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TMI Blog1977 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... es is dated February 5, 1948, and is to be found at annexure "A" on page 19 of the paper book. In spite of the fact that the assessee had agreed to buy the shares from the Bharat Bank Ltd. he did not take delivery of the transfer forms and the share certificates by making payment of the purchase price. Under the agreement dated February 5, 1948, it was agreed that the shares would be taken delivery of on or before March 31, 1948. It was further agreed that if the shares were not taken delivery of by this date, the dividends, rights, bonuses, etc., which may be declared after that date, namely, March 31, 1948, will be held by the bank for the benefit of the assessee and the assessee would be liable to pay interest at the rate of 6% p.a. on the purchase price from April 1, 1948, till actual delivery of the shares. Clause (4) of the agreement provided that if for any reason the shares were not taken delivery of by March 31, 1951, the bank will be at liberty to sell the then undelivered shares and to hold the assessee liable for the difference in the price fetched by the shares. The assessee did not take delivery of some of the shares until March 31, 1951, and paid a sum of Rs. 1,05,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1,05,000, which the assessee paid as damages to the bank, the Tribunal held that, as the assessee was not doing business exclusively in shares, he was not entitled to set off the interest paid by him as revenue loss. Thereafter, the appellant moved the Tribunal for making a reference to the High Court and after hearing counsel for the parties the Tribunal referred the following questions for the opinion of the High Court: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal rightly rejected the assessee's claim for deduction of the interest payment of Rs. 2,04,744 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal rightly held that the revenue was not estopped from disallowing the claim for the deduction of the interest amount in view of the allowance of such claim in the past ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal rightly disallowed the loss of Rs. 1,05,000 in respect of 7,500 preference shares of the Dalmia Investment Company Ltd. ? (4) Whether, on the facts and in the circumstances of the case, the Tribunal rightly held that the dividend amount of Rs. 95,664 did not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. H. Chinoy AIR 1950 PC 90, 97 Lord MacDermott, pointing out the extent of the doctrine of transfer of equitable title to a purchaser, observed as follows: "Their Lordships do not desire to cast doubt on the proposition that in India a purchaser of shares (which under the Indian Sale of Goods Act come within the definition of 'goods') does not acquire an equitable interest by virtue of the contract of sale. But they cannot agree with the application of this proposition which commended itself to the appellate court. No doubt as between a company and a purchaser of shares therein the date of completion is all important. But as between vendor and purchaser, where the contract does not otherwise provide, the term to be implied as to dividends is not confined to dividends still to be declared in respect of a period or periods prior to the contract. It includes such dividends but that is not because the period in which they were earned is crucial; what is crucial is the date or dates of declaration." It would appear from the observations of the Privy Council that even though the transaction may not amount to acquisition of equitable interest, yet between the vendor and the purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this sub-section would show that in computing the income under this head the assessee is entitled to deduction in respect of the expenditure incurred solely for the purpose of earning such income, provided the expenditure is not of a capital nature and does not include any personal expenses incurred by the assessee. In other words, before this provision could apply, the following conditions must be fulfilled: (i) the expenditure must have been incurred solely and exclusively for the purpose of earning income or making profit; (ii) the expenditure should not be in the nature of a capital expenditure ; (iii) the amount in question should not be in the nature of personal expenses of the assessee; (iv) that the expenditure should be incurred in the accounting year; and (v) there must be a clear nexus between the expenditure incurred and the income sought to be earned. In Eastern Investments Ltd. v. Commissioner of Income-tax [1951] 20 ITR 1 (SC) the facts were that the assessee which was an investment company was formed for acquiring, holding and dealing in shares and Government securities belonging to C. C died and S was appointed administrator of his estate and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be personal expenses incurred by the assessee. In these circumstances, therefore, the essential ingredients of section 12(2) are fully satisfied in this case and, on the authority of this court in Eastern Investments Ltd.'s case [1951] 20 ITR 1 (SC), the appellant's case squarely falls within the four corners of section 12(2) as a result of which the amount of interest of Rs. 2,04,744 was a permissible deduction under section 12(2) of the Act. In Bombay Steam Navigation Co. (1953) P. Ltd. v. Commissioner of Income-tax [1965] 56 ITR 52, 59 (SC) in somewhat similar circumstances, this court allowed the expenditure as a deduction under section 10(2)(xv), and observed as follows: "But, in our judgment, interest paid by the assessee-company is a permissible deduction under section 10(2)(xv) which permits 'any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation' as a permissible allowance in the computation of profits or gains of the business ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court held that payment of interest for earning dividend income was deductible under section 12(2) of the Act. In Commissioner of Income-tax v. H. H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom), a Division Bench of the Bombay High Court held that the deduction which is permissible under sub-section (2) of section 12 is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax and the dominant purpose of the expenditure incurred must be to earn income. It was further held that the connection between the expenditure and the earning of income need not be direct, and even an indirect connection could prove the nexus between the expenditure incurred and the income. We fully agree with the view taken by the Bombay High Court. In view of the direct decision of this court in Eastern Investments Ltd's. case [1951] 20 ITR 1 (SC), it is not necessary for us to multiply authorities. Summarising, therefore, the facts of the present case, the position which emerges is as follows: (1) that a genuine and bona fide contract had been entered into between the assessee and the bank for transfer of large number of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have already pointed out that the assessee's main business was not dealing in shares and, therefore, the damages paid were due to his own default and would, therefore, be a capital expenditure rather than a revenue one. The High Court and the Tribunal were right in disallowing this amount. As regards question No. (4) the position is somewhat obscure. While the Tribunal had deleted the amount of Rs. 95,664 from the total income of the assessee, the High Court also agreed with the Tribunal and answered this question in the affirmative, against the revenue. Learned counsel for the revenue has, however, submitted that if we are of the opinion that the appellant should be entitled to the deduction of Rs. 2,04,744 under section 12(2) of the Act, then it automatically follows that he cannot claim exemption in respect of the dividend income. In our opinion the argument of Mr. V. P. Raman, learned counsel for the revenue, is well founded and must prevail. Even Mr. Bishamber Lal appearing for the assessee/appellant was fair enough to concede that if we hold that the interest of Rs. 2,04,744 was a permissible deduction under section 12(2) of the Act then he would not press his claim before ..... X X X X Extracts X X X X X X X X Extracts X X X X
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