9911796707
TMI Blog2016 (10) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... s so wholly and exclusively for the purpose of making or earning dividend income. If a party expects the company to do well presently or in future, it is but natural that it would seek to acquire as many shares as it can. This too would be wholly and exclusively for the purpose of making or earning income therefrom. Parties do not acquire control for control’s sake. In the present case, the other members of the group held 72% of the equity shares. There is nothing to indicate that the assessee herself or in concert with others intended acquiring control for any reason. Our attention was not invited to anything that indicates any reason for the assessee acquiring the shares for the purpose of acquiring or even maintaining control. It is reasonable then to presume that the assessee acquired the shares wholly and exclusively for the purpose of making or earning income. The Tribunal appears to have proceeded only on the basis that the entire shareholding of the company is held by the appellant along with other members of the group including her husband and her husband’s HUF and the fact that the dividend had not been declared. There could always be prospects of the company doing wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether under the facts and circumstances of the case, Tribunal is justified that the shares have been purchased by appellant to acquire controlling interest and hence not allowable deduction? 3. The assessee had claimed a deduction of ₹ 18,91,335/- on account of interest paid to the Ashok Kumar Malhotra HUF. Ashok Kumar Malhotra is the assessee s husband and the assessee is a member of the said HUF. The assessee claimed that she had borrowed funds from the HUF during the Assessment Year 1987-88 to purchase shares of M/s M. Gulab Singh Sons Pvt. Ltd. (hereafter referred to as the Company ) and M/s M.B.D. Enterprises Pvt. Ltd. The Assessing Officer asked the assessee to furnish details of the investment out of the borrowed funds. As the assessee did not furnish the details, the Assessing Officer assumed that out of the borrowed funds investment to the extent of 50 per cent had been made for the purchase of the shares in these companies. He accordingly disallowed 50 per cent of the interest amounting to ₹ 9,45,660/- out of the total interest claimed. 4. The CIT(A) observed that the entire borrowed funds of ₹ 18,91,355/- had been used by the assessee for ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as difficult to accept the contention that she purchased the shares for the purpose of making or earning income. 9. The assessee s income chargeable under the head Income from other sources is to be computed after making the deductions mentioned in Section 57 which under sub-section (iii) thereof includes any other expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making and earning such income. The words such income refer to income from other sources. The deduction under Section 57 (iii) is not available only to persons who deal in shares as a business. Even other investors are entitled to the benefit of Section 57. The observation, that unless and until the assessee proves that she has been dealing in shares as a business it is difficult to accept the contention that the shares purchased by her are for the purpose of making and earning such income, is not wellfounded. There is no presumption that a person not involved in the business of dealing in shares purchases them for a purpose other than making or earning income from such shares. There is certainly no presumption that such persons purchase shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this Court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, 4 (SC), where interpreting the corresponding provision in s. 12(2) of the I.T. Act, 1922 which was ipsissima verba in the same terms as s. 57(iii), Bose J., speaking on behalf of the Court observed: It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned . It is indeed difficult to see how, after this observation of the Court, there can be any scope for controversy in regard to the interpretation of s. 57(iii). 12. Thus, the fact that no dividend is declared does not by itself indicate that the expenditure was not laid out or expended for the purpose of making or earning income. The first ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e synonymous to each other. Almost every dictionary and law lexicon suggests this. In Corpus Juris Secondum, Volume 33 Page 113, it is stated that the term exclusively has been held equivalent to or synonymous with solely and wholly . Corpus Juris Secondum, Volume 81 at page 387 states that the word solely is defined as meaning exclusively and wholly . It states that the word solely has been held equivalent to or synonymous with exclusively and wholly . Corpus Juris Secondum, Volume 94 at page 15 states that the word wholly has been held to be equivalent to or synonymous with exclusively and solely . 