{"id":185295,"date":"1977-09-21T00:00:00","date_gmt":"1977-09-20T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/r-dalmia-vs-c-i-t-delhi-new-delhi-on-21-september-1977"},"modified":"2015-09-03T04:22:45","modified_gmt":"2015-09-02T22:52:45","slug":"r-dalmia-vs-c-i-t-delhi-new-delhi-on-21-september-1977","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/r-dalmia-vs-c-i-t-delhi-new-delhi-on-21-september-1977","title":{"rendered":"R. Dalmia vs C.I.T., Delhi, New Delhi on 21 September, 1977"},"content":{"rendered":"
Supreme Court of India<\/div>\n
R. Dalmia vs C.I.T., Delhi, New Delhi on 21 September, 1977<\/div>\n
Equivalent citations: 1977 AIR 2394, \t\t 1978 SCR (1) 537<\/div>\n
Author: S M Fazalali<\/div>\n
Bench: Fazalali, Syed Murtaza<\/div>\n
           PETITIONER:\nR. DALMIA\n\n\tVs.\n\nRESPONDENT:\nC.I.T., DELHI, NEW DELHI\n\nDATE OF JUDGMENT21\/09\/1977\n\nBENCH:\nFAZALALI, SYED MURTAZA\nBENCH:\nFAZALALI, SYED MURTAZA\nBHAGWATI, P.N.\n\nCITATION:\n 1977 AIR 2394\t\t  1978 SCR  (1) 537\n 1977 SCC  (4) 329\n\n\nACT:\nIncome Tax Act 1922, s. 12(2)-Assessee borrowed money from a\nbank  and  bought shares-Agreement  provided  that  dividend\netc., on shares declared after a certain date shall be\theld\nby the bank for the benefit of the assessee Shares not taken\ndelivery of by the assessee by the stipulated  date-Dividend\ndeclared, it accrued to the assessee.\nSection\t 12(2), scope of-Interest paid on loan\tand  damages\npaid-If permissible deduction.\n\n\n\nHEADNOTE:\nThe  assessee borrowed a large sum of money from a bank\t and\npurchased  shares from it; but did not take delivery of\t the\ntransfer  forms and share certificates by making payment  of\nthe  purchase price.  Clause (3) of the agreement,  however,\nstipulated that if the shares were not taken delivery of  by\na certain date, dividends, rights, bonuses etc. which  might\nbe  declared after that date would be held by the  bank\t for\nthe benefit of the assessee; and that the assessee would  be\nliable\tto pay interest on the purchase price.\t Clause\t (4)\nprovided  that if the assessee did not take delivery of\t the\nshares\tby a certain date, the bank would be at\t liberty  to\nsell the undelivered shares and to hold the assessee  liable\nfor the difference in the. price fetched by the shares.\nThe assessee paid to the bank over two lacs of rupees by way\nof interest and more than a lac of rupees by way of  damages\nfor  failure to take delivery of the shares.  A sum  of\t Rs.\n95,000\todd  was earned as dividend by the assessee  on\t the\nshares.\nThe Income Tax Officer disallowed the claim of the  assessee\nfor  deduction Linder s. 12(2) of the Indian Income Tax\t Act\n1922 of the interest on the loan and damages paid by him  to\nthe  bank but included the dividend earned on the shares  in\nhis  total  income.   On  appeal  the  Appellate   Assistant\nCommissioner  affirmed the view of the Income  Tax  Officer.\nThe  Tribunal, on the other hand, held that since there\t was\nno transfer of equitable title in the shares to the  assesee\nhe was not entitled to any deduction of interest; disallowed\nthe  deduction of damages paid by the assessee but  excluded\nthe dividend from his total income on the ground that it was\nnot  dividend earned by him.  On reference, the\t High  Court\naffirmed the findings of the Tribunal.