COMMISSIONER OF INCOME TAX Vs. JAGMOHANDAS J KAPADIA

JUDGEMENT

(1.) THIS is a reference under sub -section (1) of section 66 of the Indian Income -tax Act at the instance of the department. the assessee is a registered firm carrying on business as share and stock broker on a large scale. We are here concerned with the assessment year 1959 -60, relevant accounting year being Samavat year 2014. At the end of the said Samvat year (Samvat year 2014), the balance in the overdraft account of the assessee stood at Rs. 13,54,781 as against shares of Rs. 13,36,208 and Government securities of Rs. 24,925 held and offered as security for the overdraft.

(2.) ON the aforesaid overdraft account, the assessee paid Rs. 67,773 as interest for the said Samvat year 2014. The assessee claimed the aforesaid amount of Rs. 67,773 as a deduction under sub -section (2) of section 12 of the Income -tax Act against its dividend income of Rs. 81,967. It may be stated that during the assessment year, the income earned by the assessee was form three sources : Income earned by it form its business under the head 'business', income earned by it under the head 'securities' and income earned by it under the head 'dividends'. The Income -tax Officer did not allow the claim of the assessee for deduction of the said amount of Rs. 67,773 gains tits dividend income. The Income -tax Officer, however, allowed the said amount as deduction against the assessee's business income. The reasons given by the Income -tax Officer for disallowing the assessee's claim for deduction in his own words are : 'The position would have been different in the case of a investor who borrows money purely for the purpose of earning dividends and interest form investments; such a case would be no doubt covered by section 12(2). Even then no investor would borrow money for the purpose of investing in securities because he would have always to pay a higher rate of interest than what he would get from the securities. The assessee being a dealer in shares and securities, section 12(2) has no application here at all because the payments of interest against the borrowings will have to be considered only under section 10 as the borrowing is for the purpose of doing business. I have looked into the assessee's balance -sheets as on Diwali day of 1957, as well as on Diwali day of 1958, which are the last days of S. Y. 2013 and the accounting year under consideration, respectively, and I find that the bulk of the borrowed money on which interest is paid is used in buying substantial quantity of shares and securities in the year and in Vyaj Badla transactions. Both these activities of the assessee -firm are business activities and therefore interest on borrowed money is correctly allowed against the income form business. The assessee's claim is therefrom rejected. The interest paid on the borrowings will be allowed only under section 10 against business income.'

(3.) THE assessee took a further appeal to the Tribunal and the Tribunal allowed the appeal. The reasons given by the Tribunal are contain in paragraphs 2 and 3 of its order, which are in the following terms : '2. The shares in question are admittedly the stock -in -trade of the assessee. The dividends received form these shares as also the interest paid to the banks on the loans taken with the shares as security must form part of the normal business transactions of the assessee. 3. All the same, dividend income requires to be assessed under section 12, so that it is necessary to separate it form the otherwise trade receipts. In arriving at such income, which is the net income, all expenses necessary for the purpose of earning it have necessarily to be deducted. It cannot be disputed that the dividend in question has been earned only form the very shares which had been purchased out of the borrowings on which the impugned interest has been paid; had it not been for the interest payments, the dividend could not have been earned. the income form 'other sources' to be assessed under section 12 will thus have to be only the net income form dividends after deduction of the interest paid to the bank. The assessee's contention is accordingly accepted.'