JUDGMENT
Ajit K. Sengupta J.
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.
4. The Tribunal, after an elaborate discussion of the matter in dispute held that the interest paid was in respect of borrowals for the purpose of the assessee’s business and that no portion of such interest paid could be said to be an expenditure wholly and exclusively laid out for the purpose of earning or making dividend income which was only an incidental benefit. They, therefore, directed the authorities below to allow deduction of the entire interest from business income and not to allocate any portion of such interest to dividend income and consequent deduction therefrom. In the assessment year under reference, the Tribunal followed the above order as the facts except with regard to the quantum of interest were the same and directed the income-tax authorities to allow the deduction of the entire interest amount specified above from business income and not to allocate any portion to the dividend income and consequent deduction therefrom. The cross-objection by the assessee was consequently allowed.
5. On the aforesaid facts, the following question of law has been referred to this court :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no part of the interest paid could be said to be an expenditure laid out or expended wholly and exclusively for the purpose of making or earning income from dividends and that the entire amount of interest paid should be allowed as a deduction in computing the profits and gains of the assessee’s business ?”
6. The contention of the Revenue before us is that, in the present case, overdrafts were utilised by the company in investing in the shares of the managed companies. Here, the objects were not only for the purpose of business but also for the purpose of earning dividend and hence the provisions of Section 57 of the Act relating to the dividend income are applicable in the present context. Mr. Moitra has submitted that the inference drawn by the Tribunal that the interest was in respect of borrowings for the assessee’s business and no portion of the interest paid can be an expenditure wholly and exclusively laid out for the purpose of earning or making dividend income cannot be sustained on the materials on record.
7. Dr. Pal, however, appearing for the assessee, has contended to the contrary. He has also relied on several decisions in support of his contention that the Tribunal has come to the correct conclusion on the facts of this case.
8. The question in the present reference is whether the entire amount of interest paid should be allowed as a deduction in computing the profits and gains of the assessee’s business.
9. The Tribunal found firstly that the assessee is not a dealer in shares. Nor does it carry on the business in holding of investments. Its business is that of a managing agency. Secondly, the shares held by the assessee were with a view to retain the managing agency and were also necessary for such retention. It, therefore, follows from this finding that the investment of borrowed money in these shares was for the purposes of the business of the assessee. Therefore, the borrowal itself was for the purposes of the business and that the interest paid was in respect of such borrowal. On those findings of fact, it is not possible to draw a conclusion that the interest paid in respect of such borrowed funds utilised for investment in shares which was necessary to retain the managing agency and held with a view to retain such agency is an expenditure laid out or expended wholly or exclusively for the purposes of making or earning dividend income.
10. The Tribunal also found that the investment in shares was principally and primarily with a view to obtain the managing agency commission rather than the dividend income. The said fact is evident from the comparatively small amount of dividend which the assessee received compared to the large amount of managing agency commission which the assessee received during the various previous years. The bulk of the shares was held by the assessee with a view to have a firm grip over its managing agency business. The Tribunal, therefore, held, and in our view rightly, that the interest paid is in respect of borrowals for the purposes of the business and that no portion of such interest paid could be said to be expenditure wholly and exclusively laid out for the purposes of earning or making any dividend income. The dividend received is only an incidental benefit. The finding of fact that the interest paid is in respect of the borrowal for the purposes of the business and no portion of such interest paid can be said to be an expenditure wholly and exclusively laid out for the purposes of earning or making dividend income has not been challenged by raising any appropriate question as to whether such finding is a perverse one or whether such finding is based upon any material or evidence. In that event, the said finding cannot be challenged otherwise. It is the categorical finding of the Tribunal that the borrowal for the purchase of the shares was for the managing agency business of the assessee and to retain its grip over the managing agency business.
11. Dr. Pal, in support of his contention, has relied on two decisions of the Gujarat High Court and a decision of this court. The first decision of the Gujarat High Court is in the case of CIT (Addl.) v. Laxmi Agents P. Ltd. [1980] 125 ITR 227. The Gujarat High Court, on similar facts, held that interest paid on the borrowal with which the shares were purchased in the managed company for the purposes of carrying on its managing agency business should be allowed under Section 10(2)(iii) of the Indian Income-tax Act, 1922 (corresponding to Section 36(1)(iii) of the Income-tax Act, 1961), and no portion of the said interest can be deducted in the computation of dividend income.
