K APPA RAO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) DURING the calendar year 1949, relevant to the assessment year 1950-51, the assessee borrowed a sum of rupees one lakh from a bank and purchased shares in a public limited company. He paid a sum of Rs. 6, 543 towards interest on the loan during the year of account. DURING that year he derived no dividend from the shares in that company or any other shares owned by him. He had, however, other income which was assessable and was in fact assessed under the head "other sources" and he claimed that the interest payment should be deducted from the income from other sources before the assessable income under that head could be computed. The Income-tax Officer refused this relief on the ground

(2.) IT is not also disputed by the learned counsel for the department that in computing the income under each of the heads specified under section 6 of the Act, the different incomes relating to the several activities that would fall under the same head have to be taken. But what the Tribunal has thought fit to do in this case is to ignore a loss that occurred in respect of one of the many sources which fell under this head of income on the ground that there was no income to start with from which the interest payment could be deducted. The question accordingly is whether this is the proper method of approach in computing the income under the head " other sources ". IT has to be noticed that if there had been any income from these shares, the Tribunal apparently thought that the interest payment could be adjusted against such dividend income

(3.) IT is clear therefore that the ultimate decision of the court was rested on the fact that there was no proof that the expenditure was incurred solely for the purpose of making or earning such income In Eastern Investments Ltd. v. Commissioner of Income-tax, the assessee was in receipt of income from certain shares. The assessee was an investment company which was formed for the purpose of acquiring 50, 000 shares of the face value of Rs. 50, 00, 000 held by another person. On the latter's death, the administrator of his estate held those shares in that capacity. The executor was in need of funds and accordingly an arrangement was entered into between the administrator and the assessee whereby the assessee agreed to reduce its share capital by Rs. 50, 00, 000 by taking over the 50, 000 shares at Rs. 100 a share and the administrator on his part agreed to accept instead of cash, debentures of the face value of Rs. 50, 00, 000 carrying interest at 5 per cent. per annum. This arrangement was entered into with the sanction of the High Court. When the assessee sought to deduct the interest paid on these debentures from his income, the claim was disputed by the department. The High Court also on a reference held that the interest payment was not an allowable item of expenditure. On further appeal to the Supreme Court their Lordships enunciated certain principles on the true construction of section 12(2). They stated that it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned further that it is enough to show that the money was expended not of necessity and with a view to a direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business and that beyond these no hard and fast rule could be laid down to explain what is meant by the word " solely ". They refer also to Farmer v. Scottish North American Trust Ltd., where it was held that interest paid on an overdraft required for purchasing shares was an outgoing which could be deducted from the receipts in order to ascertain the taxable profits and gains which were earned by themIT seems to us that the above decision practically concludes the point. We may usefully refer to another decision, Ormerods (India) Private Ltd. v. Commissioner of Income-tax. In that case, the assessee company purchased shares and for this purpose took large loans. During the relevant years interest payments were made on the loans but there was no income at all from those shares. The assessee claimed to set off these payments of interest against his other income in these years. The Tribunal took the view that the investment in shares was not made with a view to trading in them and that the purchase of the shares was intended to serve to accommodate the convenience of two persons who controlled the share capital.