TaxTMI 
TaxTMI 
1961 (3) TMI 95
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....overdraft was utilised for purchasing shares worth Rs. 1,40,625 in M/s. Norton Brown Ltd. and Rs. 11,57,250 in M/s. Hall and Anderson Ltd. in the names of the partners of the applicant firm. M/s. Norton Brown Ltd. (a private limited company) are the managing agents of M/s. Hall & Anderson Ltd. On the overdraft account, Rs. 63,298 was paid as interest during the previous year relevant to this assessment. On the above said investment no income or dividend was received during the relevant previous year. Rs. 63,298 paid as interest was claimed as a deduction in computing the profits. The Income-tax Officer disallowed it in the following words: "Interest a/c. This includes Rs. 63,298 payable to Madanlal Sohanlal H.A. A/c. It represents interest on loans taken for, the purpose of acquiring shares by the partners and members of their family. As such the loans cannot be treated as one for the purpose of the business of the assessee. Hence, interest of Rs. 63,298 is disallowed." 3. The only objection pressed in the appeal to the Appellate Assistant Commissioner was against the disall....
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....marked exhibit "A" and forms part of the statement of the case. 8. On the above facts and circumstances, the question of law that arises for reference to the High Court is as follows: "Whether, on the facts and in the circumstances of the case, Rs. 31,500 paid by the applicant as interest on the loan taken for an investment and which investment did not yield any income during the relevant previous year was allowable as a deduction in computing the assessable profits?" 9. Copies of the draft statement of the case were sent to both the parties. The respondent had no suggestion to make. The applicant has made a suggestion which cannot be incorporated. The reasons for not incorporating it have already been given in the separate order dated 9th July, 1956, while refusing to refer the first question suggested by the applicant. The draft statement is finalised. S. Mitra, for the assessee E. Meyer and B. L. Pal, for the Commissioner JUDGMENT P.B. MUKHARJI J.- This income-tax reference under section 66(1) of the Income-tax Act raises the following question of law fo....
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....ares". The assessee in this case is a registered firm by the name of Madanlal Sohanlal. The Income-tax Officer thereupon appealed to the Appellate Tribunal contending (1) that as the shares were acquired mainly with a view to control the companies, it could not be said that the expenditure was incurred solely for earning dividend and (2) as there was no receipt by way of dividend the interest paid could not be said to have been incurred for the purpose of making or earning the income. The assessee contended that as the assessee firm jointly held with four other parties only 2,76,640 shares out six lakhs shares of Hall & Anderson Ltd., it could not be said that the purchase was to obtain the controlling interest or control over the company. The Appellate Tribunal found that in company matters a large block of shares, as in this case, did, on occasions, confer such a majority as to amount almost to a control and came to the conclusion that the amount had been admittedly borrowed for the purpose of investment and as such interest on the loan could be claimed only under section 12(2) of the Income-tax Act, but as no dividend was received during the year, interest paid or payable on the....
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....x Act." On the strength of this observation it is contended by the learned counsel for the Commissioner of Income-tax before us that the decision in the case of Eastern Investment Ltd. [1951] 20 I.T.R. 1, 7; [1951] S.C.R. 594 is a decision where there was some income and some return and, in fact, the words "earned income" clearly showed that the Supreme Court proceeded on the basis that the principle of construction that it was not necessary to show that the expenditure in fact earned any profit was related to the question of net profit only and not where there was no income whatever. In support of this contention, Mr. Meyer, the learned counsel for the Commissioner of Income-tax, specially referred to the two English decisions of Moore v. Stewarts & Lloyds Ltd.** and Usher's case*** of which notice was taken by the Supreme Court for that propositions. A reading of the two cases shows clearly that there the language used in the statute was not only entirely different from the one now used in section 12(2) of the Indian Income-tax Act but that it was more near to what is now section 10(2) (xv) of the Indian Income-tax Act. In both those English cases, Schedule D, rule 1, of t....
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.... of the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax* by these observations: "In the Supreme Court case, the interest was paid the company on the money borrowed by it and utilised for investment which earned income, and, as such, it was held that although the loan was taken on an overdraft, as it was utilised for investment on which the company earned income, the interest paid by the company on such loan was a permissible deduction under section 12(2) of the Act. In the present case, however, the position is different." The Patna decision in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax** has been the subject of dissent and controversy. Dissent was expressed by the Division Bench of the Bombay High Court consisting of S.T. Desai and K.T. Desai JJ. in Ormerods (India) Private Ltd. v. Commissioner of Income tax*** S.T. Desai J. in that case, after quoting the particular sentence of the Supreme Court decision in Eastern Investment Ltd.*, at page 334, observed as follows: "Sub-section (2) does not say that the deduction is p....
