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2016 (10) TMI 213 - PUNJAB & HARYANA HIGH COURT

2016 (10) TMI 213 - PUNJAB & HARYANA HIGH COURT - [2017] 391 ITR 256 - Interest on money borrowed for investment in shares - whether the assessee purchased the shares for the purpose wholly and exclusively of making or earning income or whether she did so for the purpose of acquiring control of the company? - Held that:- In the present case, as we noted earlier, the assessee had acquired about 28 per cent of the shares in the company M/s M. Gulab Singh & Sons Pvt. Ltd. That by itself would not e .....

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group owns the entire shareholding in the company. When a party buys shares in a company, it is reasonable to presume that it does so wholly and exclusively for the purpose of making or earning dividend income. If a party expects the company to do well presently or in future, it is but natural that it would seek to acquire as many shares as it can. This too would be wholly and exclusively for the purpose of making or earning income therefrom. Parties do not acquire control for controlís sake. In .....

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income. - The Tribunal appears to have proceeded only on the basis that the entire shareholding of the company is held by the appellant along with other members of the group including her husband and her husbandís HUF and the fact that the dividend had not been declared. There could always be prospects of the company doing well in future. Indeed, if that was not the expectation, the appellant would not have invested in the company at all. There is merely a finding that the real intention app .....

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f making or earning income. In the facts and circumstances of this case, these two factors even taken together do not warrant the conclusion arrived at by the Tribunal. - In the facts and circumstances of this case, it was held that the assessee was not entitled to a deduction under Section 57(iii). Even the judgments referred to in that case proceeded on the basis that the shares were purchased with a view to acquiring a controlling interest in the company and in prosecuting a share-holders .....

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DER S.J. Vazifdar, Chief Justice This is an appeal against the order of the Tribunal confirming the order of the Commissioner of Income Tax (Appeals) enhancing the appellant/assessee s income. The appeal pertains to the Assessment Year 1997-98. The Assessing Officer had disallowed interest of ₹ 9,45,675/- out of the total claim of interest of ₹ 18,91,335/-. 2. By an order dated 29.10.2007, the appeal was admitted on the following substantial questions of law:- i. Whether under the fa .....

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alhotra HUF. Ashok Kumar Malhotra is the assessee s husband and the assessee is a member of the said HUF. The assessee claimed that she had borrowed funds from the HUF during the Assessment Year 1987-88 to purchase shares of M/s M. Gulab Singh & Sons Pvt. Ltd. (hereafter referred to as the Company ) and M/s M.B.D. Enterprises Pvt. Ltd. The Assessing Officer asked the assessee to furnish details of the investment out of the borrowed funds. As the assessee did not furnish the details, the Asse .....

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urchasing shares of M/s M.B.D. Enterprises Pvt. Ltd. Having held that the shares were purchased to acquire control of the company and not as an investment, the CIT (A) disallowed the entire amount of ₹ 18,91,355/-. The CIT (A) accordingly enhanced the For Subsequent orders see ITA-232-2012 assessee s income by ₹ 9,45,660/- and ordered initiation of penalty proceedings under Section 271 (1)(C) for furnishing inaccurate particulars of income. 5. The Tribunal agreed with the CIT (A) tha .....

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Ltd. and the assessee purchased 2459, 1495, 945 and 1933 equity shares in the company, respectively, aggregating to 6832 shares. The entire share capital of the company is held by them. The assessee, thus, purchased 28.29 per cent of the equity shares of the company. She is the wife of Ashok Kumar Malhotra and a member of his HUF as also a share-holder and a Director in M/s M.B.D. Enterprises Pvt. Ltd. She borrowed money from the Ashok Kumar Malhotra HUF for the purchase of these shares on inter .....

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r expended wholly and exclusively for the purpose of making or earning such income; Re: Question (i): 8. The Tribunal firstly held that the assessee had not clarified that she had been in the business of dealing in shares and that unless the assessee proved that she had been dealing in shares as a business it was difficult to accept the contention that she purchased the shares for the purpose of making or earning income. 9. The assessee s income chargeable under the head Income from other source .....

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tion 57. The observation, that unless and until the assessee proves that she has been dealing in shares as a business it is difficult to accept the contention that the shares purchased by her are for the purpose of making and earning such income, is not wellfounded. There is no presumption that a person not involved in the business of dealing in shares purchases them for a purpose other than making or earning income from such shares. There is certainly no presumption that such persons purchase s .....

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iture exclusively for the purpose of making or earning such income. If an assessee establishes that he has incurred expenditure for the purpose of making or earning such income, he is entitled to the deduction under Section 57(iii). It is not necessary that the expenditure laid out or expended actually results in making or earning such income. There are several companies which do not declare dividend in certain years. There are companies which do not declare income for several years and are ulti .....

