1968 (8) TMI 26 - HC - Income Tax

Assessee is not admittedly a dealer in shares - business income - deduction - income arose to the assessee out of the investments on shares - it would not fall under the head business but only under the head other sources - expenditure incurred by way of interest paid in respect of investments made for buying shares cannot be claimed as a business expenditure of the assessee

Summary

Issues Involved:
1. Deduction of interest paid on loans for acquiring shares under Section 10(2)(iii) or (xv) or Section 12 of the Indian Income-tax Act, 1922.
2. Validity of disallowance of interest as not admissible under the aforementioned sections.

Issue-wise Detailed Analysis:

1. Deduction of Interest Paid on Loans for Acquiring Shares under Section 10(2)(iii) or (xv) or Section 12 of the Indian Income-tax Act, 1922:

The assessee, a Hindu undivided family engaged in banking and chit business, claimed deductions for interest paid on loans used to acquire shares in various companies. The relevant deductions were Rs. 18,525 for the assessment year 1958-59 and Rs. 17,514 for 1959-60. The assessee argued that these investments were part of its business activities and necessary for the furtherance or preservation of its business.

The Income-tax Officer disallowed these claims, stating that the investments were unrelated to the assessee's business and did not yield any income. The Appellate Assistant Commissioner upheld this decision, noting that the investments were not regular business transactions. The Income-tax Appellate Tribunal also dismissed the appeals, affirming that the investments were unconnected with the assessee's business and not part of its normal banking activities.

The Tribunal emphasized that the assessee was not a dealer in shares and that any income from these investments would fall under "other sources," not "business." Consequently, the interest paid on these investments could not be claimed as business expenditure. The court agreed with this assessment, concluding that the first part of the questions must be answered against the assessee.

2. Validity of Disallowance of Interest as Not Admissible under Section 10(2)(iii) or (xv) or Section 12 of the Indian Income-tax Act, 1922:

The court examined whether the interest expenditure could be allowed under Section 12 of the Act. The Appellate Tribunal had stated that there was no direct connection between the money borrowed and the purchase of shares. The Tribunal also noted that the investments were not regular business transactions and were primarily in companies where the assessee's family had interests.

The court reviewed relevant case law, including decisions from the Madras, Calcutta, Patna, and Bombay High Courts. The Madras High Court in P. V. Mohamed Ghouse v. Commissioner of Income-tax supported the assessee's claim, asserting that the absence of income does not bar the deduction of interest expenditure under Section 12(2). The Calcutta High Court in Madanlal Sohanlal v. Commissioner of Income-tax took a contrary view, stating that deductions under Section 12(2) are not permissible without any income from "other sources."

The court favored the view of the Madras High Court, which aligned with the decisions of the Bombay and Allahabad High Courts. It held that the right to allowances under Section 12(2) does not depend on the receipt of income in the relevant year. The court cited the principle that unremunerative expenditure made for the purpose of trade is deductible, even without corresponding income.

Thus, the court concluded that the interest paid on loans for acquiring shares is an allowable deduction under Section 12(2) of the Act. The first part of the first question was answered in the negative, against the assessee, while the second part was answered in the affirmative, in favor of the assessee. This conclusion governed the second question in both cases, with each party bearing its own costs.