1961-VIL-82-MAD-DT

Equivalent Citation: [1962] 46 ITR 511 (Mad)

MADRAS HIGH COURT

Tax Case No 127 of 1958(Reference No. 61 of 1958)

Dated: 16.11.1961

K. APPA RAO

Vs

COMMISSIONER OF INCOME-TAX, MADRAS

T. V. Viswanatha Iyer, T. V. Ramanathan and S. Narayanaswami, for the assessee

S. Ranganathan, for the Commissioner

Bench

S. RAMACHANDRA IYER C.J. AND SRINIVASAN, J.

JUDGMENT

SRINIVASAN J.--During the calendar year 1949, relevant to the assessment year 1950-51, the assessee borrowed a sum of rupees one lakh from a bank and purchased shares in a public limited company. He paid a sum of Rs 6,543 towards interest on the loan during the year of account. During that year he derived no dividend from the shares in that company or any other shares owned by him. He had, however, other income which was assessable and was in fact assessed under the head "other sources"; and he claimed that the interest payment should be deducted from the income from other sources before the assessable income under that head could be computed. The Income-tax Officer refused this relief on the ground:

            "It is gathered at the time of hearing that the assessee borrowed more than a lakh of rupees from this bank for investing in shares in Subhodaya Publications, a limited concern. No income is derived from this company so far. This interest payment cannot, therefore, be allowed under 'business' as the borrowed money was not utilised for business purposes."

The Appellate Assistant Commissioner also held against the assessee on the ground that for the allowance to fall within the scope of section 12(2) of the Act, there should be some income from that source.

Virtually, the same argument was adopted by the Appellate Tribunal in the appeal. The Tribunal observed:

              "For purposes of section 12(2) the outlay to be considered is with reference to each source and not merely to the head of income. So long as there is no income from the shares which is the source in question, the interest referable thereto cannot constitute a proper deduction in the assessment. There can be no two opinions about Mr. Viswanatha Aiyar's argument that the ultimate result can conceivably be a loss but such a loss must be computed for each source under the head 'other sources' which is obligatory only if there is any income at the starting point in the computation."

Under section 66(1) of the Act, the Tribunal referred the following question:

       "Whether the interest payment of Rs 6,543 can be set off against the income from ground rents received by the assessee and assessed under the head 'other sources'?"

In is conceded that the assessee has several heads of income and one of such heads is "income from other sources". Under this head "other sources" are several sub-heads such as share income, income by way of ground rents from properties and the like. It is not also disputed by the learned counsel for the department that in computing the income under each of the heads specified under section 6 of the Act, the different incomes relating to the several activities that would fall under the same head have to be taken. But what the Tribunal has thought fit to do in this case is to ignore a loss that occurred in respect of one of the many sources which fell under this head of income on the ground that there was no income to start with from which the interest payment could be deducted. The question accordingly is whether this is the proper method of approach in computing the income under the head "other sources". It has to be noticed that if there had been any income from these shares, the Tribunal apparently thought that the interest payment could be adjusted against such dividend income.

It is not disputed by the department that the expenditure by way of payment of the interest was incurred solely for the purpose of making or earning such income, profits or gains from the shares acquired with the amount borrowed. What the learned counsel for the department suggests is that the investment in dividends is only a potential source and that if no income is actually derived from those sources, the expenditure could not be said to have been incurred solely for the purpose of making or earning such income, profits or gains. A case, though not directly in point has been relied upon by the department and that is Kameshwar Singh v. Commissioner of Income-tax [1957] 32 I.T.R. 377. In that case, the assessee acquired certain shares in a company which he treated as an investment and the income therefrom was assessable under section 12(1) of the Act. He made a contribution to the trustee for debenture holders in the company for expenses of litigation. The litigation was against the State Government who revoked their earlier undertaking to purchase the company as a going concern and sought for its winding up. In basing his claim for allowance under section 12(2) of the Act, the assessee contended that the contribution was for purposes of safeguarding his interest in the shares of the company which was being forced into liquidation. But the department and the Tribunal disallowed the expenditure on the ground that, as the company had ceased to pay dividends since a long time, the expense was not an expenditure incurred for earning dividends in the company. On a reference to the High Court, the learned judges held that the expenditure could not have been incurred for the purpose of making or earning any income because the shares had ceased to earned dividends since a long time. We are not satisfied that this decision has any real application to the facts of the present case. What was found as a question of fact by the Tribunal was that there was no prospect of any income being received from the shares in that company. After referring to certain decisions, the learned judges proceeded to hold:

           "...none of these cases have any application to the present case for the simple reason that here the finding of fact reached by the Tribunal is that the assessee was not a debenture holder, and that there was nothing on record to show that this amount was spent for litigation to protect the so-called investments. The Tribunal further found that there was no evidence showing the real purpose for which the assessee contributed the expenses, and that the holding of the shares was in the nature of an investment, and the expense for protecting the investment was not expense incurred for earning dividends of the company which ceased to pay dividends since a long time."