12. The said judgment has been referred to and relied upon by this court in the case of CIT v. J.K. Industries (P.) Ltd. [1980] 125 ITR 218.
13. The same view has again been followed by the Gujarat High Court in the later decision in the case of CIT v. Cotton Fabrics Ltd. [1981] 131 ITR 99.
14. This court in CIT v. New India Investment Corporation Ltd. [1978] 113 ITR 778 and CIT v. Davenport and Co. Pvt. Ltd. [1986] 158 ITR 348 emphasised that, if an assessee holds shares and securities as stock-in-trade and does not hold such shares and securities by way of investment and dividend is received by the assessee from such stock-in-trade, in such a case, dividend earned by the assessee though assessable under a particular head must be held to be business income of the assessee and the expenditure incurred by the assessee should be allowed under the head “Business” and cannot be apportioned under two different heads, i.e., business and dividend. Even if the income of the assessee was solely referable to dividend, there cannot be any apportionment.
15. In this case, as we have already indicated, the assessee is not a dealer in shares nor does it carry on business in the holding of investments. The Tribunal took note of the fact that the Appellate Assistant Commissioner, in his order for assessment year 1964-65, which is the main speaking order on the issue, found that the shares held by the assessee were with a view to retain the managing agency and were also necessary for such retention. It, therefore, follows from this finding that the investment of borrowed money in these shares was for purposes of business of the assessee and that, therefore, the borrowal itself was for purposes of business and that the interest paid was in respect of such borrowal.
16. The Tribunal also relied, in coming to its conclusion, on the comparative statement of dividends and also commission received for several years. The said chart is as follows :
“Assessment year
Year ending on 31st March
Dividends
Commission
Â
Â
Rs.
Rs.
1960-61
1960
12,30,035
47,64,787
1961-62
1961
13,80,771
43,90,332
1962-63
1962
16,29,488
41,28,548
1963-64
1963
25,94,758
56,47,290
1964-65
1964
30,86,520
58,23,813
1965-66
1965
25,52,318
47,17,172
1966-67
1966
27,20,092
52,59,451
1967-68
1967
21,35,656
50,88,381
1968-69
1968
20,02,126
53,28,813
1969-70
1969
12,02,459
57,10,275
1970-71
1970
12,79,033
59,18,116
1971-72
1972
12,23,648
64,06,982.”
17. This chart is indicative of the fact that the investment in shares was principally and primarily with a view to obtain the managing agency commission rather than the dividend income. The dividend is only an incidental benefit. Whether or not the interest payment shown is primarily for earning dividend or for retaining its grip over managing agency business is essentially a question of fact.
18. The Tribunal approved the finding of the Appellate Assistant Com missioner that interest was paid on the borrowal for the purposes of investment in shares of the managed company and such investment was for the purposes of the business of the assessee and the borrowal itself is for the purposes of the business. Once it is held that the borrowal is for the purposes of the business, we look no further and the interest which is paid on the capital borrowed for the purposes of the business is to be fully allowed. Even if capital has been borrowed for the purchase of securities which do not produce any taxable income, such interest is to be fully allowed.
19. A similar question came up for consideration in Income-tax Reference No. 172 of 1980 (CIT v. National and Grindlays Bank Ltd. ) where the judgment was delivered on May 31, 1991. There, this court, relying upon a Division Bench decision in CIT v. Anniversary Investments Agencies Ltd. [1989] 175 ITR 199, held that where the entire
dividend income is attributable to the business activity of the assessee, even if such income is assessed under the head “Other sources”, the nature and quality of such income would not thereby be affected. The expenditure laid out wholly and exclusively for the purpose of business which includes the earning of dividend on shares held for retaining the managing agency is allowable as a business expenditure.
20. For the reasons aforesaid, we are unable to accept the contention of the Revenue.
21. We, therefore, answer the question in the affirmative and in favour of the assessee.
22. There will be no order as to costs.
K.M. Yusuf, J.
23. I agree.