1971 (7) TMI 23 - HC - Income Tax

Assessee speculator in cotton and shares also derives income from salary, properties and dividends. At the end of S.Y. 2014, corresponding to the assessment year 1959-60, his liabilities included an overdraft from the Bank and loans from sundry creditors - whether interest paid to Bank on over draft is allowable if there is no evidence that the over draft was created for purchase of shares

Summary

Issues:
Interpretation of section 12(2) of the Income-tax Act, 1922 regarding deduction of interest paid on bank overdraft against dividend income.

Analysis:
The judgment by the High Court of Bombay involved the interpretation of section 12(2) of the Income-tax Act, 1922 concerning the deduction of interest paid on a bank overdraft against dividend income. The assessee, a speculator in cotton and shares, also derived income from salary, properties, and dividends. The assessee claimed a deduction of interest paid to the bank and other creditors against the dividend income. The Income-tax Officer and the Appellate Assistant Commissioner allowed the deduction as a business loss under section 10(2)(iii, contrary to the assessee's claim under section 12(2). The Tribunal partially allowed the deduction only for the interest paid to the bank. The High Court directed the Tribunal to refer the question of the admissibility of the deduction under section 12(2) based on the purpose of incurring the expenditure solely for earning the dividends.

The court analyzed the provisions of section 12(2) which allow deductions for expenditures incurred solely for earning the income. The Tribunal's decision was criticized for not applying its mind to the specific provisions of section 12(2) and for failing to establish a clear correlation between the interest paid and the purpose of earning dividends. The court emphasized that the mere connection between borrowed funds and shares purchased is insufficient to justify the allowance of interest in the computation of dividend income.

Referring to a previous judgment, the court highlighted that the object or purpose of incurring the expenditure, specifically for earning dividend income, is crucial for claiming deductions under section 12(2). The court rejected the argument that the borrowing through an overdraft was for the purpose of acquiring shares to earn dividends, as the assessee failed to establish this intent. The court also dismissed the argument that the assessee had turned into an investor, as it was not raised earlier in the proceedings.

The court differentiated this case from other precedents where facts necessary for the court's opinion were not found by the Tribunal. Ultimately, the court held that the assessee was not entitled to the deduction allowed by the Tribunal, and the question was answered in the negative. The assessee was directed to pay the costs of the reference to the Commissioner.