MADANLAL SOHANLAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS income-tax reference under s. 66(1) of the IT Act raises the following question of law for the decision :

(2.) BEFORE proceeding to decide the question, it will be appropriate to give a brief account of the relevant facts. The applicant is a registered firm with four partners and the assessment year in question is 1948-49, the relevant previous year being 2004 R. N. The bone of contention relates to the payment of interest on an overdraft. The applicant firm took a loan on overdraft from the Hongkong Shanghai Banking Corporation Ltd., during the year 2003 R. N., in the name of Madanlal Sohanlal H. A. A/c., meaning thereby Hall and Anderson Ltd. account. The overdraft was utilised for purchasing shares of the value of Rs. 1,40,625 in the names of the partners of the applicant firm in two companies, Norton Brown Ltd. and Hall and Anderson Ltd. Norton Brown Ltd. are the managing agent of Hall and Anderson Ltd. On this overdraft a sum of Rs. 63,298 was paid as interest during the previous year relevant to this assessment. The essential point of significance in this case is that on the investment no income or dividend was received at all during the relevant previous year. The applicant claimed Rs. 63,298 so paid as interest as a deduction in computing the profits. The ITO disallowed it on the ground that "it represents interest on loan 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."

(3.) THE earliest decision relevant on the point is Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1,4, 5. It was a decision on s. 12(2) of the IT Act and although the appeal was allowed by the Supreme Court, Bose J. at page 598 expressed the view that the law on the point of true construction of s. 12(2) of the IT Act was correctly summarised in the judgment of the High Court. Bose J. at page 598 of the SCR laid down four principles as "relevant". One such principle was "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". This principle was supported by reference to two English decisions, one being Moore vs. Stewarts and Lloyds Ltd(supra). and the other in Usher's case (supra).