1. The question of law that is raised in this reference under the Indian Income-tax Act is fairly simple, though judicial opinion in the matter is conflicting.
2. The assessee, who is an individual, is carrying on business as a bus operator. He acquired shares, of the value of Rs. 65,000, of a Limited Company called Southern Transport Ltd., Kilakarai, during the year ended 30th June, 1956. He also lent money during that year to the same Company to the tune of about Rs. 35,552. He borrowed in the course of that year, from various persons, in all, a sum of Rs. 2,15,154. It is not in dispute that a portion of this borrowing was utilised for the purchase of the shares of the Southern Transport Ltd. For the assessment year 1957-58, relevant to the previous year ended on 30th June, 1956, he claimed deduction, in the computation of his business income, of a sum of Rs. 21,048, representing interest paid by him on the total borrowing of Rs. 2,15,154. The Income-tax Officer, who dealt with his assessment, estimated the interest relating to the borrowed amount utilised for the purchase of shares at Rs. 7,500 and disallowed it on the ground that the amount borrowed for purchase of shares was not for the purpose of the transport business. The assessee had only two heads of income under Section 6 of the Act, business and property. He had no income to be assessed under the miscellaneous head covered by Section 12 of the Act. The assessee preferred an appeal to the Appellate Assistant Commissioner objecting to the disallowance of the interest payment of Rs. 7,500 though he did not challenge the quantum of the estimate made by the Income-tax Officer. The Appellate Assistant Commissioner upheld the contention of the assessee mainly on the ground that similar question which arose for consideration in the assessment of another year was decided in his favour by the Income-tax Appellate Tribunal. The reason given by the Appellate Assistant Commissioner was as follows:
It is arguable whether the investment in shares of the Southern Transport can be construed as a part of the appellant's transport business. However, as the Tribunal has already been pleased to hold that it is part of the appellant's business, the decision is followed here and the disallowance of Rs. 7,500 is deleted.
The Department went up on appeal to the Appellate Tribunal and urged that purchase of shares by the assessee was not part of his business venture and that the disallowance of the interest amount of Rs. 7,500 by the Income-tax Officer was correct. The Tribunal took the view that the shares in the Southern Transport Ltd., did not constitute an asset of the Transport business of the assessee, that the amount expended for the purchase of the shares was not capital borrowed by the assessee for the business and that therefore no deduction under Section 10(2)(iii) of the Act was permissible. A further point was raised before the Tribunal by the Assessee that the interest paid on the amount expended for the acquisition of the shares can be deducted under Section 12(2) of the Act. But the Tribunal negatived relief even under Section 12(2) on the ground that there has been no computation of income at all under that section. The appeal preferred by the Department was allowed and the assessment made by the Income-tax Officer was restored. On an application preferred by the assessee under Section 66(1) of the Act, the Tribunal has referred the following question to this Court:
Whether the interest payment of Rs. 7,500 attributable to the holding of shares in the Southern Transport Ltd., is a proper deduction in the assessment under any of the provisions of the Income-tax Act
3. The main contention of the assessee is that the sum of Rs. 7.500 represents interest on borrowed capital falling under Section 10(2)(iii) of the Act and is properly deductible in the computation of his business income. First, we have to determine the question whether the purchase of shares by the assessee in the Southern Transport Ltd., was part of his business activity as a transport operator. He was, of course, not a dealer in shares; he was not buying and selling shares. If it was within the scope of his transport business to acquire or purchase shares of limited companies, the purchase of shares of Southern Transport Ltd., would be part of that trading activity and it would be immaterial whether or not he was doing business in shares apart from the transport business. A transport operator cannot be said to act within the range of his business as such, if he were to acquire or purchase shares in a film producing company or a textile manufacturing company. The very fact that the two things, the transport business and the purchase of shares, are remote from each other and are not interdependent dissociates the purchase of shares from the business. But, it is argued by the learned Counsel for the assessee that the Southern Transport Ltd., is a company doing transport business just like the assessee and that the similarity of the business is sufficient to establish that the purchase of the shares is within the framework of the assessee's business. The argument is that the assessee's business is only extended by the purchase of shares and that the carrying on of the business need not necessarily be confined to the actual running of the buses, but may encompass holding of shares in any business of a similar kind. We are unable to appreciate the soundness of this contention. The real question is whether the purchase of shares was a necessary or even an incidental step to be taken in any stage of the business towards its furtherance or development. In our opinion, it is not. On the materials available, it seems to us that the purchase of shares was rather in the nature of an investment than a trading activity. The claim of the assessee, based on Section 10(2)(iii) of the Act, to deduct the sum of Rs. 7,500 from the business income cannot, therefore, be sustained.