17. This brings us to the interpretation of section 57(iii) in so far as it is relevant to this appeal. The main question that calls for consideration is whether the assessee acquired these shares to gain control or whether she acquired them as an investment. The Tribunal upheld the finding of the Assessing Officer and of the CIT (A) that the assessee s real intention was to hold and acquire control over the company-M/s M. Gulab Singh Sons Pvt. Ltd. 18. Decided cases have cautioned against mistaking the purpose of expenditure laid out or expended for making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or gains by the assessee company but something fraudulent, viz., the convenience of the interested parties whose names are mentioned as Gupta and Morarka. The short argument of Mr. Joshi is that there is a clearly recorded finding of fact as to what the purpose of this borrowing was and it is said that the only answer that can be given on the question before us must, therefore, be against the assessee. We are unable to acquiesce in this argument. It is indubitably true that the Tribunal has stated that the purchase of these shares by the company has served the purpose of giving facility or convenience to two interested parties. It is equally true that the Tribunal has used the word purpose in recording this finding. Evidently there is here the use of an expression which has more than one meaning. Purpose may, in some context, suggest object, and purpose may some times suggest motive for a transaction. But under section 12, we have to read the word purpose in its legal sense to be gathered from the context in which it appears. We have to find out the meaning as far as possible from the language of the section itself and without attributing to the Legislature a precise apprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. In Seth R. Dalmia vs. The Commissioner of Income Tax, Delhi, New Delhi, (1977) 4 Supreme Court Cases 329, the Supreme Court referred to the judgment of the Bombay High Court in Ormerods (India) Private Ltd. vs. Commissioner of Income-Tax, Bombay City, [1959] 36 ITR 329 (Bom) and C.I.T. vs. Vijaykuverba Saheb of Morvi, [1975] 100 ITR 67 (Bom). In that case also, the Supreme Court dealt with Section 12(2) of the 1922 Act. In paragraph 8, the Supreme Court observed:- Apart from these decisions of this Court, a number of decisions of the High Courts have also taken the same view. In Ormerods (India) Private Ltd. vs. Commissioner of Income-tax, Bombay City, 36 ITR 329 (Bom HC), the Bombay High Court allowed certain sums of money paid as interest on borrowed capital for the purchase of shares and held that the word purpose in the expression expenditure incurred solely for the purpose of making or earning such income, profits or gains did not mean motive for the transaction, much less can it mean ulterior motive or ulterior object. The Court held that as the investments were made for the purpose of earning income, the interest paid thereon would be deductible under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75 per cent of the equity shares, can ensure that a special resolution is passed or defeated. A person, who controls over 90 per cent of the equity shares of a company, ensures that the other shareholders, even together, cannot maintain an action for oppression and mis-management under sections 397 and 398 of the Companies Act except with the permission of the Central Government. In a given case and depending upon the spread of the equity capital, a person may well be in a position to control the company with much less than 51 per cent of the equity shares. Once it is conceded that section 57(iii) is inapplicable where the purpose of acquisition of shares is to control a company and not to make or earn income, the proposition would apply irrespective of the nature or the extent of the control. We reiterate that we proceed on the basis of the said concession. 27. Secondly, the control need not necessarily be on account of the shares being held by a single shareholder. If more than one person holds the controlling interest in concert with others, i.e., with the common purpose of acquiring or maintaining control, each of them would be said to have acquired the shares for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgments in Ormerods (India) Private Ltd. vs. Commissioner of Income-Tax, Bombay City, [1959] 36 ITR 329 (Bom); Seth R. Dalmia vs. The Commissioner of Income Tax, (1977) 4 Supreme Court Cases 329 and C.I.T. vs. Vijaykuverba Saheb of Morvi, [1975] 100 ITR 67 (Bom), referred to earlier. 