ORDER
T.V. Rajagopala Rao, President
1. This is an appeal filed by the assessee against the order of the Commissioner (A) VI, Bombay dated 23-9-1992. The only question involved in this appeal is whether the loss sustained by the assessee can be carried forward to the next year for being set off.
2. The facts are few and they can be stated as under :
For assessment year 1987-88 the assessee, which is a private limited company, had filed its income-tax return on 29-7-1987 showing a loss of Rs. 93,585. Along with the return the profit and loss account and the balance sheet, which have been audited were filed. The company was incorporated on 19-3-1986. The accounts of the company were closed for the first time on 31-12-1986. The accounts for the assessment year 1987-88 were therefore prepared for the period from 19-3-1986 to 31-12-1986. The objects of the company were inter alia, to carry on the profession of consultancy, advisors and also carry on the business of underwriting, to subscribe, acquire, take up and hold shares, stocks, debentures and securities issued by any company carrying on business in India or in any foreign company. Thus it can be seen from the objects clause of the company that selling of shares was not one of the objects for which the company was formed. The company carried on activities of soliciting, assignments for management consultancy and financial consultancy. The company’s directors were qualified persons, who have vast experience in the field of industrial management. In the accounting year in question the assessee-company made investments into shares and other securities of various private/public limited companies. The company purchased shares worth Rs. 8,13,960 as on 31-12-1986. The company borrowed funds by way of loans for making investment in shares. The total borrowings from M/s Patel Holdings P. Ltd. and M/s. Guru Holdings P. Ltd. together with accrued interest as on 31-12-1986 was Rs. 8,91,957.26. From the balance sheet one can know that the total borrowings from M/s. Patel Holdings P. Ltd. were on various dates whereas from M/s. Guru Holdings P. Ltd. the whole amount was borrowed only once. Admittedly the assessee-company did not earn any dividend income. So also the assessee-company did not obtain any sort of receipt from the management consultancy services which it offered to the public. The assessee had to pay a gross amount of Rs. 87,641.15 on its borrowings towards interest and after deducting T.D.S., the net amount payable to its creditors remained at Rs. 70,113.18. While making the assessment, the Assessing Officer had taken the ultimate loss as disclosed in the profit and loss account, namely, Rs. 94,227 and he had computed the total loss at Rs. 89,010. The assessee has no dispute with regard to the correctness of the loss computed. Its contention is that the loss should be carried forward. The Assessing Officer refused to carry forward the loss computed since the loss was accrued under the head ‘Income from other sources’. Against the assessment order dated 31-8-1989 completed under Section 143(3), the assessee-company went in appeal before the Commissioner (A) VI, Bombay. The only plea raised before him was that the loss of Rs. 87,642 represents the interest on moneys borrowed for purposes of investment in shares which did not yield any dividend, it should be treated as business loss and it should be allowed to be carried forward. The learned Commissioner (A) rejected the contention of the assessee holding that there is no income from dividend this year, no receipt from management consultancy and there is no business activity. He held that merely investing in shares, which ultimately resulted in interest payment for this year, is not allowable against consultancy, which did not even yield any income. This interest cannot be capitalised or carried forward. There is no evidence of business being set up and the business being in operational stage. He thus dismissed the appeal filed by the assessee by impugned order dated 23-9-1992. In the second appeal it was contended that the learned Commissioner (A) erred in disallowing business loss of Rs. 87,642 being carried forward. According to the assessee such loss should be computed and allowed to be carried forward as per the decision of the Hon’ble Supreme Court in the case of CIT v. Rqjendra Prasad Moody [1978] 115 ITR 519.