\nAllowing the appeal in part,\nHELD  :\t (1) The High Court and the Tribunal were  wrong  in\ntaking\tthe  view  that\t the  Income  Tax  Officer   rightly\ndisallowed  the\t interest  claimed by  the  assessee.\tThis\namount was a permissible deduction under s.12(2) of the\t Act\nand  should  have  been allowed.  There is  a  direct  nexus\nbetween the amount paid by the assessee as interest and the\nearning of the dividend income. [546 A-B]\n(2)  In\t the  Bank of India v. J. A. H. Chinoy\tA.I.R.\t1950\nP.C.  90  at 97, the Privy Council held that even  though  a\ntransaction  may not amount to an acquisition  of  equitable\ninterest, yet as between the vendor and the purchaser a term\nregarding  payment of the declared dividend would  be  fully\neffective because once the dividends are declared, they will\nbe deemed to have accrued to the purchaser even though there\nmay  not  have been any transfer of equitable title  to\t the\npurchaser.  Clause (3) of the agreement read in the light of\nthis  decision shows that even if there was no\ttransfer  of\nequitable title to the assessee, since the dividend declared\nwould be an additional source of income to him, the assessee\nwould  be entitled to deduct the interest paid on  the\tloan\nfor acquiring the shares. [541 E & H]\n538\n(3)  An\t analysis  of s.12(2) of the Indian Income  Tax\t Act\n1922  shows  that  before this provision  could\t apply,\t the\nfollowing conditions must be fulfilled; (i) the\t expenditure\nmust have been incurred solely and exclusively for the\tpur-\npose   of  earning  income  or\tmaking\tprofit;\t  (ii)\t the\nexpenditure  should  not  be  is the  nature  of  a  capital\nexpenditure;  (iii) the amount in question should not be  in\nthe  nature of personal expenses of the assessee;  (iv)\t the\nexpenditure  should be incurred in the accounting year;\t and\n(v  there  must\t be a clear nexus  between  the\t expenditure\nincurred and the income sought to be earned. [542 E-G]\nIn the instant case (i) a genuine and bona fide contract had\nbeen  entered  into between the assessee and  the  bank\t for\ntransfer  of a large number of shares to the assessee;\t(ii)\nthe assessee, in pursuance of this agreement raised the loan\nfrom the bank and paid interest for this purpose; and  (iii)\nunder  cl.(3)  of the agreement the  dividends,\t rights\t and\nbonuses\t etc., were held by the bank for the benefit of\t the\nassessee after they were declared.\nEastern Investments Ltd. v. Commissioner of Income Tax, West\nBengal<\/a>\t20 I.T.R. 1 and Bombay Steam Navigation\t Co.  (1963)\nPrivate Ltd. v. Commissioner of Income-tax, Bombay 56 I.T.R.\n52, 59, followed.\nJ.   K.\t Commercial  Corporation  Ltd.\tv.  Commissioner  of\nIncome-tax, U.P.<\/a> 72.\t I.T.R.\t 296  and  Commissioner\t  of\nIncome-tax,  Bombay  City I v. H. M.  Maharani\tVijaykuverba\nSaheb of Morvi<\/a> 100 I.T.R. 67, approved.\nOrmerods (India) Private Ltd. v. Commissioner of Income-tax,\nBombay\tCity  36 I.T.R. 329 and Smt.  Nirmala  M.  Doshi  v.\nCommissioner  of Income-tax, Bombay City 11 82\tI.T.R.\t648,\nreferred to.\n(4)  Since  the assessee's main business was not dealing  in\nshares,\t damages  were paid by him due to his  own  default.\nThe  damages paid would, therefore, be capital\texpenditure.\n[546 C]\n(5)  The dividend earned by the assessee should be  included\nin his total income. [546 F]\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1519  of
