TMI Blog1961 (3) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... Brown Ltd. and ₹ 11,57,250 in M/s. Hall and Anderson Ltd. in the names of the partners of the applicant firm. M/s. Norton Brown Ltd. (a private limited company) are the managing agents of M/s. Hall Anderson Ltd. On the overdraft account, ₹ 63,298 was paid as interest during the previous year relevant to this assessment. On the above said investment no income or dividend was received during the relevant previous year. ₹ 63,298 paid as interest was claimed as a deduction in computing the profits. The Income-tax Officer disallowed it in the following words: Interest a/c. This includes ₹ 63,298 payable to Madanlal Sohanlal H.A. A/c. It represents interest on loans taken for, the purpose of acquiring shares by the partners and members of their family. As such the loans cannot be treated as one for the purpose of the business of the assessee. Hence, interest of ₹ 63,298 is disallowed. 3. The only objection pressed in the appeal to the Appellate Assistant Commissioner was against the disallowance of the above said interest. The Appellate Assistant Commissioner found that ₹ 63,298 represented payment of interest for two years, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, on the facts and in the circumstances of the case, ₹ 31,500 paid by the applicant as interest on the loan taken for an investment and which investment did not yield any income during the relevant previous year was allowable as a deduction in computing the assessable profits? 9. Copies of the draft statement of the case were sent to both the parties. The respondent had no suggestion to make. The applicant has made a suggestion which cannot be incorporated. The reasons for not incorporating it have already been given in the separate order dated 9th July, 1956, while refusing to refer the first question suggested by the applicant. The draft statement is finalised. S. Mitra, for the assessee E. Meyer and B. L. Pal, for the Commissioner JUDGMENT P.B. MUKHARJI J.- This income-tax reference under section 66(1) of the Income-tax Act raises the following question of law for the decision: Whether, on the facts and in the circumstances of the case, ₹ 31,500 paid by the applicant as interest on the loan taken for an investment and which investment did not yield any income during the relevant previous year was allowable as a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no receipt by way of dividend the interest paid could not be said to have been incurred for the purpose of making or earning the income. The assessee contended that as the assessee firm jointly held with four other parties only 2,76,640 shares out six lakhs shares of Hall Anderson Ltd., it could not be said that the purchase was to obtain the controlling interest or control over the company. The Appellate Tribunal found that in company matters a large block of shares, as in this case, did, on occasions, confer such a majority as to amount almost to a control and came to the conclusion that the amount had been admittedly borrowed for the purpose of investment and as such interest on the loan could be claimed only under section 12(2) of the Income-tax Act, but as no dividend was received during the year, interest paid or payable on the amount borrowed for the purpose of investment could not be allowed as an expenditure. The Appellate Tribunal, therefore, set aside the order of the Appellate Assistant Commissioner. It will be apparent from the above statement of facts that the decision in this case will involve an interpretation and comparison of section 12(2) and section 10(2)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary to show that the expenditure in fact earned any profit was related to the question of net profit only and not where there was no income whatever. In support of this contention, Mr. Meyer, the learned counsel for the Commissioner of Income-tax, specially referred to the two English decisions of Moore v. Stewarts Lloyds Ltd.** and Usher's case*** of which notice was taken by the Supreme Court for that propositions. A reading of the two cases shows clearly that there the language used in the statute was not only entirely different from the one now used in section 12(2) of the Indian Income-tax Act but that it was more near to what is now section 10(2) (xv) of the Indian Income-tax Act. In both those English cases, Schedule D, rule 1, of the English Act which was consideration reads as follows: No sum shall be set against or deducted from or allowed to be set against or deducted from such profits or gains for any disbursements or expenses whatever not being money wholly and exclusively laid out or expended for the purpose of such trade. That has a ring familiar with section 10(2)(xv) of the Income-tax Act which uses the relevant words laid out or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Singh v. Commissioner of Income-tax** has been the subject of dissent and controversy. Dissent was expressed by the Division Bench of the Bombay High Court consisting of S.T. Desai and K.T. Desai JJ. in Ormerods (India) Private Ltd. v. Commissioner of Income tax*** S.T. Desai J. in that case, after quoting the particular sentence of the Supreme Court decision in Eastern Investment Ltd.*, at page 334, observed as follows: Sub-section (2) does not say that the deduction is permissible when any income has been earned or profits or gains made. All that it speaks of is that the expenditure must have been laid out solely for the purpose of earning income. There is nothing in the language of the section to suggest that the purpose needs to be fulfilled nor is it necessary that the purpose should fructify in to any benefit to the assessee by way of return in the shape of income. These observation were followed by certain discussions about attempted distinction between purpose and motive which we do not consider relevant from our point of view. What is important is that the Division Bench of the Bombay High Court disagrees with the view taken by the Patna High Court and that will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of a business in this reference. In other words, therefore, in this context section 10(1) of the Act means a tax on the profits or gains of a business. Section 10(2) goes on to provide how such profits or gains shall be computed after making the allowances mentioned thereunder. The allowance that is relevant for our purpose is contained in clause (xv) which reads as follows: 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 