K.K. Desai, J.
1. The applicant-assessee earned property income, business income and income from other sources, i.e., dividend income, resulting from ownership of shares of limited companies. In the year of account ending March 31, 1958, the assessment year being 1958-59, the assessee applied to the Tata Iron & Steel Co. Ltd. to allot to the assessee 2,700 ordinary shares of the fact value of Rs. 75. It appears that along with the application the assessee had to pay Rs. 30, Rs. 25 thereof being premium. The assessee paid the application money of Rs. 30, and in pursuance thereof, some time prior to November 25, 1956, acquired 2,700 ordinary shares of the above company.
2. It appears that the assessee was liable to pay the sum of Rs. 70 by installments of two calls of Rs. 35 each in respect of the above shares. By notice dated November 25, 1956, the assessee was called upon to pay the first call of Rs. 35 per share and he was informed that in default of payment of the sum of Rs. 35 of the call before December 29, 1956, interest at the rate of 6 per cent. per annum would be charged from the due date to the date of actual payment. In fact, the assessee defaulted in making payment on the due date and ultimately paid Rs. 94,500 of the first call along with interest of Rs. 3,775, on June 28, 29, 1957.
3. The assessee, thereafter, received notice for the second and final call claiming Rs. 35 per share dated May 1, 1954. By this notice, the assessee was notified that in default of payment of the call money on July 1, 1957, interest at the rate of 9 per cent. per annum would be charged from the due date to the date of actual payment. The assessee made default in payment on the due date and ultimately paid Rs. 94,500 of the second call with interest of Rs. 5,245 on February 24, 1958.
4. Prior to the date, the above company served the assessee with a notice dated February 1, 1958, copy whereof is annexure 'A' to the statement of the case. Under the powers reserved to the company in the articles of association and other enabling provisions (of the Companies Act), this notice informed the assessee that unless the sum of Rs. 94,500 of the second and final call was paid in the company's office before February 24, 1958, with accrued interest thereon, the share were liable to be forfeited and the board would proceed to a forfeiture of the shares.
5. In the assessment proceedings the contention on behalf of the assessee was that in respect of the payment of interest aggregating to Rs. 9,020 (Rs. 3,775 plus Rs. 5,245) made in the aforesaid manner the assessee was entitled to deduction under section 12(2) in connection with the source 'dividend income'. The case on behalf of the revenue was that the above expenditure for payment of interest was capital expenditure and in any event was not expenditure incurred solely for the purpose of earning dividend income.
6. The Appellate Tribunal by its order dated September 20, 1962, accepted this case of the revenue. In that connection, it rejected the contentions made on behalf of the assessee by holding that the transaction which required to be examined was the contract made between the assessee and the above company which had come into existence upon allotment of the 2,700 shares of the company to the assessee. The demand made by the company for payment of interest on arrears of calls and the notice of forfeiture was in accordance with the contract terms. The observation was :
'The contract terms would certainly be found in the articles of the company.'
7. The further observation was :
'.... it was because of the breach of the terms of the contract committed by the assessee that she was called upon by the company, the other party to the contract, to pay certain interest. Hence, the interest was paid... not for the purpose of earning any income by way of dividend... but for the purpose of acquiring the very source of that income, for failure to pay the call amount with or without interest would have certainly led to the forfeiture of the shares, i.e., loss of the assets themselves.'
8. On these grounds, the Tribunal held that the expenditure was in the nature of capital expenditure and that it was not incurred solely for the purpose of earning dividend income.
9. Now, in connection with the above findings of the Tribunal, it at once require to be stated that the Tribunal has referred to several facts without any documentary evidence in respect of such facts. These are facts which cloud only be gathered by having the relevant documentary evidence on record. The Tribunal had proceeded to discuss the matter of contract between the assessee and the company without having on record the application made by the assessee, the allotment letter issued by the company and without the articles of association of the company being brought on record. Having regard to other facts on record and particularly the notices referred to above, it is abundantly clear that the interest was claimed from the assessee not under any contractual arrangement made between the assessee and the company nor as result of breach of any terms agreed to between the assessee and the company. Apparently, all the observations made by the Tribunal in connection with its findings are based on conjectures relating to the contents of the documents which should have been on the record. The findings made by the Tribunal in the above manner cannot be justified and are liable to be set aside for that one reason alone.
