed with this view, stating that the damages paid were indeed a capital expenditure and not deductible as business expenditure.

3. Inclusion of Dividend Income of Rs. 95,664 in the Total Income of the Assessee:
The third issue was whether the dividend income of Rs. 95,664 should be included in the total income of the assessee. The Tribunal had deleted this amount from the total income, and the High Court had affirmed this decision. However, the Supreme Court noted that if the interest payment of Rs. 2,04,744 was allowed as a deduction under section 12(2), then the dividend income must be included in the total income of the assessee.

The Supreme Court set aside the order of the High Court and the Tribunal deleting the dividend income, thereby including the amount of Rs. 95,664 in the total income of the assessee.

Conclusion:
The Supreme Court allowed the appeal in part, holding that the assessee was entitled to a deduction of Rs. 2,04,744 under section 12(2) of the Act. However, the Court affirmed the High Court's decision disallowing the deduction of Rs. 1,05,000 as damages. Additionally, the Court included the dividend income of Rs. 95,664 in the total income of the assessee. The parties were directed to bear their own costs.

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