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....Income-tax Act. This statute must be our primary guide in interpreting the law under those sections. With a view to appreciate the context it is necessary to note that Chapter III of the Income-tax Act deals with the subject "Taxable Income". Section 10 and section 12 come within this Chapter. The Chapter begins with section 6 indicating heads of income chargeable to income-tax. The heads with which we are concerned are those under business, profession or vocation and income from other sources. Section 10 deals with business. Section 10(1) provides that the tax shall be payable by an assessee under the head "profits and gains of business, profession or vocation", in respect of profits or gains of any business, profession or vocation carried on by him. We are concerned with the case of a business in this reference. In other words, therefore, in this context section 10(1) of the Act means a tax on the profits or gains of a business. Section 10(2) goes on to provide how such profits or gains" shall be computed after making the allowances mentioned thereunder. The allowance that is relevant for our purpose is contained in clause (xv) which reads as follows: &....
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....em on the same level and with exactly similar consequences in the face of express difference in language. It is all the more so because section 10(2)(xv) of the Act has been amended and has history which is relevant on the point. The original clause (ix) renumbered as (xii) by section 11 of the Indian Income-tax (Amendment) Act, 1939 (Act VII of I939), was future renumbered as (xv) by section 3 of the Indian Income-tax (Amendment) Act, 1946 Act VIII of 1946). Section 12(2) of the Act had some amendments as, for instance, introduction of income by way of dividend by section 9 of the Finance Act, 1955, which came into effect from the 1st April, 1959. Under section 12(2), the deductions that are not permissible are 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". This was the type of language which was used in section 10(2)(ix) of the old Act before the amendment which now corresponds, after the amendment, to section 10(2) (xv) of the present Act. The language of section 10(2)(xv) of the present Act reads, on this relevant part, excluding the features not necessary for our purpose:....
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....ct. The Supreme Court enunciated these principle in Eastern Investments Ltd. v. Commissioner of Income-tax*, by emphasising, "it is not necessary to show that any expenditure was profitable or that, in fact, any profit was earned". It is of importance, therefore, to recognise the limits of that clear enunciation. That limit is that a "profit" need not be shown. The expenditure need not be shown to be profitable in fact. The expenditure need not also be shown to have earned any "profit" It will be a wrong application of this principle, in our view, to extend this doctrine to the case where it is not a question of actual profit but where there is no return whatever. That, in our view, would be to tax not an income or to allow a deduction not against such a mere prospect. This is not permissible, in our view, in the context and interpretation of section 12 of the Income-tax Act. It is precisely this difference which is made after the amendment in section 10(2)(xv) of the Act where no question of the purpose of making or earning such income arises and where it is enough to show only an expenditure wholly or exclusively for the purpose of the business itself. That is why the cases to wh....
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....o long as the expenditure is wholly or exclusively for the purpose of such business it is allowable. It will, therefore, be a wrong approach to the question to suggest that allowance must follow the same principle in section 10(2)(xv) of the Act as in section 12(2) of the Act in spite of the difference in language which has been noticed already. Mr. Mitter, learned counsel for the assessee, relied on the decision in Royal Calcutta Turf Club v. Commissioner of Income-tax***. That was not a case under section 12(2) of the Income-tax Act but one under section 10(2)(xv) of the Act. The question there was whether expenditure incurred for the purpose of earning or ensuring the earning of future profits in a business by establishing schools for training of Indian boys as jockeys came within the meaning of section 10(2)(xv) of the Income- tax Act. Chakravartti C.J. at page 623 observed: "It is thus not merely direct benefit to the trade which can be the objective of expenditure made wholly and exclusively for the purpose of the trade. Expenditure incurred for secur....
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....r principles, of which the relevant principle has already been quoted before, was doing so on this question, what is meant by the word "solely". The fourth principle which Bose J. laid down in that page is what is meant by the word 'solely'". Therefore, the principle "It is not necessary to show that the expenditure was a profitable one or that, in fact, any profit was earned", which was principle (b), is to be read in the light of being a principle on the question as to what is meant by the word "solely" under principle (d) as laid down by Bose J. in the Supreme Court. Therefore, our answer to the question referred to us must be in the negative and we decide accordingly. The assessee will pay the costs of this reference. BOSE J.--The question propounded in this reference involves the interpretation of section 12(2) of the Indian Income-tax Act. The crucial or leading words of section 12(2) are, "expenditure...incurred solely for the purpose of making or earning such income..." Now, section 12(1) of the Act deals with taxability of "Income from other sources" and the words "such income" in sub-section (2) evidently refer back to the "Income from other sources" mention....
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.... profit was earned. But in the case before the Supreme Court, the company concerned, which was an investment company and which borrowed money and utilised it for its investments on which it earned income, was allowed deduction under section 12(2) in respect of the interest paid by the company on the loan. So, in that case, there was income earned in the relevant year and so the provision of section 12(2) was applied. Profit and income are not the same thing though the concept of profit includes the concept of income. As pointed out by the Supreme Court in a later case, Calcutta Company Ltd. v. Commissioner of Income- tax(2), quoting with approval the observation of Lord Herschell in Russell v. Town and County Bank Ltd.(3): "The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word 'profits' in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to ....