TMI Blog1968 (9) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... he family properties between himself and his adopted son and the assessee by means of two unregistered documents. At the division the assessee got for his share several shares in joint stock companies. O. S. No. 185 of 1952 was instituted by Janaki disputing the adoption as well as the propriety of the division. The assessee was one of the defendants in the suit, which was dismissed. There was an appeal from the decree, in which also the assessee was successful. For the assessment year 1959-60, a sum of Rs. 2,700 was claimed by the assessee as deduction from his dividend income, charged to tax under section 12. This was disallowed by the revenue. The Tribunal concurred with it, its view being that the expenditure had been incurred to retain the title to shares and not to get over any impediment that stood in the way of the assessee's collecting the income thereform, and that the purpose of the suit was to undermine the assessee's very right to the shares, to complete which he had to defend himself. For the next year, the assessee sought to deduct a sum of Rs. 2,500, the expenditure incurred in the appeal, and this time, again, he sought deduction from the dividend received for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the employee in the course of earning his salary. For instance, allowance in respect of books, subject to a limit, is available only if the expenditure has been incurred by the assessee on the purchase of books and other publications necessary for the purpose of his duties. So too, in the case of " conveyance allowance ", which is deductible only if the conveyance is owned and used by the assessee, for the purpose of his employment. Under the head " interest ", by a proviso, allowance is provided for in the computation of the total interest on securities. Allowance, in this respect, relates to any reasonable sum expended by the assessee for the purpose of realising such interest, or in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee. There are certain exceptions to this, but they need not detain us. Likewise, when we come to property income, only expenses relating to the maintenance of the property, but not in the nature of a capital expenditure, or expenditure incurred for the purpose of realising rents, that is permitted for deduction in the computation of total property income. The deductions permitted under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its or gains ". This provision was deleted in 1939 and clause (xv) of section 10(2) was enacted in its present form, and it is in this form the residuary deduction under the head " business " is reiterated in the 1961 Act. Under the head " other sources " sub-section (2) of section 12 provides : " Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains, and further in the case of any income by way of dividend, for any reasonable sum paid by way of commission or remuneration to a banker or any other person realising such dividend on behalf of the assessee, provided that no allowance shall be made on account of. . . " This sub-section has remained in that form right from its inception, though in the 1961 Act, instead of the word " solely ", the words " wholly and exclusively " have been inserted. But it is noteworthy that in the 1961 Act the words " for the purpose of making or earning such profits or gains " have been retained. It has been argued before us for the revenue that having regard to that background, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Our attention has been invited to Eastern Investments Ltd. v. Commissioner of Income-tax, especially proposition (c) in the judgment, for the view that there is in effect no difference between section 10(2)(xv) and section 12(2) in their scope. The Supreme Court was there dealing with an investment company and the question was whether " interest " paid on debentures issued in consideration of purchase of shares of the majority shareholders in order to cut down the share capital of the company, could be allowed as a deduction under section 12(2). The deduction was held to be permissible. In coming to that conclusion, the Supreme Court referred to section 12(2), on which the appeal before it rested, and formulated certain principles in the context of which the third was this : " 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 British Insulated and Helsby Cables Ltd. v. Atherton. " If this proposition is literally applied to section 12(2), there can be no doubt that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age employed by that provision. On this point the Gujarat High Court in Commissioner of Income-tax v. Lalbhai viewed as follows: " But when the Supreme Court applied that proposition to the construction of section 12(2), it must be read in the context of that section and so it is clear that the words 'in order indirectly to facilitate the carrying on of the business' in their application to section 12(2) must mean 'in order indirectly to facilitate the earning of the income', vide also the difference in language between section 10(2)(xv) and section 12(2). What the third proposition therefore provides is that the expenditure need not be obligatory nor incurred with a view directly and immediately to result in the earning of the income but it would be sufficient if the expenditure is incurred voluntarily on the ground of commercial expediency in order indirectly to facilitate the earning of the income. There must be a connection, direct or indirect, between the expenditure incurred and the income earned ..... and, in judging whether in respect of a particular expenditure there is such connection, we should not be guided by abstract or academic consideration but should take into c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urges that the expenditure involved in this case was unrelated to the earning of the dividend and that, in any case, its connection with it is too remote, because the dispute in the suit related to the status of the assessee as the adopted son and did not spring from or relate to a dispute about the ownership of the investments or deriving of the dividend. It is equally strongly urged by Mr. Ramamani, for the assessee, that the nexus between the expenditure and the earning of the dividend is apparent from the fact that the adoption of the assessee provided the very foundation of his title to the investments and a defence of that title was a defence of the investments which provide the dividends. The solution is not, in this particular case, difficult to arrive at. What is necessary to see is whether the nexus necessary, as we indicated earlier, is satisfied by the expenditure in this case. We are unable to see any connection, direct or indirect, between the status of the assessee as an adopted son and the investments which produced the dividends. It is true that, unless his adoption is upheld, the assessee's title to the investments will fail. But the two things cannot be mixed up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found existing between the stock-in-trade of money-lending and the expenditure in the defence of the suit in order to protect and safeguard the realisation of the sum of Rs. 10 lakhs lent out. There was a connection between the character of the expenditure and the character of the source that produced income, namely, the stock-in-trade of the money-lending. The other decision relied on by Mr. Ramamani is Commissioner of Income-tax v. Purshottamdas Thakurdas, which perhaps, on first sight, would appear to be closer to the facts in the present reference. But on a careful consideration of this decision we are of the view that it too does not help the assessee. The assessee there had been elected as a member of the local board of the Reserve Bank of India. The election was disputed and in defending the election the assessee had incurred legal expenses to the extent of Rs. 7,500. The question was whether the assessee was entitled to deduction of that amount under section 12(2). The Bombay High Court held that it was an allowable expenditure. The nexus required between the expenditure and the derivation of the income appears to have been assumed in that case and the only question on whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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