1970 (9) TMI 14 - HC - Income Tax

Interest paid on money borrowed for the purchase of shares - whether it would fall under section 10(2)(iii) or under section 12(ii) - deductibility

Issues Involved:

1. Assessability of sums received as income.
2. Nature of the share acquired in the sugar mills.
3. Allowance of depreciation on the acquired share.
4. Deduction entitlement for interest paid on borrowed money for share purchase.

Issue-wise Detailed Analysis:

1. Assessability of Sums Received as Income:

The court analyzed whether the sums of Rs. 16,000 and Rs. 39,262 received by the assessee from Seth Kanshi Ram and Seth Devi Chand, respectively, were assessable as income. The assessee had entered into a lease agreement and later received these sums as part of a compromise when the lease was repudiated. The court referred to several precedents, including *Commissioner of Income-tax v. Panbari Tea Co. Ltd.*, *Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax*, and *Commissioner of Income-tax v. Vazir Sultan & Sons*, to distinguish between capital and revenue receipts. The court concluded that the sums received were in lieu of expected profits, thus constituting assessable income. The court stated, "The substituted sum of Rs. 68,000 for the estimated profits was of the nature of profits to be received by the defendant (sic assessee) Rs. 16,000 is a part of the total amount of Rs. 68,000. Consequently, the sum of Rs. 16,000 received by the assessee was its income assessable to tax." Similarly, the sum of Rs. 39,262 was also deemed assessable as income.

2. Nature of the Share Acquired in the Sugar Mills:

The court addressed whether the assessee acquired a 1/6th share of the sugar mills or merely a 1/6th interest in the property. The Tribunal had used the terms "share" and "interest" interchangeably but did not consider any substantial difference between them. The court clarified that the assessee obtained a 1/6th share in the sugar mills under a deed of exchange. The court stated, "There is, therefore, no difficulty in holding that under the deed of exchange the second party did obtain 1/6th share of the sugar mills." Thus, the question was answered in favor of the assessee.

3. Allowance of Depreciation on the Acquired Share:

The court examined whether the assessee was entitled to claim depreciation on the 1/6th share in the sugar mills. The relevant provision was clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922, which allows depreciation on "buildings, machinery, plant or furniture being the property of the assessee." The court held that ownership of a fractional share does not qualify for depreciation under this clause. The court reasoned, "Such separate claims for depreciation with respect to the same item of machinery are likely to create confusion. Clause (vi) should, therefore, be construed strictly." Consequently, the claim for depreciation was denied.

4. Deduction Entitlement for Interest Paid on Borrowed Money for Share Purchase:

The court considered whether the assessee was entitled to a deduction of Rs. 75,211 paid as interest on money borrowed to purchase shares of Jaswant Sugar Mills Ltd. The court referred to precedents such as *Ormerods (India) Private Ltd. v. Commissioner of Income-tax* and *Chhail Behari Lal v. Commissioner of Income-tax*, which allowed such deductions. The court noted that the Tribunal did not record a definite finding on whether the shares were purchased in connection with the assessee's business. However, even if the shares were not connected to the business, the deduction could still be allowed under sub-section (2) of section 12 of the Act. The court concluded, "The Tribunal was, therefore, right in taking the view that the assessee is entitled to deduction of Rs. 75,211 on account of interest paid on the loan taken for acquiring shares of Jaswant Sugar Mills Ltd."

Conclusion:

The court answered the questions as follows:
1. The sums of Rs. 16,000 and Rs. 39,262 were assessable as income (against the assessee).
2. The assessee acquired a 1/6th share of the sugar mills (in favor of the assessee).
3. Depreciation on the 1/6th share was not allowable (against the assessee).
4. The assessee was entitled to a deduction of Rs. 75,211 on account of interest paid (in favor of the assessee).

Parties were directed to bear their own costs in this reference.

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