the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The next section with which this reference is concerned relates to Other sources and is mentioned in section 12. Section 12(1) of the Act provides that the tax shall be payable by an assessee under the head Income from other sources in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads). This, therefore, again is a tax on income from other sources or a tax on profits or gains from other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old Act before the amendment which now corresponds, after the amendment, to section 10(2) (xv) of the present Act. The language of section 10(2)(xv) of the present Act reads, on this relevant part, excluding the features not necessary for our purpose: Any expenditure....laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The question of purpose of making or earning such income, profits of gains no longer arises under section 10(2)(xv) of the Act. In other words, this kind of a change has not been introduced in the present sub-section (2) of section 12 of the Act. Having regard to this history of the amendment, it will not be right, in our view, to draw the conclusion that in spite of such material difference in the language, the effect of section 10(2)(xv) and section 12(2) of the present Indian Income-tax Act should be the same. That will be ignoring the difference in language which the legislature has deliberately introduced and maintained. Section 12(2) indicated the tax payable on the income from Other sources . If there is no income in the sense that there is no return of any kind whatever, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such income arises and where it is enough to show only an expenditure wholly or exclusively for the purpose of the business itself. That is why the cases to which Mr. Mitter, learned counsel for the assessee, draws our attention, namely, to Anglo-Persian Oil Co. (India) Ltd. v. Commissioner of Income-tax, In re Tata Iron Steel Co. Ltd.*** and Vallambrosa Rubber Co. Ltd. v. Farmer#, will not support the present case but, in fact, supports the view that we are taking. For instance, Rankin C.J. in Anglo-Persian Oil Co. (India) Ltd. v. Commissioner of Income-tax**, at page 845, says: Clause (ix) of sub-section (2) of section 10 of the Indian Act does not say and does not mean that the expenditure must be made with a view to produce profits in the year of account. This was held by the Bombay High Court in In re Tata Iron Steel Co. Ltd.* and though the case of Vallambrosa Rubber Co. Ltd. v. Farmer** was not decided under the Indian Act, the judgment of the Lord President of the Court of Session in Scotland in that case may conveniently be referred to as very fully disclosing the soundness of the Bombay decision. Here again, as will be seen, Rankin C.J. wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectly facilitate the carrying on of business can also be expenditure laid out wholly and exclusively for the purpose of the business. This case also quoted the observation of Lord Keith in Morgan v. Tata Lyle Ltd. [1954] 26 I.T.R. 195, where it was said: If the purpose of the expenditure is to benefit the trade, it is not necessary to show by demonstration that in fact the expenditure has produced, or will produce, profit or has prevented loss of profit or has facilitated or will facilitate the earning of profit. Commenting on this observation of Lord Keith, Chakravartti C.J. in Royal Calcutta Turf Club v. Commissioner of Income-tax [1958] 33 I.T.R. 616, at page 629, said: ...the expenditure must be laid out for that purpose and with that expectation. This is exactly the view that we are also taking of section 10(2)(xv) and, on the very same reasons, we are coming to the conclusion, due to the express difference in language on this very point in section 12(2) of the Act, that this test does not hold good under section 12(2) of the Act in the sense we have indicated above. The Royal Calcutta Turf Club case** went up in appeal to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicated in sub-section (2). So, if there is no income at all from Other sources no expenditure can be deducted from the income which does not exist at all. In other words, unless there is some income from Other sources which is brought under assessment, there can be no question of allowing deductions in respect of expenditure incurred solely for making or earning such income. In a running business, items of expenditure are commonly treated as belonging to the accounting period in which they are met. A taxpayer may deduct expenditure in the year of assessment (provided it is not of a capital nature) connected with his earnings of that year. In my view, by the words employed in sub-section (2), the intention to refer to the Income from other sources under assessment is clearly expressed. In construing these words of section 12(2) of the Act in the case of Commissioner of Income-tax v. Basant Rai Takhat Singh* the Judicial Committee observed: In their Lordships' view, on the true construction of that sub- section, the allowance for any expenditure incurred must be an allowance for expenditure incurred in the year in respect of which arise the income, profits and ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple enunciated in clause (b) are based on the case of John Moore v. Stewarts and Lloyds Ltd.(4); and Usher's Wiltshire Brewery, Ltd. v. Bruce(5), which dealt with the provisions analogous to the provisions of section 10(2)(xv) of the Indian Act, the wordings of which are different from the wordings of section 12(2). Mr. Mitra also relied on a decision of the Bombay High Court Ormerods (India) Private Ltd. v. Commissioner of Income-tax(6) and a decision of the Allahabad High Court in Chhail Behari Lal v. Commissioner of Income-tax(7), which simply follows the Bombay case, in support of his contention. These cases have been dealt with at length by my learned brother and so I do not propose to deal with them over again. In my view the decision of the Patna High Court in Kameshwar Singh v. Commissioner of Income-tax(8) is based on a correct reading of the scope and implication of the judgment of the Supreme Court in Eastern Investments Co.'s case* and is more in accord with the textual interpretation that should reasonably be put upon sub-section (2) of section 12. In my view, the finding of the Tribunal is correct and the question should be answered in the negativ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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