\n1971.\n<\/p>\n
Appeal\tby Special Leave from the Judgment and\tOrder  dated
\n22-1-1971 of the Delhi High Court in 1. T. Reference No.  25
\nof 1966.\n<\/p>\n
Bishamber Lal for the Appellant.\n<\/p>\n
V.   P. Raman, Addl.  Sol.  Genl. and J. Ramamurthi for\t the
\nRespondent.\n<\/p>\n
The Judgment of the Court was delivered by
\nFAZAL ALI, J. In this appeal by special leave, the  assessee
\nwho is an individual had purchased a large number of  shares
\nfrom  the Bharat Bank Ltd. for Rs. 44,14,990\/- by  borrowing
\nthis  amount from the, Bharat Bank and he paid\tinterest  of
\nRs. 2,04,744\/- on the said amount.  In fact four years\tback
\ni.e. in 1944-45 the joint family of which the assesses was a
\nmember had sold these very shares along with other shares to
\nthe  Bharat Bank Ltd.  The agreement by which  the  assessee
\npurchased  these shares is dated February 5, 1948 and is  to
\nbe found at Annexure A on p. 19 of the Paper Book.  In spite
\nof  the fact that the assessee had agreed to buy the  shares
\nfrom  the Bharat Bank Ltd. he did not take delivery of\tthe
\ntransfer forms and the share certificates by making  payment
\nof the purchase price.\tUnder the agree-\n<\/p>\n
539<\/span><\/p>\n
ment  dated February 5, 1948 it was agreed that\t the  shares
\nwould be taken delivery of on or before March 31, 1948.\t  It
\nwas  further  agreed  that  if the  shares  were  not  taken
\ndelivery  of  by this date, the dividends,  rights,  bonuses
\netc.  which may be declared after that date,  namely,  March
\n31,  1948  will be held by the Bank for the benefit  of\t the
\nassessee and the assessee would be liable to pay interest at
\nthe rate of 6% p.a. on the purchase price from April 1, 1948
\ntill  actual  delivery\tof the shares’\tClause\t(4)  of\t the
\nagreement  provided that if for any reason the\tshares\twere
\nnot taken delivery of by March 31, 1951, the Bank will be at
\nliberty to sell the then undelivered shares and to hold\t the
\nassessee  liable for the difference in the price fetched  by
\nthe  shares.  The assessee did not take delivery of some  of
\nthe  shares  until  March 31, 1951 and paid  a\tsum  of\t Rs.
\n1,05,000\/-  as damages for his failure to take\tdelivery  as
\nstipulated in the agreement between the parties.  It is also
\nthe admitted case of the parties that the assessee earned  a
\ndividend income of Rs. 95,664\/-.  The assessment year in the
\ninstant\t case  is  1953-54 i.e.\t the  previous\tyear  ending
\nSeptember  30,\t1952.\tThe assessee  claimed  that  be\t was
\nentitled  to  deduct  the interest paid\t for  acquiring\t the
\nshares\tworth Rs. 44,14,990\/- and, therefore, a sum of\tRs.,
\n2,04,744\/-  was deductible under s. 12(2) of the  Income-tax
\nAct,  1922-hereinafter\treferred to as ‘the  Act’.   It\t was
\nfurther\t alleged  by  the assessee  that  even\tthe  damages
\namounting to Rs. 1,05,000\/- which he had paid to the  Bharat
\nBank  for  not\ttaking\tdelivery of  the  shares  were\talso
\ndeductible   because  this  was\t a   business\texpenditure.
\nFinally,  the  assessee\t also claimed that the\tsum  of\t Rs.
\n95,664\/ being the dividend income was not to be included  in
\nthe  total income of the assessee.  The\t Income-tax  Officer
\nrejected all the pleas taken by the assessee and  disallowed
\nthe  deductions claimed by the assessee as mentioned  above.
