COMMISSIONER OF INCOME-TAX Vs. JARDINE HENDERSON LTD

JUDGEMENT

(1.) This is a reference at the instance of the Revenue under Section 256(2) of the Income-tax Act, 1961, for the assessment year 1971-72. The facts leading to this reference are set out as under: The assessee carried on the business of managing agency, secretary-ship, etc., and also has a trading department. To be more elaborate, its business consists of managing limited companies, working as a registrar for several other companies and also trading in fertilizers, yarn, gunny exports, plastics and agencies. In addition to business income, it has also derived income from interest on securities, property and dividends. The assessee-company was incorporated in 1946. As per its memorandum of association, it was also to acquire all the shares in the companies held by the firm, Jardine Skinner and Co., which was an old establishment and a well-known managing agency house. The assessee borrowed money from time to time through several overdraft accounts with banks. Such overdrafts were utilised by it in the course of its trading activities, in advancing loans to and financing the companies in the agency and realising interest therefrom and in investing in the shares of the companies in the agency.

(2.) The assessee had to pay interest on the loans so borrowed from banks. Its claim was that the interest paid was in respect of borrowals for the purpose of its business. The Income-tax Officer held that the entire amount of interest so paid could not be deducted from the business income and that a portion of interest relatable to that portion of the borrowed amount which was utilised for investments in shares had to be disallowed as a deduction from business income and could be allowed only as a deduction from the dividend income and interest on securities. On this basis, out of the total interest debited to the profit and loss account in the assessment year 1971-72, he disallowed Rs. 16,17,638 from the business income and deducted it from the gross dividend income. In other words, he disallowed a portion of the interest while working out the business income but allowed it while working the income from dividend. The Appellate Assistant Commissioner confirmed the action of the Income-tax Officer.

(3.) The assessee did not prefer any appeal to the Tribunal against the above finding of the Appellate Assistant Commissioner. On the other hand, an appeal was preferred by the Department in which the assessee took a cross-objection to the effect that the Appellate Assistant Commissioner had erred in sustaining the above disallowance in the computation of profits and gains of business carried on by the assessee and allowance of the same as a deduction against dividends.