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rt under the 1961 Act. In Eastern Investments Limited vs. Commissioner of Income Tax, [1951] 20 ITR 1(SC), the Supreme Court held that it is not necessary to show that the expenditure was a profitable one or in fact any profit was earned. In Commissioner of Income-Tax, West Bengal-III vs. Rajendra Prasad Moody, [1978] 115 ITR 519, the Supreme Court held:- 3. What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning i .....

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tify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this Court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, 4 (SC), where interpreting the corresponding provision in s. 12(2) of the I.T .....

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out or expended for the purpose of making or earning income. The first question of law is, therefore, answered in favour of the appellant/assessee. 13. The observation in Moody s case that Section 12(2) of the 1922 Act is ipsissima verba takes us to the next point. It was observed that the corresponding provision of Section 12(2) of the 1922 Act is Section 57(iii) of the 1961 Act and that Section 12 (2) was ipsissima verba (in the same terms) as Section 57(iii). Section 12(2) of the 1922 Act, in .....

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sed the word solely whereas section 57(iii) uses the words wholly and exclusively . It seems to us that there is no qualitative difference on account of the use of the words wholly and exclusively in place of the word solely . The Legislature appears merely to have emphasized the point rather than expanded the scope of the section. This is clear for more than one reason. 14. Firstly, the Supreme Court itself held in Moody s case that section 12(2) is ipsissima verba as section 57(iii) of the 196 .....

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sting section has been substituted by the words wholly, necessarily and exclusively for the purpose….. to secure uniformity with the language adopted elsewhere in the Bill. The Notes on Clauses do not indicate any qualitative difference on account of the words wholly and exclusively in section 57(iii) of the 1961 Act substituting the word solely in section 12(2) of the 1922 Act. The words were used only to secure uniformity with the language adopted elsewhere in the Bill. 16. Thirdly, eac .....

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d wholly . Corpus Juris Secondum, Volume 94 at page 15 states that the word wholly has been held to be equivalent to or synonymous with exclusively and solely . 17. This brings us to the interpretation of section 57(iii) in so far as it is relevant to this appeal. The main question that calls for consideration is whether the assessee acquired these shares to gain control or whether she acquired them as an investment. The Tribunal upheld the finding of the Assessing Officer and of the CIT (A) tha .....

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r the purpose of making or earning such income, the assessee is entitled to the benefit of section 57(iii) irrespective of the motive for doing so. 19. In Ormerods (India) Private Ltd. vs. Commissioner of Income-Tax, Bombay City, [1959] 36 ITR 329 (Bom), the assessee purchased a block of shares in Gannon Dunkerley & Co. Ltd. for a sum of ₹ 52.25 lacs. ₹ 36 lacs was paid from a loan granted by Life Assurance Company Limited against a pledge of those shares. The assessee also incur .....

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sferred the shares to the assessee and took the same back after some time. The ITO rejected the claim observing that the investment was not for a proper business consideration and was purely a transaction in which the company acquiesced in the personal financial transactions of the Gupta and Morarka families. The Appellate Assistant Commissioner confirmed this view. The Tribunal held that the assessee had served one purpose and that was the convenience of the said Gupta and Morarka. Paragraphs 5 .....

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.….. .….. ….. .…… 11. It has been, strenuously urged that the Tribunal has recorded an express and explicit finding that the purpose of these borrowings was not earning of any income or profits or gains by the assessee company but something fraudulent, viz., the convenience of the interested parties whose names are mentioned as Gupta and Morarka. The short argument of Mr. Joshi is that there is a clearly recorded finding of fact as to what the purpose of this b .....

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ion which has more than one meaning. Purpose may, in some context, suggest object, and purpose may some times suggest motive for a transaction. But under section 12, we have to read the word purpose in its legal sense to be gathered from the context in which it appears. We have to find out the meaning as far as possible from the language of the section itself and without attributing to the Legislature a precise appreciation of the technical appropriateness of its own. But whatever Way we read th .....

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rded is that the shares were not purchased with a view to trading in them. Incidentally, we may mention that the Income-Tax Officer had observed that the investments were not for a proper business consideration nor for any sound investment consideration . But we are concerned with the finding of the Tribunal and not what the Income-Tax Officer may have said. There is, therefore, in our view, no finding by the Tribunal that these shares were not purchased solely for the purpose of making or earni .....

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ve for the purchase of the shares. It follows from the order of the Tribunal, part of which we have already set out, that the Tribunal took the view that the assessee was entitled in respect of the three subsequent years to set off the payment of interest on the loans against the dividend income. 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, whil .....

