1970 (3) TMI 51 - HC - Income Tax

Assessee was allotted shares by company - non payment of further calls on due dates - claim for deduction of the amount paid as interest from the due dates - since interest paid was solely for the purpose of earning the dividend income it cannot be treated as capital expenditure

Summary

Issues:
Assessment of interest expenditure as capital expenditure or deductible under section 12(2) for earning dividend income.

Analysis:
The case involved the assessment of interest expenditure incurred by an assessee in connection with owning shares of a company. The assessee applied for 2,700 ordinary shares, paying the application money and subsequent calls. The company demanded interest on delayed payments, threatening share forfeiture. The Tribunal initially ruled the interest expenditure as capital expenditure, not solely for earning dividend income. However, the Tribunal's findings lacked documentary evidence and were based on conjectures, leading to an unjustified decision.

The assessee argued that upon share allotment, she became the owner without further capital expenditure. The interest paid was to maintain share ownership, not to enhance capital value. The revenue contended the interest was capital expenditure as it related to share acquisition, not solely for earning dividends. The court noted that the interest payment was crucial to prevent share forfeiture, preserving the asset's value for dividend income. The court emphasized that the interest payment was akin to borrowing for share investment, where interest would be deductible for dividend income.

The court ultimately held that the interest expenditure of Rs. 9,020 was solely for earning dividend income, not capital expenditure. The payment was necessary to protect the asset and maintain dividend income. Therefore, the Tribunal's decision was overturned, and the question was answered in favor of the assessee. The Commissioner was directed to pay costs.

In conclusion, the judgment clarified that the interest expenditure on share payments was deductible for earning dividend income, not capital expenditure. The decision highlighted the importance of interest payments in preserving share ownership and income generation, ultimately benefiting the assessee.