3. I have heard Shri D.M. Harish, learned counsel for the assessee and Shri Y.S. Rawat, learned Departmental Representative. The learned counsel for the assessee drew my attention to India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) for the proposition that though moneys were borrowed for purpose of investment in shares, it should be held to be business expenditure and it is to be allowed. It is quite irrelevant to consider the object with which the loan was obtained. So also on the strength of the Bombay High Court decision in the case of Premier Automobiles Ltd. v. CIT [1971] 80 ITR 415, it is contended that the act of borrowing money is incidental to the carrying on of the business. The loan obtained is not an asset or advantage of an enduring nature and the expenditure is incurred for securing the use of money for a certain period and it is irrelevant to consider the object with which the loan is obtained. In a more direct decision rendered by the Hon’ble Supreme Court in Rqjendra Prasad Moody’s case (supra) it was held by the Hon’ble Supreme Court that where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies, the interest on moneys borrowed for investment in shares, which had not yielded any dividend was admissible as deduction under Section 57(iii) of the Income-tax Act, 1961 in computing its income from dividend under the head “Income from other sources”. I fear that this argument is quite besides the point and does not aim at helping to arrive at the correct conclusion about the point in controversy, namely, whether the loss computed by the Assessing Officer can be carried forward to the next year. I do not see any difficulty whatsoever to allow the accrued interest as a deduction either under the head ‘Income from other sources’ or as income from business itself.
4. I have myself come across the decision of the Gujarat High Court in the case of Addl. CIT v. Laxmi Agents (P.) Ltd. [1980] 125 ITR 227. Out of the four questions referred for the opinion of the Hon’ble High Court we are only concerned with first two questions, which are the following :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income arising out of the investments made by the assessee must be held to be the income from the business of the assessee ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, the payment of interest by the assessee on amounts borrowed for purposes of investments must be allowed as business expenditure ?
In that case the assessee was managing another company and in order to get controlling interest in the managed company, it had purchased shares of the managed company of Rs. 18,60,890 out of the total shares of the managed company of Rs. 23,63,740. The assessee-company itself had invested in shares worth Rs. 23,69,353 for the year ended 31-12-1965. The assessee had to pay interest of Rs. 3,06,839 on account of its overdraft and current accounts for the year ended 31-12-1965. It had earned interest of Rs. 62,334 thus incurring a deficit of Rs. 2,44,505 in the interest account. The assessee contended that it had made investments in shares of the managed company only with a view to safeguard its business of managing agency, its dividend income from shares as well as interest paid by it on borrowings must be assessed under the head ‘Profits and gains of business’. After elaborate reasoning the Gujarat High Court had rejected that contention and held that the Tribunal was not right in holding that the income arising out of the share investment made by the assessee should be held to be income from business. The Hon’ble High Court felt that according to law it should be charged only under the head ‘Other sources’. Then it had taken up the issue to provide answer to the second question, which was referred to above. After elaborate discussion, the Hon’ble High Court held that according to the general principles the expenditure incurred for earning income falling under a particular head should be deducted only under that head. But this general principle has to be read subject to the special provisions contained in Clause (iii) of Section 36(1) as regards deduction of interest. Section 36(1)(iii) then was quoted, which is as under :
36(1). The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 …
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession.
Their Lordships held that this being a special provision regarding deduction of interest amount, if a case falls within its terms, the general principles on which reliance is placed by the revenue would be of no avail to it. They held that the main requirement of Section 36(1)(iii) is that the interest amount which is sought to be deducted in computing business income under Section 28 should be in respect of capital which is borrowed “for the purpose of business”. Therefore if it is found that the borrowings in question were made “for the purposes of business” Clause (iii) of Section 36(1) would have full application and deduction of interest amount must be made from profits and gains of business. In this connection they had considered the decisions of the Supreme Court in India Cements Ltd. ‘s case (supra) and the Bombay High Court decision in the case of Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265, both of which were considered by the Gujarat High Court itself in the case of CIT v. Alembic Glass Industries’ Ltd. [1976] 103 ITR 715, where it was held that the expression “purposes of business” is comprehensive enough to cover expenditure of revenue nature as well as capital nature because both types of expenditure can be incurred for business purposes. Then their Lordships had also considered the Supreme Court decision in CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 in which their Lordships had considered Section 6 of the Indian Income-tax Act, 1922. In that case the assessee incurred a loss of Rs. 64,400 under the head ‘Business’ and earned Rs. 8,488 as interest on securities. For the three succeeding assessment years, the Income-tax Officer allowed the loss to be set off against the income under the head ‘Business’ but refused to set it off against the income computed under the head ‘Interest on securities’. When the matter came up before the Hon’ble Supreme Court, they held that no doubt Section 6 of the Act of 1922 classified the taxable income under different heads for the purpose of computation of net income of the assessee. Though for the purpose of computation of the income, interest on securities were separately classified, income by way of interest on securities did not cease to be part of income from business if securities were part of the trading assets. Whether a particular income was part of the income from business has to be decided not on the provisions of Section 6 but on commercial principles.
