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TMI Blog1966 (2) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend income of ₹ 81,967. It may be stated that during the assessment year, the income earned by the assessee was from three sources: income earned by it from its business under the head business , income earned by it under the head securities and income earned by it under the head dividends . The Income-tax Officer did not allow the claim of the assessee for deduction of the said amount of ₹ 67,773 against its dividend income. The Income-tax Officer, however, allowed the said amount as deduction against the assessee's business income. The reasons given by the Income-tax Officer for disallowing the assessee's claim for deduction in his own words are: The position would have been different in the case of an investor who borrows money purely for the purpose of earning dividends and interest from investments; such a case would be no doubt covered by section 12(2). Even then no investor would borrow money for the purpose of investing in securities because he would have always to pay a higher rate of interest than what he would get from the securities. The assessee being a dealer in shares and securities, section 12(2) has no application here at all because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. 3. All the same, dividend income requires to be assessed under section 12, so that it is necessary to separate it from the otherwise trade receipts. In arriving at such income, which is the net income, all expenses necessary for the purpose of earning it have necessarily to be deducted. It cannot be disputed that the dividend in question has been earned only from the very shares which had been purchased out of the borrowings on which the impugned interest has been paid; had it not been for the interest payments, the dividend could not have been earned. The income from other sources to be assessed under section 12 will thus have to be only the net income from dividends after deduction of the interest paid to the bank. The assessee's contention is accordingly accepted. On an application by the Commissioner, the Tribunal has referred the following question of law to this court: Whether the interest of ₹ 67,773 is a proper deduction in the computation of the dividend income under section 12? The question thus that arises for decision relates to the construction of sub-section (2) of section 12 of the Act. Mr. Joshi, learned counsel for the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which falls for consideration. It is not in dispute that persons who carry on business as share and stock brokers deal both in shares and securities. The course of their activities is to purchase shares and securities and sell them with a view to earning profit in the process thereof. Prior to the introduction of sub-section (1A) in section 12, income received by way of interest on securities, which were the stock-in-trade of a person dealing in shares and securities, was computed under section 8, but income received by him by way of dividends from the shares, which were his stock-in-trade but held by him in the year of account, was computed under section 10. After the said amendment of section 12 in the year 1955, the dividend income is computed under section 12 of the Act Income by way of interest on securities continued to be computed under section 8 as before. Substituting the words income from dividends for the words such income, profits and gains in sub-section (2), the material part of sub-section (2) would read: Income from dividends shall be computed after making allowance for any expenditure incurred solely for the purposes of making or earning such dividend incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to the bank on its borrowing was an expenditure incurred solely for the purposes of making or earning dividend income within the meaning of sub-section (2) of section 12. We may look at the facts from a different angle having regard to the provisions of section 10 of the Act. Section 10 relates to the computatio of income under the head business . In computing the profits and gains of business, certain allowances enumerated in clauses (i) to (xv) of sub-section (2) are allowed as deductions, and clause (iii) of sub-section (2) is material for the purposes of this case: (2) Such profits or gains shall be computed after making the following allowances, namely:--... (iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid. We have already stated that on the findings the overdraft account related to the borrowing of the assessee for the purposes of its business. The expenditure incurred by way of payment of interest on these overdrafts falls under clause (iii) of sub-section (2) of section 10, it being the amount of interest in respect of the capital borrowed by the assessee for the purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim on the ground that the object of issuing the debentures was not to invest the money in securities but to employ it in the assessee's business and that the condition imposed by the Controller made no difference. The decision of the income-tax authorities was upheld by the High Court in the reference. It will be noticed that the decisive factor was the object of the borrowing. If the object of the borrowing was to invest the borrowed money in purchase of securities with a view to earning interest, then certainly the interest paid on the borrowing was interest allowable under the proviso to section 8 of the Act. In our opinion, having regard to the language used in section 12(2), the same principle should govern the admissibility or otherwise of deduction in respect of payment of interest under sub-section (2) of section 12 of the Act. The decision in Eastern Investments Ltd. v. Commissioner of Income-tax.[1951] 20 I.T.R. 1 (S.C.)., on which reliance has been placed by Mr. Mehta, is distinguishable on facts and can hardly be said to be of any assistance to the assessee. The distinguishing feature is that the assessee-company there was an investment company and it is t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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