TMI Blog1994 (2) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... ade but were acquired simply for the purpose of acquiring controlling interest in the companies concerned ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that investment in shares was the admitted business for the assessee when the activity in such investment was only to purchase shares for acquisition of controlling interest of companies and had not earned any income (except director's fees) by such vocation ?" The assessee is an individual. This reference relates to the income-tax assessment of the assessee for the two previous years relevant to the assessment years 1982-83 and 1983-84. In respect of these two years, the assessee filed his income-tax returns showing losses of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also found that the assessee had invested Rs. 10,79,228 in purchase of shares of different companies for acquiring controlling interest and another sum of Rs. 18,96,226 in the financing business. The Assessing Officer observed that the assessee made investment on capital account and as such the interest, if any, paid on borrowed moneys could not be treated as relating to his business activities and, therefore, the net interest paid on borrowed moneys was not deductible in computing the business income under section 28 of the said Act. The Income-tax Officer calculated interest at the rate of 18 per cent. on Rs. 10,79,228 being the amount invested in purchase of shares of different companies in which the assessee acquired and held controllin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the course of its operation of promotion, management, control and financing of various companies, the assessee earned income by way of directors' fees only. The assessee did not derive any other income whatsoever. The Commissioner (Appeals), therefore, confirmed the disallowance made by the Assessing Officer. On appeal by the assessee, the Tribunal found that the deduction for expenditure by way of net interest payments on borrowed moneys was claimed by the assessee under section 36(1)(iii) of the said Act. The Assessing Officer had also disallowed the claims in computing the business income. No addition was made under the head "Income from other sources". The Tribunal observed that the disallowance of interest could not be made mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds for different purposes out of such common fund. According to the Tribunal, it was not possible to co-relate any particular borrowing to any particular investments. For this reason also, the Tribunal felt that no disallowance could be made. We are of the view that the Tribunal has come to the correct decision in this matter. Section 36(1)(iii) provides : "36. Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- . . . . (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession." The only enquiry that is to be made is whether the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing but a vocation. The assessee was admittedly a director of several controlled companies. Even otherwise, the activity of controlling, managing, administering and financing companies is nothing but a business/professional/vocational activity. In the case of CIT v. Indian Bank Ltd. [1965] 56 ITR 77, it was held by the Supreme Court as follows : "We cannot imply from this judgment that there is a general principle that if a part of the income of a business is tax-free, expenditure incurred for the purpose of earning this income is outside the purview of section 10." In that judgment, the Supreme Court placed reliance in the case of Hughes v. Bank of New Zealand [1938] 6 ITR 636 ; [1938] 21 TC 472, 523 (HL), and observed as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) prohibits allowance of unremunerative expenditure by way of interest even if the interest was paid "in respect of capital borrowed for the purposes of the business or profession the provisions of section 36 merely say that in computing the income referred to in section 28, certain deductions will have to be allowed. There is no dispute that in this case computation of income under section 28 has taken place in the assessment order. There is nothing in section 36(1)(iii) which justifies disallowance of interest on capital borrowed for the purpose of business from the business income of the assessee assessed by the Assessing Officer. The decision of this court in the case of CIT v. Model Manufacturing Co. (P.) Ltd. [1980] 122 ITR 767 doe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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