\nThe Income-tax Officer also included the sum of Rs. 95,664\/-
\nin the total income of the assessee.\n<\/p>\n
The assessee filed an appeal before the Appellate  Assistant
\nCommissioner  who  affirmed  the  order\t of  the  Income-tax
\nOfficer, though on slightly different grounds with which  we
\nare  not concerned here.  Thereafter the assessee  filed  an
\nappeal\tbefore the Tribunal which gave a finding that  under
\nthe facts and circumstances of the present case there was no
\ntransfer  of equitable title in the shares to  the  assessee
\nand, therefore, he was not entitled to any deduction of\t the
\ninterest paid by him on the capital amount which constituted
\nthe purchase money of the shares.  The Tribunal further held
\nthat  the interest paid was of a capital nature and did\t not
\nfall  within the ambit of s. 12(2) of the Act.\t As  regards
\nthe assessee’s claim to the dividend income of Rs. 95,664\/-,
\nthe Tribunal held that as the said income had been  credited
\nto  the account of the assessee in terms of cl. (3)  of\t the
\nagreement  dated February 5, 1948 it bad not  been  actually
\nearned\tby the assessee and the receipt of the\tdividend  by
\nthe Bank was only taken into account for finalisation of the
\nprice.\t The Tribunal accordingly directed deletion of\tthis
\namount\tfrom the total income of the assessee.\t As  regards
\nthe third point, namely, the sum of Rs. 1,05,000\/- which the
\nassessee paid as damages to the Bank, the Tribunal held that
\nas the assessee was not doing business exclusively in shares
\nhe  was not entitled to set off the interest paid by him  as
\nrevenue loss.\n<\/p>\n
540<\/span><\/p>\n
Thereafter  the\t appellant moved the Tribunal for  making  a
\nreference  to the High Court and after hearing\tcounsel\t for
\nthe  parties the Tribunal referred the\tfollowing  questions
\nfor the opinion of the High Court
\n\t      “(1)   Whether  on  the  facts  and   in\t the
\n\t      circumstances  of\t case the  tribunal  rightly
\n\t      rejected\tthe assessee’s claim  for  deduction
\n\t      of, the interest payment of Rs. 2,04,744\/- ?
\n\t      (2)   Whether   on  the  facts  and   in\t the
\n\t      circumstances of the case the tribunal rightly
\n\t      held  that the revenue was not  estopped\tfrom
\n\t      disallowing the claim for the deduction of the
\n\t      interest\tamount in view of the  allowance  of
\n\t      such claim in the past ?\n<\/p>\n
\t      (3)   Whether   on  the  facts  and   in\t the
\n\t      circumstances of the case the tribunal rightly
\n\t      disallowed the loss of Rs. 1,05,000\/in respect
\n\t      of  7500\tpreference  shares  of\tthe   Dalmia
\n\t      Investment Company Ltd. ?\n<\/p>\n
\t      (4)   Whether   on  the  facts  and   in\t the
\n\t      circumstances of the case the tribunal rightly
\n\t      held that the dividend amount of Rs:  95,664\/-
\n\t      did not constitute the income of the  assessee
\n\t      ?”\n<\/p>\n
Out  of\t these\tquestions, Question No.\t (2)  has  not\tbeen
\npressed\t by  the appellant because it is well  settled\tthat
\nthere is no question of estoppel or res judicata in relation
\nto  the\t assessment  of\t different  years.   Thus  the\tonly
\nquestions that were to be determined by the High Court\twere
\nQuestions Nos. (1), (3) and (4).  The High Court agreed with
\nthe  Tribunal  that in the facts and circumstances of  the
\ncase there was no transfer of equitable title of the  shares
\nto the assessee and, therefore, he was not entitled to claim
\ndeduction of Rs. 2,04,744\/-.  The finding of the Tribunal on
\nQuestion  No. (3) was also upheld and the High Court  agreed
\nthat the loss of Rs. 1,05,000\/- was rightly disallowed.\t  On
\nQuestion  No. (4) the High Court, also agreed with the\tview
\nof  the\t Tribunal  and held that this amount  could  not  be
\nincluded in the total income of the assessee.  The  assessee
\nhas  come up to this Court,, after obtaining  special  leave
\nfrom this Court.\n<\/p>\n
Both  the  Tribunal and the High Court have  gone  into\t the
\nquestion  of  transfer\tof equitable  title  at\t very  great
\nlength,\t but  in the facts and circumstances  of  this\tcase
\nafter  hearing the parties and going through the  record  we
\nfeel  that the question of transfer of equitable title is  a
\nvexed  question\t of  law and is not  free  from\t difficulty.