4. We have now to consider the alternative ground of deduction put forward by the assessee under Section 12(2) of the Act. Section 12 of the Act is a residuary provision, under which income, profits and gains not covered by Sections 7, 8, 9 and 10 can be brought to tax. Section 12(1-A) specifically provides that income from other sources shall include 'dividends.' If the assessee had derived any dividend income from the shares of Southern Transport Ltd., that income would have been taxed only under Section 12. Allowances which can be made in computing the income under Section 12 are provided for under Section 12(2), which reads:
Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains and further in the case of any income by way of dividend, for any reasonable sum paid by way of commission or remuneration to a banker or any other person realising such dividend on behalf of the assessee..
Certain expenses are excluded from the allowances and they are the subject-matter of the Proviso. Personal expenses of the assessee, interest chargeable under the Act which is payable without the taxable territories, and payment which is chargeable under the head ' Salaries ', if it is payable without the taxable territories, are specifically excluded. One of the essential conditions justifying the claim for allowances under Section 12(2) is that the expenditure should not be in the nature of a capital expenditure and should have been incurred ' solely for the purpose of making or earning such income, profits or gains.' The language of this section can be compared to that of Section 10(2)(xv). That section reads:
Any expenditure (not being an allowance of the nature described in any of the Clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.
We must observe that there is great similarity between these two provisions, Section 12(2) and Section 10(2)(xv), though there are shades of differences as well. Now, the question is whether the payment of Rs. 7,500 by way of interest by the assessee for securing the capital invested in the shares of Southern Transport Ltd., can be said to be an expenditure incurred solely for the purpose of making or earning income. It cannot be doubted that if the assessee had earned income by way of dividend from these shares, the interest payment of Rs. 7,500 would be a proper charge on that income. So much is conceded by Mr. Ranganathan, learned Counsel for the Department. But then, it is pointed out that the assessee did not earn any dividend income from these shares in the relevant year, and, in fact, he had no income to be assessed under the miscellaneous head of Section 12. The submission on behalf of the Revenue is that the absence of any income by way of dividend or other miscellaneous income under Section 12 operates as a bar against the assessee to claim the interest payment as a revenue charge.
5. It is now a well-accepted rule of Income-tax law that what the statute allows as a proper allowance or expenditure, and which can be brought on the debit side of the assessee's profit and loss account to. offset his credit receipts and to compute the income, profits or gains chargeable, cannot be. defeated by the mere accident of the assessee not being in a position to show that the receipts exceed the expenses or the credit side is larger in amount than the debit side. The rule was stated thus by Lord Thankerton in Hughes v. Bank of New Zealand L.R. (1938) A.C.366 : 21 T.C. 517.
Expenditure in the course of trade, which is unremunerative, is nonetheless a proper deduction if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense.
6. The Bombay High Court had occasion to consider the precise question, which we are now considering, in the decision reported in Ormerods (India) Private Ltd. v. Commissioner of Income-tax, Bombay City : 36ITR329(Bom) . The assessee-Company in that case purchased shares to the tune of Rs. 52 1/4 lakhs incurring liability by way of borrowing from third parties to the extent of Rs. 49 1/4 lakhs. This was during the accounting year ending with 30th November, 1948. During the accounting years relevant to the assessment years 1949-50 and 1950-51, the assessee paid the sums of Rs. 1,69,085 and Rs. 2,04,333 as interest on borrowed capital for the purchase of the shares. There was no income at all from these shares in those years. The assessee claimed to set-off these payments of interest against its other income-in those years, On a Reference under Section 66 of the Act, the High Court held that the interest payment should be set-off against the assessee's other income under Section 24(1) of the. Act. In taking that view, the learned Judges differed from the decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax, Bihar and Orissa : 32ITR377(Patna) .
7. The Allahabad High Court followed the Bombay view in Chhail Behdri Lal v. Commissioner of Income-tax, U. P. and V. P. : 39ITR696(All) . The facts in that case were as follows : The assessees, who were partners in a firm, borrowed Rs. 2,50,000 each from the firm and purchased shares in a company. During the relevant accounting; year, they did not receive any dividends but each had to pay the sum of Rs. 6,688 as interest on the money borrowed. The assessee claimed that the amount so paid by each of them was expenditure deductible under Section 12(2) of the Act and should be set-off, under Section 24(1), against their income under other heads. The High Court held that the assessees were so entitled.. There is no discussion of the question involved for decision in that case, as the. learned Judges found themselves completely in agreement with the view of the Bombay High Court in Ormerods (India) Private Ltd. v. Commissioner of Income-tax, Bombay City : 36ITR329(Bom) .