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erods (India) Private Ltd. vs. Commissioner of Income-Tax, Bombay City, [1959] 36 ITR 329 (Bom) and C.I.T. vs. Vijaykuverba Saheb of Morvi, [1975] 100 ITR 67 (Bom). In that case also, the Supreme Court dealt with Section 12(2) of the 1922 Act. In paragraph 8, the Supreme Court observed:- Apart from these decisions of this Court, a number of decisions of the High Courts have also taken the same view. In Ormerods (India) Private Ltd. vs. Commissioner of Income-tax, Bombay City, 36 ITR 329 (Bom HC) .....

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tion 12(2) of the Act. …… ….. ….. …… …… …… ……. 21. Mr. Jain also relied upon the judgment in Commissioner of Income Tax. Vs. H.H. Maharani Shri Vijaykuverba Saheb of Morvi & Ors, [1975] 100 ITR 67 (Bom), where the above proposition was reiterated. In that case, section 12(2) of the 1922 Act fell for consideration. He contended that section 12(2) was held applicable even if the expenditure was made to preserve .....

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h & Sons Pvt. Ltd. In support of his contention, he relied upon the fact that it is only members of the Malhotra group who had invested in the shares of the company. 24. Both the learned counsels proceeded on the basis that any expenditure laid out or expended to acquire shares for the purpose of controlling a company would not fall within the ambit of Section 57(iii). We, therefore, proceed on that basis without expressing an opinion on the correctness of the submission. The only question t .....

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arding the concept of control in relation to a company limited with shares. 26. Firstly, control itself is of different types and to a varying extent. We presume that what is meant by control of a company is the ability to control its management and affairs by virtue of the exercise of rights as a shareholder. A person, who holds 51 per cent of the equity shares, would be in a position to ensure that an ordinary resolution is passed or defeated. A person, who holds 75 per cent of the equity shar .....

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51 per cent of the equity shares. Once it is conceded that section 57(iii) is inapplicable where the purpose of acquisition of shares is to control a company and not to make or earn income, the proposition would apply irrespective of the nature or the extent of the control. We reiterate that we proceed on the basis of the said concession. 27. Secondly, the control need not necessarily be on account of the shares being held by a single shareholder. If more than one person holds the controlling in .....

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lling interest. The purchase of shares by each of them would then be for the purpose of acquiring control over the company. Take for instance, a case where the members of a family hold 48 per cent of the equity share capital of a company. They could acquire a controlling interest by the acquisition of more than 2 per cent of the shares through another member of the family. This acquisition of more than 2 per cent could be a purchase for the purpose of gaining or maintaining control over the comp .....

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hat the purchase is for the purpose of gaining control over the company. Merely because the acquisition of shares results in a person or a group of persons acquiring control of whatever nature and to whatever extent, it would not necessarily follow that the purpose of the acquisition was to gain control. That would again depend upon the facts of the case. If the expenditure is laid out or expended wholly and exclusively for the purpose of earning dividends, the fact that the assessee incidentall .....

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earning income by way of dividend. This is so in view of the judgments in Ormerods (India) Private Ltd. vs. Commissioner of Income-Tax, Bombay City, [1959] 36 ITR 329 (Bom); Seth R. Dalmia vs. The Commissioner of Income Tax, (1977) 4 Supreme Court Cases 329 and C.I.T. vs. Vijaykuverba Saheb of Morvi, [1975] 100 ITR 67 (Bom), referred to earlier. 29. In the present case, as we noted earlier, the assessee had acquired about 28 per cent of the shares in the company M/s M. Gulab Singh & Sons Pv .....

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y. It is true that the Malhotra group owns the entire shareholding in the company. When a party buys shares in a company, it is reasonable to presume that it does so wholly and exclusively for the purpose of making or earning dividend income. If a party expects the company to do well presently or in future, it is but natural that it would seek to acquire as many shares as it can. This too would be wholly and exclusively for the purpose of making or earning income therefrom. Parties do not acquir .....

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he purpose of making or earning income. 31. The Tribunal appears to have proceeded only on the basis that the entire shareholding of the company is held by the appellant along with other members of the group including her husband and her husband s HUF and the fact that the dividend had not been declared. There could always be prospects of the company doing well in future. Indeed, if that was not the expectation, the appellant would not have invested in the company at all. There is merely a findi .....

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exclusively for the purpose of making or earning income. In the facts and circumstances of this case, these two factors even taken together do not warrant the conclusion arrived at by the Tribunal. 32. Mr. Jain relied upon a judgment of a Division Bench of the Calcutta High Court in CIT vs. Model Manufacturing Co. (P) Ltd., [1980] 122 ITR 767. In that case, the appellantassessee carried on business as a selling agent and also in speculation and other commodities. At the instance of one of its d .....

