1967 (12) TMI 23 - HC - Income Tax

Interest paid on loans borrowed for investment in the shares of company - allowable as deduction u/s 12 of the IT Act 1922

Summary

Issues:
1. Deductibility of interest paid on loans borrowed for investment in shares without yielding dividend income.
2. Inclusion of a credited amount in the income of the assessee for tax purposes.

Detailed Analysis:

Issue 1: The first issue in this case revolves around the deductibility of interest paid on loans borrowed for investment in shares that did not yield any dividend income. The assessee had borrowed money and invested it in shares of a company. The Tribunal allowed the deduction of interest paid, contrary to the contention of the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal's decision was based on the interpretation of Section 12(2) of the Income-tax Act, 1922, which requires that the expenditure should be incurred solely for the purpose of earning income or making profits or gains. The Tribunal relied on the decision in Ormerods (India) Private Ltd. v. Commissioner of Income-tax, where it was held that interest paid on money borrowed for investment in shares is a legitimate deduction under the Act, even if no income or profit is earned from the investment. The High Court concurred with the Tribunal's view, emphasizing that the expenditure must be laid out solely for the purpose of earning income, without the requirement of actual profit being made. The Court held that the interest paid on the loans borrowed for investment in shares is allowable as a deduction under Section 12(2) of the Act.

Issue 2: The second issue pertains to the inclusion of a credited amount in the income of the assessee for tax purposes. The Tribunal referred a question regarding the inclusion of a specific amount credited to the assessee's account in the income, without an application duly made by the assessee under Section 66(1) of the Act. The High Court, citing a previous judgment, highlighted the procedural requirements for making a reference to the court under Section 66(1), including the need for a timely application accompanied by a deposit and a specific statement of the question of law. The Court emphasized that the second question could not have been referred without a proper application by the assessee and declined to answer it. Consequently, the High Court only answered the first question affirmatively, allowing the deduction of interest paid on loans for investment in shares, and left the parties to bear their own costs.

In conclusion, the High Court upheld the deductibility of interest paid on loans borrowed for investment in shares under Section 12(2) of the Income-tax Act, while declining to answer the second question regarding the inclusion of a credited amount in the income without a valid application under Section 66(1) of the Act.