29. In the present case, as we noted earlier, the assessee had acquired about 28 per cent of the shares in the company M/s M. Gulab Singh Sons Pvt. Ltd. That by itself would not establish that the shares were purchased for the purpose of acquiring control over the company. However, as we have also held, it is not an acquisition of over 50 per cent of the equity share capital alone that would allow gaining control over a company. The purpose of acquisition of shares must be ascertained after considering all the facts and circumstances of the case. 30. In the present case, the assessee acquired about 28 per cent of the shares in the company. It is true that the Malhotra group owns the entire shareholding in the company. When a party buys shares in a company, it is reasonable to presume that it does so wholly and exclusively for the purpose of making or earning dividend income. If a party expects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, in turn, sold the said shares to the assessee on the same date. The sellers were paid by borrowing from a concern M/s Tulsidas Kanoria Co. Further shares were also purchased by the assessee in the name of one Jhunjhunwala, a relative of theirs. The price of these shares was paid by taking another loan from the said M/s Tulsidas Kanoria Co. The question that arose was whether the interest on the amounts borrowed by the assessee for purchasing shares was allowable as business expenditure. The ITO found that the shares had been purchased with a view to acquiring controlling interest in the company for and on behalf of Kanorias. The ITO also found that in the subsequent assessment year the assessee had entered into further transactions in purchase and sale of these shares at cost price without profit or loss. The AAC confirmed the order. The Tribunal, however, did not agree with the finding to the effect that interest should not be allowed against the assessee s income from other sources. The Division Bench also referred to the judgment in Ormerods (India) Private Ltd. (supra) and held as under:- 21. It also appears to us that, even otherwise, the contention of the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e implementation of an expansion project. The assessee acquired the shares at a price to be paid in instalments carrying interest at 10% per annum. The assessee encountered some difficulties in acquiring the balance shares of SOML from the other shareholders. A company Karamchand Premchand Pvt. Ltd. (KPPL) offered to purchase the shares of SOML from the assessee. The shares were sold to KPPL for which the consideration was to be paid in instalments carrying interest at 9% per annum. The assessee claimed the net deficiency in interest. The ITO was of the view that the expenditure was of capital nature and that the shares were acquired by the assessee only with a view to hand over the same to KPPL. The Tribunal held that the claim for deduction under Section 57(iii) for one of the assessment years was well founded as it derived dividend income but not for the other assessment year in which dividend had not been declared and because the assessee s obligation to make payment of interest to the shareholders of SOML was independent of the right to receive interest from KPPL and that it was, therefore, not possible to say that payment of interest was required to be made by it to the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares were not purchased for the purpose of earning income, though that could be regarded as the ultimate motive. In other words, earning income, by acquiring the shares, was not the purpose but the motive. It was further found that the dominant purpose was not to earn income but to gain control and, at the highest, it was a mixed purpose. The judgment, therefore, does not carry the matter further as far as this appeal is concerned. 34. Mr. Sethi then relied upon a judgment of a Division Bench of the Bombay High Court in Commissioner of Income-Tax vs. Amritaben R. Shah, [1999] 238 ITR 777. It was a reference on the question whether the assessee was entitled to a deduction under Section 57(iii) of the interest on the loans raised for acquiring shares in Raval Tiles and Marbles Pvt. Ltd. with an intention to acquire control over the company. The assessee, her husband and her father-in-law purchased the entire share capital of the company. The Assessing Officer and the CIT(A) held that the shares were purchased with a view to acquiring controlling interest in the company and that the assessees were, therefore, not entitled to deduction under Section 57(iii). The Tribunal, however, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with deductions, inter alia, of any expenditure laid out or expended wholly and exclusively for the purposes of business or profession. Such deduction has to be in respect of any expenditure for business which was carried on by the assessee at any time during the previous year. It was held that expenditure incurred in proxy war should not be deducted as business expenditure. It is important to note that the Court proceeded on the basis that there was no dispute that the shares in question were purchased by the assessee for the purpose of acquiring controlling interest in the company and not for earning dividends. The judgment was based on this fact. As we mentioned earlier, we have proceeded on the basis of the concession that if shares are purchased with a view to acquiring controlling interest in the company, the assessee is not entitled to a deduction under Section 57(iii). In Commissioner of Income-Tax vs. Amritaben R. Shah (supra), there was a positive finding that the shares were not purchased wholly and exclusively for the purpose of earning income by way of dividends but for acquiring the controlling interest. In the facts and circumstances of this case, it was held t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
