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TMI Blog2014 (5) TMI 940X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of investment in Maharashtra State Road Development Corporation ('MSRDC 2018 Bonds' for short). It was also noticed that the assessee Company sold 3563 number of these bonds and claimed the profit thereon as 'Long Term Capital Gains'. That was assessed by the Assessing Officer as 'Short Term Capital Gains'. The Assessing Officer disallowed the interest of Rs.5,06,44,796/-incurred by the assessee in relation to bonds sold during the year as there was no provision for allowing interest on funds borrowed in the computation of income under the head 'Capital Gains'. Further, the disallowance was also made by the Assessing Officer for the reason that the bonds were transferred before the end of the year and the only income that can accrue on these bonds was 'Short Term Capital Gains. Mr.Gupta, therefore, submits that the disallowance and various additions which were made by the Assessing Officer were challenged by the assessee before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) confirmed the disallowance of Rs.5,06,44,796/-made by the Assessing Officer being interest on bonds that had been sold during the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance is rightly placed on the case of Moody (supra) because discussing the same sections, namely, Section 36 and section 57, the Hon'ble Supreme court held that there is absolutely no scope for reading into this provision something which is expressly not provided therein. The plain natural construction of the language leads to the conclusion that to bring a case within the section, namely, Section 57(iii) it is not necessary that any income should in fact have been earned as a result of the expenditure. He submits that, in the later decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax v/s Meghdoot Hotels (Pvt.) Ltd., reported in (1996) 220 ITR 185, referred by the Division Bench in Income Tax Appeal No.2620 of 2010, the asset in which the money was invested was eventually sold. However, for the purpose of acquisition of that asset, money was borrowed and thereafter invested. The Supreme Court formulated question No.1 and arrived at a conclusion that for the purpose of Section 36(1)(iii) of the Income Tax Act it is not necessary that the asset must be continued to be held. The asset can be disposed of or sold of. However, the deduction is on the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;. That income shall be computed after deductions are made and one of the deductions is allowed in respect of an expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. 9. In the first decision cited before us by Mr.Mistry, the Hon'ble Supreme Court dealt with a case of the assessees who were brothers. They borrowed moneys for the purpose of making investment in shares of certain companies and during the assessment year 19651966 for which the relevant accounting year ended on 10th April, 1965. Each of the two assessees paid interest on the moneys borrowed but did not receive any dividend on the shares purchased with those moneys. Each of the assessee made a claim of dividend on the borrowed money but this claim was negatived by the Income Tax Officer and equally in appeal on the ground that during the relevant assessment year the shares did not yield any dividend and, therefore, interest paid on the borrowed moneys could not be regarded as expenditure laid out or expended only on or exclusively for the purpose of making or earning income chargeable under the head "income from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had deliberately used words of narrower import in granting the deduction under Section 57(iii). Section 37(1) provided for deduction of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession in computing the income chargeable under the head "Profits or gains of business or profession". The language used in Section 37(1) was "laid out or expended for the purpose of the business or profession" and not "laid out or expended for the purpose of making or earning such income" and set out in section 57(iii). The words in Section 57(iii) being narrower, contended the revenue, they cannot be given the same wide meaning as the words in Section 37(1) and hence no deduction of expenditure could be claimed under Section 57(iii) unless it was productive of income in the assessment year in question. This contention of the revenue undoubtedly found favour with the High Court but we do not think we can accept it. Our reasons for saying so are as follows:- What Section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined. It would make no difference to this process whether the expenditure is X or Y or nil; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income. It is true that the language of Section 37(1) is a little wider than that of Section 57(iii), but we do not see how that can make any difference in the true interpretation of Section 57(iii). The language of Section 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose must be fulfilled so as to be expenditure qualified for deduction. The language of the section does not admit of a construction that the expenditure shall be debited only if any income is made or earned. The Hon'ble Supreme Court, therefore, has concluded the issue and in our opinion, in favour of the revenue. In doing that, the Hon'ble Supreme Court refers to the views of several High Courts including this Court and upholds them. 12. Even with regard to section 36 and that is a deduction in relation to the computation of income under section 28, the Hon'ble Supreme Court in the case of Veecumsees v/s Commissioner of Income Tax, reported in (1996) 220 ITR 185, held that the cinema house was eventually sold makes no difference so long as the liability by way of borrowings continues and subsists. The Hon'ble Supreme Court held that the revenue had during the years when the assessee carried on the business of cinematographic films permitted as a deduction under Section 36(1)(iii), the interest on loans obtained by the assessee for the purpose of constructing the said theatre shows that, at the time when the loans were obtained the said theatre was a part of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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