\nHaving regard to the peculiar facts of this case, it is\t not
\nnecessary for the Court to decide the question of  equitable
\ntransfer  in  order  to\t give relief  to  the  appellant  on
\nQuestion  No.  (1).  In other words, we are of\tthe  opinion
\nthat  the  question as to whether or not  the  appellant  is
\nentitled  to  a deduction of Rs. 2,04,744\/- can\t be  decided
\nwithout\t touching or affecting the question of\ttransfer  of
\nequitable  title  to  the assessee.  This  can\tbe  done  by
\nexamining  the\tscope and ambit of S. 12(2) of\tthe  Act  in
\norder  to  find out if the assessee’s case  for\t payment  of
\ninterest  can come within the four corners of that  section.
\nIn  these  circumstances we do not propose to  go  into\t the
\nquestion of transfer of equitable title which had occupied a
\ngreater part of the judgments of the High Court and
\n541<\/span>
\nthe Tribunal.  We would, however, like to make it clear that
\nwe should not be taken to have affirmed the decision of\t the
\nHigh Court on this point, but we refrain from expressing any
\nopinion\t thereon  in the view that we take  in\tthe  present
\ncase.\n<\/p>\n
In  Bank  of  India v. J.A.H.  Chinoy,(1),  Lord  MacDermott
\npointing  out  the  extent of the doctrine  of\ttransfer  of
\nequitable title to a purchaser observed as follows :\n<\/p>\n
\t      ” Their Lordships do not desire to case  doubt
\n\t      on  the proposition that in India a  purchaser
\n\t      of  shares  (which under the  Indian  Sale  of
\n\t      Goods  Act  come within the  definition  of  ”
\n\t      goods”) does not acquire an equitable interest
\n\t      by  virtue of the contract of sale.  But\tthey
\n\t      cannot  agree  with the  application  of\tthis
\n\t      proposition  which  commended  itself  to\t the
\n\t      Appellate\t Court.\t  No  doubt  as\t between   a
\n\t      company and a purchaser of shares therein\t the
\n\t      date  of completion is all important.  But  as
\n\t      between  vendor and purchaser, where the\tcon-
\n\t      tract does not otherwise provide, the term  to
\n\t      be implied as to dividends is not confined  to
\n\t      dividends still to be declared in respect of a
\n\t      period  or periods prior to the contract.\t  It
\n\t      includes\tsuch  dividends\t but  that  is\t not
\n\t      because  the period in which they were  earned
\n\t      is  crucial;  what is crucial is the  date  or
\n\t      dates of declaration.”\n<\/p><\/blockquote>\n
It  would appear from the observations of the Privy  Council
\nthat   even  though  the  transaction  may  not\t amount\t  to
\nacquisition  of equitable interest, yet between\t the  vendor
\nand the purchaser the term regarding payment of the declared
\ndividend would be fully effective because once the dividends
\nare  declared  they will be deemed to have  accrued  to\t the
\npurchaser  even though there may not have been any  transfer
\nof  equitable title to the purchaser.  In the instant  case,
\ncl. (3) of the agreement by which the assessee purported  to
\nacquire shares from the Bank runs thus :\n<\/p>\n
\t      “That if the shares are not taken delivery  of
\n\t      by  31-3-48  the dividends,  rights,  bonuses,
\n\t      etc.,  that may be declared after\t that  date,
\n\t      will  be\tfor your benefit, but  you  will  be
\n\t      liable  to  pay interest at 6%  from  1-4-1948
\n\t      till the date of actual delivery on the  price
\n\t      of  the shares calculated at the\trates  above
\n\t      mentioned.”\n<\/p><\/blockquote>\n
A perusal of the statement made in this paragraph manifestly
\nreveals that even if the shares are not taken delivery of by
\nthe assessee, the dividends, rights, bonuses etc. which\t may
\nbe declared after that date were to be held by the Bank\t for
\nthe  benefit of the purchaser.\tThus the principle which  is
\ndeducible  from the decision of the Privy Council in  J.A.H.