10. Mr. Shah for the assessee has contended that the assessee became owner of the above 2,700 shares upon the shares being allotted to the assessee by the allotment letters issued by the company even prior to the notice dated November 25, 1956. In this submission, apart from the two amounts of Rs. 35 each which the assessee had agreed to pay whenever calls were made, no further capital expenditure was required to be made by the assessee in connection with her ownership of these share. The dividend income in respect of these shares would be earned by the assessee as a result of her having become owner of these shares upon issuance of the allotment letter. Expenditure of the above sum of Rs. 9,020 towards interest paid to the company was accordingly not for acquisition of the share capital. His main and the second submission was that the claim of the company for interest arose mainly and wholly as a result of the two notices dated November 25, 1956, and May 1, 1957. The demand for interest was not for the call money at all. The expenditure of interest of Rs. 9,020 was not capital expenditure, because it was expenditure to maintain and protect the assets of the above 2,700 shares which had already been previously acquired. By expending the sum of Rs. 9,020 of interest, the assessee did not acquire any benefit of ending nature at all. By expending this amount, the value of the shares and/or the capital value of the shares did not increase at all. Disbursement which does not go to increase the capital value of an asset, cannot ordinarily be capital expenditure. The paid up value of the above shares increased pro rate upon payment of the application money of Rs. 30 and the two calls of Rs. 35 each. That paid up value was not enhanced in respect of these shares in any manner by expenditure of the above sum of Rs. 9,020 of interest. He, therefore, submitted that the finding of the Tribunal that the expense of interest was capital expenditure was entirely unjustified. On the basis of these very facts and for the same reasons, Mr. Shah submitted that the above interest of Rs. 9,020 has been expended solely for earning dividend income. For these reasons, the findings of the Tribunal were wrong and the question raised in this reference should be answered in favour of the assessee.
11. Mr. Joshi, for the revenue, has submitted that the above sum of Rs. 9,020 had been expended towards acquiring the source of dividend income. This amount was adjunct to and attached to the liability to pay the first and second call money of Rs. 35 per share. It was, therefore, capital expenditure. He has submitted in the alternative that as this sum was paid towards acquisition of the above shares, it cannot be held to have been paid solely for earning dividend income. In that connection, his submission was that in law and otherwise also, there was power in the board of directors of the above company to call upon the assessee to pay interest in respect of the call money and to give notice that in default of payment within the time fixed by the board of directors, the shares would stand forfeited. This, according to him, must lead to the consequence that the interest had been paid solely for earning dividend income.
12. In connection with their rival contentions, it first requires to be recorded that from the facts admitted it is quite clear that upon allotment of the 2,700 shares to her by the above company, the assessee became the owner thereof even before she was called upon to pay the first and second call of Rs. 35 per share. Unless and until the company in accordance with the provisions of the Companies Act and the scheme in the articles of association of the company forfeited the shares, the assessee would not cease to be the owner of the shares. In connection with her becoming owner of these shares as fully paid-up shares, the assessee was liable to pay nothing in addition to the application money of Rs. 30 other than Rs. 35 for the first and Rs. 35 for the second call. By the notice which we have referred to above, Rs. 35 of the first call was payable not later than December 29, 1956, and Rs. 35 for the second call was payable not later than July 1, 1957. The payment of the call money would have in ordinary course completed the paid up value of these shares. In connection with acquisition of the ownership of these shares as fully paid-up shares, ordinarily, no further amount was payable by the assessee to the company. Apparently, the liability to pay interest in respect of the call money for the first time arose by the two notices respectively dated November 25, 1956, and May 1, 1957. Interest was not to be charged until the due dates, i.e., December 29, 1956, and July 1, 1957. The demand for interest in law was raised and for the first time fixed by the above two notices and had no relevance to the application of the assessee for acquisition of the shares and the allotment of the shares to the assessee by the company. Mr. Shah is right in his submission that in default of payment of interest as fixed by the above notices, in accordance with the third notice dated February 24, 1958, the company was entitled to proceed to forfeit all the 2,700 shares. The asset of the shares and the investment in these shares which was the source for dividend income would have altogether become destroyed if the assessee had failed to pay the interest of Rs. 9,020. These facts, in our opinion, go to prove that the above sum of Rs. 9,020 was paid solely for earning dividend income. It is also quite clear, having regard to the facts discussed above, that for acquisition of the above share capital, it was entirely unnecessary for the assessee to pay any amount to the company except the application money of Rs. 30 and the money of the first and second calls of Rs. 35 per each share. The payment of interest, apparently, did not go to enhance the value of the shares acquired by the assessee. The market value of the shares and the value of the shares of the assessee herself was the same as for all the shareholders.
13. Now, payment of interest to the company on the amounts of the call stands on the same footing as payment of like interest on the same amount and for the same period to an outside lender from whom she borrowed the amount for payment to the company. Even Mr. Joshi did not dispute that if money are borrowed for investing in shares to earn dividends the interest paid on the borrowing would be deductible as expenditure from income from dividends.
14. In these circumstances, it is not possible for us to accept Mr. Joshi's submission that the payment of Rs. 9,020 was capital expenditure. The payment must be held to have been made solely for the purpose of earning dividend income.
15. In the result, the question in this reference is answered in the affirmative. The Commissioner will pay costs.
16. Question answered in the affirmative.