9911796707
TMI Blog1978 (1) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... sed 10,100 shares in the New City of Bombay Manufacturing Co. Ltd., a well-established cotton mill in Bombay (hereinafter referred to as the Bombay company), in the names of the said N. L. Kanoria and one Tulsidas Kanoria for a sum of Rs. 27,77,500 at the rate of Rs. 275 per share. The Kanorias, in turn, sold the said shares to the assessee on the same date. The sellers were paid off to the extent of Rs. 14,29,413 borrowed by the assessee from a concern, M/s. Tulsidas Kanoria & Co., for the purpose of acquiring the said shares. Another 3,400 shares in the Bombay company were also purchased by the assessee in the name of one Biswanath Jhunjhunwala, a relative of the Kanorias. The price of these shares was paid by the assessee by taking another loan of Rs. 4,85,000 from the said Tulsidas Kanoria & Co. In the relevant assessment years, the question arose whether the interest paid on the amounts borrowed by the assessee for purchasing the said shares of the Bombay company was allowable as business expenditure. The ITO found that the said shares were purchased with a view to acquiring controlling interest in the Bombay company, for and on behalf of the Kanorias, who were the directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest paid should be allowed against the dividend income it was contended that as the assessee did not have any dividend income from the shares of the Bombay company, the question of allowance of such interest did not arise. A decision of this court in the case of Madanlal Sohanlal v. CIT [1963] 47 ITR 1 (Cal) was relied on in support of this contention. The Tribunal came to the conclusion that the aseessee did not purchase the said shares for the purpose of dealing in them, the apparent object of the assessee being to acquire the controlling interest of the Bombay company either by the Kanorias or by the assessee itself. Purchase of the said shares at a rate higher than the prevailing market price and sale thereof only to the relatives of the Kanorias, the directors of the assessee, were noted by the Tribunal as not being incidents of normal business activity. The Tribunal, therefore, held that the interest paid on the amounts borrowed by the assessee could not be allowed as a business expenditure. In respect of the further contention of the assessee that the interest paid should be allowed against its income from other sources, the Tribunal, however, did not agree with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made the said gift the company would have gone into liquidation and he would have lost, (a) his capital invested in the company, (b) his salary as the managing director of the company, and, (c) his business reputation and credit. On these facts, the Bombay High Court held that the assessee's claim could not be sustained under s.10 of the Act where allowance could be claimed only for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning profits or gains. It was held that the assessee had incurred the expenditure partly for the purpose of earning other income, partly for protection of the income of the other shareholders of the company and partly for the protection of his business reputation and as such was a capital expenditure. (b) Indian Steamship Co. Ltd v. CIT [1953] 24 ITR 448 (Cal). The assessee in this case obtained the permission of the Controller of Capital Issues for the issue of shares and debentures on condition that any sum received in excess of a certain amount, should be invested in Govt. securities, pending actual expenditure for the purpose of business. An amount was accordingly invested, in Govt. securities and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held on the facts that the assessee was a dealer in shares and that the shares in question were the assessee's stock-in-trade but the interest paid could not be deducted against the dividend income as the amount borrowed could not be said to be for the purpose of earning dividend. The High Court observed as follows (p. 669) : " It would be noticed that what is allowable as expenditure under the said sub-section is only the expenditure incurred solely for the purpose of making or earning dividend income. Emphasis thus appears to be on the object or purpose of incurring of the expenditure. The exclusive object of incurring expenditure has to be the making or earning of the dividend income. The mere fact that income by way of dividend has accrued and that the expenditure incurred is in some manner or other related to the accrual of the dividend income is not sufficient." (e) CIT v. Kasturbhai Lalbhai [1968] 70 ITR 267 (Guj). The facts in this case were that following disputes between the directors of a limited company, the assessees, and the directors of its managing agents, the assessees jointly spent certain amounts in sending out circulars to the shareholders and in collect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o other submission having been made by the revenue, it was not open to the revenue at this stage to make new submissions which necessitated fresh investigation into facts. Mr. Pal further contended that the specific findings of the Tribunal were that the said shares were acquired by way of investment and not as stock-in-trade and further that the assessee had an expectation of dividend. These findings not being challenged, it was not open to the revenue to go further into the motive of the assessee in acquiring the shares. Mr. Pal finally contended that both under s. 12(2) of the earlier Act and s. 57 of the later Act the revenue authorities had to determine total income under the head " Other sources " and not income arising from a particular source. If there was gross income under the head " Other sources " then the expenditure incurred for the purpose of earning any income under this head must be deducted from such gross income, even though the item against which such expenditure was incurred did not yield any income. Mr. Pal submitted that this was the law laid down in the case of Madanlal Sohanlal's case [1963] 47 ITR 1 (Cal). Mr. Pal also cited a few decisions which are chr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts of the case and the finding recorded by the Tribunal the only possible conclusion that we can reach is that these investments were made for the purpose of earning income or dividends or for making profits or gains. In our opinion, the Tribunal has mixed up the concept of the purpose of the purchase of these shares by the company and what in its judgment was the motive for the purchase of the shares ...... That the purchase of the shares was to earn income would seem to be the very basis of that part of the order made by the Tribunal. In our judgment, where the Tribunal has gone wrong is that it has, while appreciating the nature of the purchase of the shares by the assessee-company, given overriding effect to what it concluded was the motive for the purchase of the shares. The motive for the purchase of the shares and the purpose for purchase of the same should not have been allowed to be mixed up in that manner. " (b) CIT v. Kirkend Coal Co. [1969] 74 ITR 67 (SC). This decision was cited by Mr. Pal for the following observation of the Supreme Court (p. 72) : " But in a reference under section 66 of the Indian Income-tax Act, 1922, only the question which was either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by way of investment, and not for the purpose of acquisition of stock-in-trade. This finding is not challenged. The only contention of the revenue before the Tribunal was that the assessee was not entitled to claim deduction under s. 57 as the said shares themselves did not yield any income. This proposition was sought to be supported by the decision in Madanlal Sohanlal's case [1963] 47 ITR 1 (Cal). The decision in Madanlal Sohanlal read with the later decision in Sutlej Colton Mills Ltd.'s case [1971] 81 ITR 641 (Cal), in our view, clearly lays down a proposition to the contrary. Before the Tribunal, the revenue refrained from putting forward the argument that the purpose of the assessee being to obtain the control of the Bombay company, the purchase of the said shares cannot be held to be by way of investment or for earning dividend therefrom. In our view, it is no longer open to the revenue to make that argument at this reference. To resolve this controversy further investigation and appreciation of facts would be necessary. The observation of the Supreme Court in Kirkend Coal Co.'s case [1969] 74 ITR 67 appear to us to be fully applicable in such circumstances. It also app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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