\nChinoy’s  case\t(supra) fully applies to the  facts  of\t the
\npresent\t  case.\t  It  follows,\tas  a\tlogical\t  corollary,
\ntherefore,  that even if there was no transfer of  equitable
\ntitle to the assessee, since a Company declared the dividend
\netc. which would be an additional source
\n(1)  A.I.R.1950P.C90., 97.\n<\/p>\n
542<\/span><\/p>\n
of  income  to the assessee, would he not  be  entitled\t to,
\ndeduct\ta sum of Rs. 2,04,744\/- being the interest  paid  on
\nthe loan for acquiring the shares ? The position will become
\nclear  if we extract s. 12(2) of the Act as it stood at\t the
\nrelevant time
\n\t      “(2)  Such income, profits and gains shall  be
\n\t      computed\t after\tmaking\tallowance  for\t any
\n\t      expenditure incurred solely for-the purpose of
\n\t      making  or  earning such\tincome,\t profits  or
\n\t      gains provided that no allowance shall be made
\n\t      on account of–\n<\/p>\n
\t      (a)   any personal expenses of the  assessees,
\n\t      or\n<\/p>\n
\t      (b)   any\t interest chargeable under this\t Act
\n\t      which   is   payable   without   the   taxable
\n\t      territories,  not\t being interest\t on  a\tloan
\n\t      issued for public subscription before the\t 1st
\n\t      day  of April, 1938, or not being interest  on
\n\t      which tax has been paid or from which tax\t has
\n\t      been deducted under section 18, or\n<\/p>\n
\t      (c)   any\t payment which is  chargeable  under
\n\t      the  head “Salaries” if it is payable  without
\n\t      the  taxable territories and tax has not\tbeen
\n\t      paid  thereon  nor  deducted  therefrom  under
\n\t      section 18.”\n<\/p>\n
An analysis of this sub-section would show that in computing
\nthe  income  under  this head the assessee  is\tentitled  to
\ndeduction in respect of the expenditure incurred solely\t for
\nthe purpose of earning such income, provided the expenditure
\nis not of a capital nature and does not include any personal
\nexpenses  incurred by the assessee.  In other words,  before
\nthis provision could apply the following conditions must  be
\nfulfilled :\n<\/p>\n
\t      (i)   the expenditure must have been  incurred
\n\t      solely  and  exclusively for  the\t purpose  of
\n\t      earning income or making profit;\n<\/p><\/blockquote>\n
\t      (ii)  the\t expenditure  should not be  in\t the
\n\t      nature of a capital expenditure;\n<\/p><\/blockquote>\n
\t      (iii) the amount in question should not be  in
\n\t      the   nature  of\tpersonal  expenses  of\t the
\n\t      assessee;\n<\/p><\/blockquote>\n
\t      (iv)  that the expenditure should be  incurred
\n\t      in the accounting year; and\n<\/p><\/blockquote>\n
\t      (v)   there must be a clear nexus between\t the
\n\t      expenditure incurred and the income sought  to
\n\t      be earned.\n<\/p><\/blockquote>\n
In  Eastern Investments Ltd. v. Commissioner of\t Income-tax,
\nWest Bengal<\/a>(1) the facts were that the assessee which was an
\nInvestment  Company  was formed for acquiring.\tholding\t and
\ndealine in shares and Government securities belonging to  C.
