TMI Blog1975 (12) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ss, (2)income me from trading in shares,, and (3) income from other sources, i.e., dividends. It is found that during the accounting period, relevant to the assessment year 1966-67, the assessee paid interest of Rs. 2,44,505 on the borrowings made by it. The assessee has claimed this payment of interest as deduction from its business income. The assessee also claimed deduction of tax on inter-corporate dividends, contemplated by S. 8 5 A of the I.T. Act, 1961. But the assessee claimed this deduction under s. 85A without deducting the interest paid on borrowings made for the purpose of purchasing shares because, according to the assessee, the interest paid on these borrowings should be deducted from its business income. During the course of the assessment, the ITO refused to deduct the interest paid on the borrowings from the assessee's business income, but deducted the same from its dividend income from shares. He, accordingly, computed the deduction contemplated by S. 85A on the dividend income reduced by the amount of interest paid on the borrowings. This view was taken by the ITO on the ground that the borrowings on which the interest was paid were mainly for the purpose of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing four questions have been referred to us for our opinion : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income arising out of the investments made by the assessee must be held to be the income from the business of the assessee ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, the payment of interest by the assessee on amounts borrowed for purposes of investments must be allowed as business expenditure? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to tax deduction in accordance with section 85A of the Act calculated on the amount of gross dividend income and not on net amount of dividends after deducting any amount of expenses by way of interest ? (4) Whether, on the facts and in the circumstances of the case, the income from dividend must be assessed under the head ' Income from other sources' as laid down in sections 56 and 57? " The factual data, relevant to the contentions, which arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, we now turn our attention to the questions, which have been referred to us by the Tribunal. The first question shows that the Tribunal is of the view that the dividend income arising from investment in shares must be held to be income from " business " and must be assessed as such. The contention of the revenue is that in view of the provisions contained in sub-s. (2) of S. 56 this income cannot be assessed under any head other than the head " Income from other sources ", we are of the opinion that the view taken by the Tribunal on this point is not correct. We shall presently discuss how this is so. Section 14 of the I.T. Act, 1961 (which is hereinafter referred to as "the Act "), classifies income under six different heads, and income which is specifically chargeable under a distinct head cannot be brought to charge under a different head for the simple reason that rules for computing income and the deductions, which are permissible, vary with each of the six different heads. Therefore, the scheme of the Act is first to classify the income under different heads and then to work out the computation under each of the heads as per the 'provisions relating to such head and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r charging of income-tax the particular section dealing with that head will have to be looked at. The various sources of income, profits and gains have been so classified that the items falling under those heads become chargeable under sections 7 to 12 according as they are income of which the source is 'salaries', 'interest on securities ', 'property', ' business, profession or vocation ' other sources' or 'capital gains'. Looked at thus, the contention of counsel for the revenue that under the scheme of the Act and on a true construction of these relevant sections 'interest on securities ' by whomsoever and for whatever purpose held has to be taxed under section 8 and under no other section is well founded and must be sustained. It being specific head of chargeability of tax, income from 'interest on securities', whether held as a trading asset or capital asset, would have to be taxed under section 8 and not under section 10 of the Act." Similar view is taken by the Supreme Court in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49. In that case, the appellant-company, which was incorporated with the objects of buying and developing landed properties a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There, on behalf of the assessee, it was submitted, as is submitted in the instant case before us, that when a company is formed for the purpose of acquiring shares and making investments and generally undertaking financial and commercial obligations and transactions and operation of all kinds, the dividend income must be computed under s. 10, because the company is formed expressly for the purpose of carrying on business and holding shares in the course of it. The court did not accept this contention and observed that, on principle, before dividend on shares can be assessed under S. 10, the assessee, be it an individual or a company or any other entity, must carry on business in respect of shares, that is to say, the assessee must deal in those shares. The court further observed that it is evident that an individual, who merely invests in shares for the purpose of earning dividend, does not carry on business. The only way he can come under s. 10 is by converting the shares into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares, as did the company in CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86 (SC). These decisions, therefore, conclusively sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision given by this court in Distributors (Baroda) P. Ltd. v. CIT [1968] 69 ITR 614, which is affirmed subsequently by the Supreme Court in appeal in CIT v. Distributors (Baroda) P. Ltd. [1972] 83 ITR 377. This case was decided with reference to the applicability of S. 23A of the Act of 1922, and the question, which arose for consideration of this court, was whether holding of investment shares with a view to retain managing agency, amounted to " business " within the meaning of S. 23A. This court has observed in this case as under (p. 627 of 69 ITR): " Now, as the finding of fact recorded by the Tribunal shows, the shares of the managed companies were held by the assessee for the purpose of safely retaining the managing agencies of the managed companies which were assets productive of income. These shares were investments made for the purpose of holding the managing agencies and they represented as it were the monies required to be invested for the purpose of holding and retaining the managing agencies. These shares were not held as part of a business activity of holding investments and it would be stretching the words to their breaking point to say in these circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ductions 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. " This being a special provision regarding deduction of the interest amount, if a case falls within its terms, the general principles on which reliance is placed by the revenue would be of no avail to it. We shall, therefore, presently consider whether the facts of this case are covered by this special provision. The main requirement of the above quoted cl. (iii) of s. 36(1) is that the interest amount which is sought to be deducted in computing business income under s. 28 should be in respect of capital which is borrowed " for the purpose of business ". Therefore, if it is found in this case that the borrowings in question were made " for the purpose of business ". cl. (iii) of s. 36(1) would have full application and deduction of interest amount must be made from profits and gains of business. The facts of the case show and that is also the finding of the Tribunal that borrowings were mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of borrowing does not, by itself, bring any new asset of enduring nature into existence, and that it is the transaction of the investment of the borrowed capital in the purchase of the new asset which brings that asset into existence. Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd. v. Commissioner of Income-tax [1966] 60 ITR 52 (SC) that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. " The principle that income falling under a specific head should be made chargeable under that head even if it is earned for business purposes, is to be worked out only for the limited purpose of computing total income of an assessee. This principle is accepted by the Supreme Court in the decisions in CIT v. Chugandas and Co. [1965] 55 ITR 17 (SC), CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC), Western States Trading Co. P. Ltd. v. CIT [1971] 80 ITR 21 (SC) and by this court in CIT v. Bhavnagar Trust Corporation (P.) Ltd. [1968] 69 ITR 278 (Guj). We have made a casual reference to these de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... breaking up which is contemplated by the different heads of income is only for the purpose of computation of the total income and that being so, if a question arises for any purpose other than computation of total income, the court can look into the intrinsic nature of the income which is earned and can consider from the commercial point of view whether this income was earned for the business purpose or not. Practically the same view is taken by the Supreme Court in CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306. In that case, the assessee-company, which carried on banking business, held securities as part of the trading assets of its business. For the assessment year 1949-50, it incurred a loss of Rs. 64,400 under the head " Business " and earned Rs. 8,488 as interest on securities and the net loss amounted to Rs. 55,912. For the three succeeding assessment years, the ITO allowed this loss to be set off against the income under the head " Business " but refused to set it off against the income computed under the head " Interest on securities ". On these facts, the court observed that the scheme of the I.T. Act was that income-tax was one tax. Section 6 of the Act of 192 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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