It is clear therefore that the ultimate decision of the court was rested on the fact that there was no proof that the expenditure was incurred solely for the purpose of making or earning such income.

In Eastern Investments Ltd. v. Commissioner of Income-tax [1951] 20 I.T.R. 1, the assessee was in receipt of income from certain shares. The assessee was an investment company which was formed for the purpose of acquiring 50,000 shares of the face value of Rs 50,00,000 held by another person. On the latter's death, the administrator of his estate held those shares in that capacity. The executor was in need of funds and accordingly an arrangement was entered into between the administrator and the assessee whereby the assessee agreed to reduce its shares capital by Rs 50,00,000 by taking over the 50,000 shares at Rs 100 a share and the administrator on his part agreed to accept instead of cash, debentures of the face value of Rs 50,00,000 carrying interest at 5 per cent. per annum. This arrangement was entered into with the sanction of the High Court. When the assessee sought to deduct the interest paid on these debentures from his income, the claim was disputed by the department. The High Court also on a reference held that the interest payment was not an allowable item of expenditure. On further appeal to the Supreme Court their Lordships enunciated certain principles on the true construction of section 12(2). They stated that it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned; further that it is enough to show that the money was expended not of necessity and with a view to a direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business; and that beyond these no hard and fast rule could be laid down to explain what is meant by the word "solely". They refer also to Farmer v. Scottish North American Trust Ltd.*, where it was held that interest paid on an overdraft required for purchasing shares was an outgoing which could be deducted from the receipts in order to ascertain the taxable profits and gains which were earned by them.

It seems to us that the above decision practically concludes the point. We may usefully refer to another decision, Ormerods (India) Private Ltd. v. Commissioner of Income-tax. In that case, the assessee company purchased shares and for this purpose took large loans. During the relevant years interest payments were made on the loans but there was no income at all from those shares. The assessee claimed to set off these payments of interest against his other income in these years. The Tribunal took the view that the investment in shares was not made with a view to trading in them and that the purchase of the shares was intended to serve to accommodate the convenience of two persons who controlled the share capital. In dealing with the meaning of the expression "purpose", occurring in section 12(2) of the Act, the learned judges pointed out that it did not mean the motive for the transaction but that the purpose of the purchase was an entirely different matter, and they held that notwithstanding that no income was realised from the shares in question, the investments were made for the purpose of earning the income and that the interest paid on the loans could be set off against other income under section 24(1) of the Act.

Though the question that was considered in the Bombay case referred to was one of set-off under section 24(1) of the Act it seems to us that even before the assessee can ask for a set-off it is open to him to adjust under the same head of income the various receipts and outgoings in order to arrive at the net assessable figure. In Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax*, the Supreme Court observed thus:

                "Next, a set-off under section 24(1) can only be claimed when the loss arises under one head and the profit against which it is sought to be set off arises under a different head. When the two arise under the same head, of course the loss can be deducted but that is done under section 10 and not under section 24(1)...In the present case, the loss is computed by striking a balance in the profit and loss account of just the one business and consequently no question of different heads arises."

The principle appears to us to be the same where any single head of account is considered. If there are several distinct sources coming under the same head set out under section 6, there should be an adjustment of the profit and loss under the different sources before the assessable income under the major head can be computed. In the present case, as it is not denied that the assessee is in receipt of income which also falls under the head "income from other sources", it should follow that the interest payment being an allowable item of expenditure under section 12(2) can be set off or adjusted against the other income under the same head before the assessable income under section 12 is reached. Though it is not altogether necessary, we may also refer to Chhail Behari Lal v. Commissioner of Income-tax**, a decision of the Allahabad High Court, where again it was held that the interest payment on sums borrowed for purposes of investing in shares was an allowable items of expenditure under section 12(2) of the Act notwithstanding that no dividends were received from those shares.

We accordingly answer the question in favour of the assessee. The assessee will be entitled to his costs. Counsel's fee Rs 250.

Question answered accordingly.