5. All the above discussion would clearly show that the interest payable on amounts borrowed for purpose of investment in shares is allowable under Section 36(1)(iii) since the shares themselves were purchased as part of investment in this case and the investment as well as deriving dividend income from the shares was also a part of the business of the assessee-company. However, the question is whether the loss sustained would also become business loss. In my understanding of Section 72 it is not simply enough if the shares were purchased as a measure of investment and purchasing of shares also is for purposes of business in the broad sense of the term. A reading of Section 72(1) would show that the loss should be sustained under the head ‘Profits and gains of business’ and no other head. Section 72(1) is as follows:
Where for any assessment year, the net result of the computation under the head ‘Profits and gains of business or profession” is a loss to the assessee, not being a loss sustained in a speculation business, and such, loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of Section 71, so much of the loss as has not been so set off or where he has no income under any other head, the whole loss- shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and …
This section is very clear and it states that the loss should result as a net result of the computation under the head “Profits and gains of business or profession” and it is also pertinent to note that not all the losses sustained in a business were permitted to be set off. In fact the loss sustained in speculative business is not entitled to be set off. So simply because the interest payable on the amounts borrowed, which were utilised for the purpose of purchasing shares, is allowable as a deduction under the head ‘Business’. Though the dividends, if any derived from the investment in shares could be computed only under the head ‘Income from other sources’ and though the interest payable on the amounts borrowed for purposes of purchasing shares were allowable under Section 36(1)(iii) and though the shares were held as investment by the assessee and the dividend income if any derived by the assessee can be considered as business income in the broad sense of the term, yet the loss sustained in the facts and circumstances of the case could not be set off under Section 72(1) for the simple reason that the dividend income which may be derived on the investment in shares held by the assessee are derived only as income from other sources and not business income. The question involved in this case is not a question of allowing interest payable on the borrowings made by the assessee for purposes of purchasing shares. That was already allowed and the ultimate loss also was arrived at or computed. The question is whether such loss can be carried forward to the next year for purposes of set off. Section 72(1) has a direct impact upon the computation under the head “Profits and gains of business or profession”. If the income cannot be computed under the head ‘Profits and gains of business or profession’, then Section 72(1) does not come into operation. Here in this case the dividend income if any derived by the assessee on the shares held by the company as investment can be considered to be income from profits and gains of business or profession. Dividends can never be considered as profits and gains of business but should always be considered as income under the head ‘Other sources’. For that simple reason Section 72(1) does not come into operation. In the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) at page 97, the following view of the Indian Transformers Ltd. v. CIT [1972] 86 ITR 192 (Ker.) (Indian Transformer’s case) approvedly quoted as under :
It is not possible to accept the view that Section 72 has no bearing on, or is unconnected with, the computation of the total income of an assessee under the head ‘Profits and gains of business or profession’. Actually, Section 72(1) provides that where the net result of computation under the head ‘Profits and gains of business or profession’ is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of Section 71, so much of the loss as has not been so set off, subject to the other provisions of the Chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession for that assessment year. Therefore, Section 72(1) has a direct impact upon the computation under the head ‘Profits and gains of business or profession’.
In this case since the loss was not sustained under the head ‘Profits and gains of business or profession’, the loss cannot be carried forward. So simply because the overall result of all the activities carried on by the assessee resulted in a loss, such a loss cannot automatically be carried forward under Section 72(1) specially when such loss was not incurred under the head ‘Profits and gains of business or profession’. Therefore to my mind it appears that the denial of set off relief prayed for by the assessee by both the lower authorities is sound in law and does not require any interference from me. I fail to see any valid point in this appeal and hence it is dismissed.