1993 (1) TMI 53 - HC - Income Tax

Interest on borrowings for SOML share acquisition held capital, not deductible as income from other sources s.57(iii)

HC held that interest expenditure incurred on borrowed funds used for acquiring shares of SOML was capital in nature and not deductible under s.57(iii) as ... Disallowance of interest relatable to purchase of shares - deduction in computing its income from other sources. - Nature of expenditure - Capital Or Revenue - HELD THAT:- 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 not have sold the shares again to KPPL as, by that time, it had already acquired more than 90% shares, and that would have satisfied its object of earning more income by possessing more shares. The reason why the assessee sold the shares was that it was not able to get 100% control by purchasing all the remaining shares. Thus, from the nature of the transaction, it becomes apparent that the expenditure which was incurred by the assessee was not for the purpose of earning income, but for the purpose of getting full control over SOML. Thus, applying the test as laid down in Kasturbhai Lalbhai's case [1967 (6) TMI 16 - GUJARAT HIGH COURT] and Smt. Virmati Ramakrishna's case [1976 (2) TMI 4 - GUJARAT HIGH COURT] 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 the Act. Thus, we answer the question referred to us in the affirmative, that is, against the assessee and in favour of the Revenue. Issues Involved:1. Disallowance of interest related to the purchase of shares.2. Nature of expenditure: Capital or Revenue.3. Deduction eligibility u/s 36 and u/s 57(iii) of the Income-tax Act, 1961.Summary:1. Disallowance of Interest Related to Purchase of Shares:The Tribunal confirmed the disallowance of interest amounting to Rs. 2,87,096, which was related to the purchase of shares of Swastik Oil Mills Ltd. (SOML). The assessee, Sarabhai Sons (P) Ltd., had purchased shares from other shareholders to hold 100% shares in SOML. The interest was paid on the unpaid purchase price of these shares.2. Nature of Expenditure: Capital or Revenue:The Income-tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) both held that the expenditure was of a capital nature. The ITO viewed that the shares were acquired with the intention of handing them over to KPPL, and thus, the interest expenditure was not for the assessee's business or earning income from other sources. The AAC further stated that the interest payment was an integral part of the purchase price, reinforcing its capital nature.3. Deduction Eligibility u/s 36 and u/s 57(iii):- Section 36: The Tribunal rejected the claim under section 36, noting that the purchase of shares had no connection with the assessee's managing agency of SOML.- Section 57(iii): The Tribunal allowed the deduction for the assessment year 1968-69 as the assessee derived dividend income. However, for the assessment year 1969-70, the Tribunal denied the deduction, stating that the source of income (dividend) was extinct and the obligation to pay interest was independent of the right to receive interest from KPPL.Court's Analysis and Decision:- The court found merit in the assessee's argument that, per the Supreme Court's decision in CIT v. Rajendra Prasad Moody, earning actual income is not necessary for claiming deduction u/s 57(iii). The court also noted that the connection between expenditure and income need not be direct; an indirect or incidental connection suffices.- However, applying the test from Kasturbhai Lalbhai's case and Smt. Virmati Ramkrishna's case, the court concluded that the dominant purpose of the expenditure was not to earn income but to gain full control over SOML. Therefore, the expenditure was for a mixed purpose and fell outside the purview of section 57(iii).Conclusion:The court answered the referred question in the affirmative, against the assessee and in favor of the Revenue, confirming the disallowance of the interest deduction. No order as to costs.