TaxTMI 
TaxTMI 
1958 (10) TMI 38
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.... the time of the hearing of the reference applications before their Lordships. The assessee purchased a block of shares in Gannon Dunkerley&Co. Ltd., Bombay, for a sum of about Rs. 52,25,000 during the accounting year ending with November 30, 1948. These shares were pledged with the Empire of India Life Assurance Co. Ltd., and the assessee had taken a loan of about Rs. 36 lakhs from the insurance company. Besides this loan, which was secured against those shares, there were other sundry creditors and unsecured loans amounting to Rs. 13½ lakhs. The paid up capital of the company is only Rs. 5 lakhs. The total assets shown in the balance-sheet are about Rs. 64 lakhs and include a block of shares in Gannon Dunkerley & Co. Ltd. of the value of Rs. 52½ lakhs. In the previous year relevant to the assessment years 1949-50 and 1950-51, the assessee paid a sum of Rs. 1,69,085 and Rs. 2,04,333 respectively as interest on capital borrowed. There was no income from the shares in Gannon Dunkerley & Co. Ltd. in the two years under reference. The Income-tax Officer observed in the assessment order for the assessment year 1949-50:  ....
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.... assessee has, however, paid interest in respect of the money borrowed for the purchase of shares in these years. The assessee says that you must compute its loss under section 12 in respect of his holdings in shares. If there is no income, the interest paid on borrowings should be treated as loss and set off against other heads of income under section 24(1) of the Act. The Tribunal, however, took the view that as the investment in shares was capital investment, there could be no question of ascertaining a minus income from that source. Dividend income is assessable under section 12. If there is no dividend income, section 12 does not come into play. 5. The point in issue is of considerable importance to the Department. If the assessee's contention was to be accepted, it would mean that there is no material difference in the computation of income from shares held as an investment or a stock-in-trade. 6. The question of law which arises is: "Whether on the facts and in the circumstances of the case interest paid on moneys borrowed for the purchase of shares in Gannon Dunkerley & Co. Ltd., which did not yield a....
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....st on the capital borrowed for the purchase of the shares. During the relevant years, there was no income at all from those shares and the assessee claimed to set off these payments of interest against its other income in respect of the relevant assessment years. The Income-tax Officer dismissed the claim observing as under: "I, therefore, come to the conclusion that the investments made by Ormerods (India) Ltd. is not for a proper business consideration nor for sound investment consideration. This is purely a transaction in which the company, acquiesced in the personal financial transaction of the Gupta and Morarka Families. I, therefore, disallow the interest paid on these overdrafts in the computation of profits." The Appellate Assistant Commissioner also took the same view and the assessee carried the matter in appeal to the Tribunal. The Tribunal held that the investment by the assessee in the shares of Gannon Dunkerley & Co. Ltd. was not a business venture. On a fair reading of the statement of the case and the order of the Tribunal, it is clear to us that the Tribunal has treated....
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....ointed out that at all material times the ownership as well as the beneficial interest in these shares vested in the assessee company which had incurred liabilities specifically for the purpose of buying these shares. Then the Tribunal has expressed the view: "The dividend income on these investments is not the business income of the assessee company..................If any dividend income is included in the appellant's assessment the interest should be allowed against such dividend income." The question which we have to determine on this reference is: "Whether on the facts and in the circumstances of the case interest paid on moneys borrowed for the purchase of shares in Gannon Dunkerley & Co. Ltd. which did not yield any dividend income, could be set off against other income under section 24(1) of the Income-tax Act?" At the very outset of his argument, Mr. Palkhivala, learned counsel for the assessee, stated that he did not intend to rely on any argument founded on the application of section 10(2)(iii). He has relied pr....
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....een earned in the accounting year as a result of that borrowing or any expenditure of a like nature to bring the case within the meaning of that expression. Mr. Palkhivala has also drawn our attention to certain observations made by the Supreme Court in Eastern Investment Co. Ltd. v. Commissioner of Income-tax [1951] 20 I.T.R. 1.0. In that case, their Lordships held that the transaction before them was of such a nature as would fall within the purview of section 12(2) and the interest paid would be an allowable deduction under the sub-section. In the course of the judgment, it has been observed: "It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned." Sub-section (2) does not say that the deduction is permissible when any income has been earned or profits or gains made. All that it speaks of is that the expenditure must have been laid out solely for the purpose of earning income. There is nothing in the language of the section to suggest that the purpose needs to be fulfilled nor is it necessary that the purpose should fructify into any benefit ....
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....more than one meaning. "Purpose" may, in some context, suggest object; and purpose may sometimes 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 the word "purpose" it cannot certainly mean a motive for a transaction. Much less can it mean the ulterior motive or the ultimate object of purchasing the shares by the company. The only possible way to read what Mr. Joshi has described as the express and explicit finding of the Tribunal is, in our opinion, no more than a finding by the Tribunal as to the ulterior motive or ultimate object in purchasing the shares. But the purpose of the purchase is a different matter. All that the Tribunal has recorded 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 consideratio....
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....or facility which, according to the Tribunal, was given by the assessee to Gupta and Morarka. It is difficult to see how any argument founded on fraud can stand on this reference. There has been some suggestion that the purpose of the borrowing may be said to be to increase the capital of the company. There is little scope for any such argument on this case. Mr. Joshi has relied on a decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax [1957] 32 I.T.R. 377. In that case one of the points to be determined by the court was whether interest paid by an assessee in his overdraft account on moneys borrowed for payment of call money on shares in companies which were new and which had not declared dividends could be treated as expenditure incurred solely for the purpose of making or earning income. The decision of the court was that no deduction was permissible to the assessee in respect of payment of such interest. At page 389 of the report, it is mentioned that the Appellate Assistant Commissioner had found that the assessee had paid the call moneys on shares in companies which were new and which had not declared dividends and as such th....