1965 (5) TMI 1 - HC - Income Tax

Interest paid on borrowed capital - whether deductible u/s. 8 if no interest had been derived by the assessee from the securities acquired by him from such capital - answer to the question referred would be in the negative

Summary

Issues:
Interpretation of section 8 of the Indian Income-tax Act, 1922 regarding the allowance of expenditure in excess of income under the head "Interest on securities."

Analysis:
The judgment involved a reference under section 66(1) of the Act on whether expenditure exceeding income (negative income) could be allowed under section 8. The case revolved around an assessee who purchased debentures but received no interest, leading to claimed losses. The Income-tax Officer disallowed these items, but the Appellate Assistant Commissioner allowed the deductions. The Appellate Tribunal later set aside the Commissioner's decision, leading to the current reference.

The Appellate Tribunal analyzed the language of section 8 and distinguished it from other sections, emphasizing the wording of the proviso. The section pertains to interest on securities and allows for deductions on interest payable on money borrowed for investment in securities. The Tribunal's decision was based on interpreting this specific language and its implications.

The counsel for the assessee argued for deductions based on common sense and business practices, emphasizing that interest paid on borrowed capital should be deductible. They referenced the draft bill and subsequent Act of 1961 to support their interpretation. However, the court noted that statements in draft bills are not valid for interpreting enacted laws. The court also highlighted the distinction in language between section 8 and other sections, indicating a legislative intention to treat interest on securities differently.

The court examined the unhappy wording of the proviso in section 8 and referred to a Calcutta case for guidance. The observations from the case supported the view that deductions should only be allowed when there is actual income from interest on securities. The court concluded that the intention of the legislature was clear in allowing deductions only when interest income is realized, and the wording of section 8 supports this interpretation.

Ultimately, the court upheld the decision of the Appellate Tribunal, ruling that the view taken was correct. The answer to the reference question was in the negative, affirming that expenditure exceeding income could not be allowed under section 8. The judgment highlighted the importance of interpreting tax laws based on legislative intent and specific language used in relevant sections.

The judges, A. N. Grover and S. K. Kapur, both concurred in answering the question in the negative, leaving the parties to bear their own costs.