8. In the decisions cited above, reference has been made to the decision of the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax, West Bengal : 20ITR1(SC) . We shall now refer to that decision. The assessee was an investment company. The majority of its shares was held by C and the rest was held by the nominees of C.C died and S was appointed administrator of his estate in India. S held his shares namely, 50,000 ordinary shares in that capacity. Money was needed by the executors of C in Great Britain and S entered into an agreement with the assessee under which the assessee agreed to reduce its share capital by 50 lakhs by taking over from S the 50,000 shares, and S on his part agreed to forego cash payment and to receive instead debentures of the face value of Rs. 50,00,000 carrying interest at 5 per cent. per annum. The sanction of the High Court was obtained in due course and the agreement was fulfilled. The Vncome-tax authorities, the Appellate Tribunal and the Calcutta High Court took the view that in computing the income of the assessee, the interest paid on these debentures should not be deducted under Section 12(2) of the Act on the ground that it was not expenditure incurred for the purpose of earning the income, profits or gains of the assessee, and that even if it were so, it was not expenditure incurred solely for that purpose. The Supreme Court held that the only question that should be considered was whether the transaction was voluntarily entered into in order to facilitate the carrying on of the business of the assessee and was made on the ground of commercial expediency. The Supreme Court held that the transaction was of such a nature that it fell wthin the purview of Section 12(2) and that the interest paid was a permissible deduction. At page 4, Bose, J., referred to four principles as being relevant in construing the question in issue, and one of the principles is thus laid down:
It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned.
9. It is obvious that the Supreme Court accepted as a sound rule of law that an expenditure need not result in any income as a condition or test of its deductibility under the Act.
10 The contrary view expressed by the Patha High Court in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax, Bihar and Orissa : 32ITR377(Patna) may now be examined. The assessee had acquired certain shares in a company, which he treated as an investment. He made a contribution to the trustee for debenture-holders; in the company for the expenses of litigation against the U.P. Government, who revoked their undertaking to purchase the company, as a going concern and pressed for its winding-up. The assessee claimed that the contribution was for the purpose-of safeguarding his interest in the shares of the company. The Department and the Tribunal did not allow the expenditure on the ground that the Company had ceased to pay dividends. The assessee also claimed deduction under Section 12(2) of interest paid on overdrafts obtained for payment of income-tax (both Central and Agricultural), payment of land revenue and cess, and payment of call moneys on shares in companies which were found to be new and which had not declared dividends. The Patna High Court held that no deduction was permissible in respect of contribution to litigation expenses and of interest on overdrafts for payment off call moneys on shares in companies which were new and which had not declared dividends mainly on the ground that the expenses were not incurred for making or earning the income. There are no doubt observations in the judgment indicating that the absence of income is presumptive proof of the character of the expenses as not being incurred for the sole purpose of making or earning income. With respect we disagree.
11. We have been referred to the decision of the Calcutta High Court in Reference: No. 52 of 1955 which is, however, not yet reported in any of the Law Reports Since reported as Messrs. Madanlal Madras, Sohanlal v. Commissioner of Income-tax, Calcutta : 47ITR1(Cal) . If we can act upon the typed copy of the judgment placed before us, We must observe that we are not able to agree with that decision. The Calcutta High Court has followed the Patna view and has differed from the view expressed by the Bombay High Court and the Allahabad High Court in the decisions already cited.
12. Insistence on the residue of taxable income to uphold the claim for expenses, derives no support from the language of Section 12(2). 'For the purpose of' means ' with a view to ' or ' intending to'. If the purpose fails and there is no income it is a common misfortune to the Revenue and the assessee, but that is no answer to the claim for expenses incurred hopefully to earn income.
13. In T.C. No. 127 of 1958 Since reported as K. Appa Rao v. C.I.T. ( : (1962)2MLJ280 to which one of us was a party, the Bombay and the Allahabad views have been followed. In that case, the assessee Had income from. ' other sources ' and it was held that the interest on borrowed capital can be adjusted towards that income. In our opinion, it is not necessary that there should be income assessable to tax under the miscellaneous head, Section 12(1), before upholding the claim for expenses under Section 12(2). If there is no such income the expenses would amount to a loss which will be available to the assessee to be adjusted against the other heads of income under Section 24(1) in the same year. In fact, this was the view of the Bombay High Court, and, as already stated, this Court has followed that view.
14. The Reference is answered in favour of the assessee, who will be entitled to his costs from the Department. Counsel's fees Rs. 250.