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ia & Co. The question that arose was whether the interest on the amounts borrowed by the assessee for purchasing shares was allowable as business expenditure. The ITO found that the shares had been purchased with a view to acquiring controlling interest in the company for and on behalf of Kanorias. The ITO also found that in the subsequent assessment year the assessee had entered into further transactions in purchase and sale of these shares at cost price without profit or loss. The AAC conf .....

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ITR 329, where the High Court made a clear distinction between motive and purpose on facts almost identical to those before us. This decision has been approved by the Supreme Court. We follow the said decision with respect and draw similar distinction between motive and purpose and hold that in the instant case, though the ultimate or ulterior motive of the assessee might have been to confer controlling interest either to itself or to the Kanorias, yet the immediate purpose for acquisition of th .....

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the assessee acquiring shares was to acquire or maintain the controlling interest. Having said that, it must be noted that the judgment really turned on the facts of the case. The Court analyzed the facts of the case in arriving at its conclusion. It is not for us to consider whether the analysis of the facts is correct or not and we refrain from doing so. Whether our analysis of the facts and perception thereof would be the same or not is irrelevant. The judgment, however, supports Mr. Jain s .....

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areholder of Swastik Oil Mills Ltd, referred to therein as SOML , and was also its managing agent. It held 11264 shares of SOML. Two other groups also held shares. The three groups decided that all the shares be held by the assessee to facilitate the implementation of an expansion project. The assessee acquired the shares at a price to be paid in instalments carrying interest at 10% per annum. The assessee encountered some difficulties in acquiring the balance shares of SOML from the other share .....

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n under Section 57(iii) for one of the assessment years was well founded as it derived dividend income but not for the other assessment year in which dividend had not been declared and because the assessee s obligation to make payment of interest to the shareholders of SOML was independent of the right to receive interest from KPPL and that it was, therefore, not possible to say that payment of interest was required to be made by it to the shareholders of SOML in order to earn or derive income b .....

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the shares in order to improve the business of SOML by holding 100% shares of SOML, which would have enabled it to implement the expansion projects. Thus, the shares which were purchased by the assessee were not for the purpose of earning income, though that can be regarded as the ultimate motive. The shares were purchased by the assessee with a clear purpose or object of getting 100% control over SOML. If the purpose was to earn income only, or even if that was the dominant purpose, it would n .....

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ose of getting full control over SOML. Thus, applying the test as laid down in Kasturbhai Lalbhai's case, [1968] 70 ITR 267 (Guj) and Smt. Virmati Ramkrishna's case, [1981] 131 ITR 659 (Guj) to the facts of this case, it becomes clear that the dominant purpose for which expenditure was incurred was not to earn income. At the highest, it was a mixed purpose. For that reason, it will have to be held that the expenditure incurred in that behalf fell outside the purview of section 57(iii) of .....

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shares, was not the purpose but the motive. It was further found that the dominant purpose was not to earn income but to gain control and, at the highest, it was a mixed purpose. The judgment, therefore, does not carry the matter further as far as this appeal is concerned. 34. Mr. Sethi then relied upon a judgment of a Division Bench of the Bombay High Court in Commissioner of Income-Tax vs. Amritaben R. Shah, [1999] 238 ITR 777. It was a reference on the question whether the assessee was entitl .....

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n 57(iii). The Tribunal, however, allowed the deduction. The assessee did not appear at the hearing of the reference before the High Court. The High Court held:- It is clear from a plain reading of above provision that in order to get deduction, the expenditure should be incurred wholly and exclusively for the purpose of making or earning the income from other sources and that it should not be in the nature of capital expenditure. Section 58(1)(a) further provides that no deduction shall be allo .....

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any and not for earning dividend. That being so, the expenditure incurred by way of interest on the loan taken by the assessee for the said purpose cannot be held to be an expenditure incurred wholly and exclusively for the purpose of earning income by way of dividends. From the nature of transaction, it is clear that the expenditure was not for the purpose of earning income by way of dividends but for the purpose of acquiring controlling interest in the company and, therefore, it would not be a .....

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n Chinai and Co. Pvt. Ltd. v. CIT, [1994] 206 ITR 616. In that case, there was a dispute in regard to deduction of expenditure under section 37 of the Act. The expenditure was incurred by the assessee in fighting another group of shareholders to protect the investment in the erstwhile managed company. The court held that such an expenditure was not a business expenditure. It was observed that section 37 of the Act dealt with deductions, inter alia, of any expenditure laid out or expended wholly .....

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