\nC  died and S was appointed Administrator of his estate\t and
\nin that capacity he sold 50,000 ordinary shares.  Money\t was
\nrequired  by  the  Executor  of C and  he  entered  into  an
\nagreement with the assessee Company by which the assessee
\n(1)  20 I.T.R. 1
\n543<\/span>
\nagreed to reduce its share capital by Rs. 50 lakhs by taking
\nover  from the Administrator 50,000 shares at Rs. 100\/-\t per
\nshare and to receive instead debentures of the face value of
\nRs.  50\t lakhs\tcarrying  interest at  5%  per\tannum.\t The
\nagreement   was\t sanctioned  by\t the  High  Court  and\t was
\nultimately  carried  out.  The transaction was\theld  to  be
\ngenuine.  The Appellate Tribunal and the Calcutta High Court
\ntook  the view that in computing the income of the  assessee
\nthe  interest paid on the debentures could not\tbe  deducted
\nunder  s. 12 (2) of the Act as this was not  an\t expenditure
\nfor  the purpose of earning the income.\t This  Court,  while
\nreversing the judgment of the Calcutta High Court, held that
\nonce the transaction was held to be a genuine one it clearly
\nfell  within  the  purview of s. 12(2) of the  Act  and\t the
\ninterest  paid by the assessee was a  permissible  deduction
\nunder  s. 12(2) of the Act.  In this connection, this  Court
\nobserved as follows :-\n<\/p>\n
\t      “On  a  full review of the facts it  is  clear
\n\t      that this transaction was voluntarily  entered
\n\t      into  in\torder indirectly to  facilitate\t the
\n\t      carrying on of the business of the company and
\n\t      was   made   on  the  ground   of\t  commercial
\n\t      expediency.   It\ttherefore falls\t within\t the
\n\t      purview  of  Section 12(2) of  the  Income-tax
\n\t      Act, 1922, before its amendment.
\n\t      This  being  an  investment  company,  if\t  it
\n\t      borrowed\tmoney and utilised the same for\t its
\n\t      investments  on  which it earned\tincome,\t the
\n\t      interest paid by it on the loans will  clearly
\n\t      be a permissible deduction under Section 12(2)
\n\t      of the Income lax Act.”\n<\/p><\/blockquote>\n
The aforesaid case appears to be on all fours with the facts
\nin  the\t present case.\tIn the instant case also it  is\t not
\ndisputed  before us that the agreement entered into  between
\nthe  parties  was a genuine one.  In fact the  Tribunal\t had
\nalso held that the agreement was actually acted upon.\tOnce
\nthis  was so, then the interest which the assessee  paid  on
\nthe loan of Rs. 44,14,990\/- which came to Rs. 2,04,744\/- was
\nreally\tpaid for the purpose of earning income, namely,\t the
\ndividends, bonuses etc. which were held by the Bank for\t the
\nbenefit\t of  the assessee.  The interest of  Rs.  2,04,744\/-
\npaid  by the appellant could not be said to be of a  capital
\nnature,\t nor  could it be, deemed to  be  personal  expense&
\nincurred   by\tthe  assessee.\t In   these   circumstances,
\ntherefore,  the essential ingredients of s. 12(2) are  fully
\nsatisfied in this case and on the authority of this Court in
\nEastern Investments Ltd.’s case (supra) the appellant’s case
\nsquarely  falls\t within the four corners of s.\t12(2)  as  a
\nresult of which the amount of interest of Rs. 2,04,744\/- was
\na permissible deduction under s. 1 2 (2) of the Act.
\nIn  Bombay  Steam  Navigation Co.  (1953)  Private  Ltd.  v.
\nCommissioner  of Income-tax Bombay(1), in  somewhat  similar
\ncircumstances,\tthis  Court  allowed the  expenditure  as  a
\ndeduction under s. 10(2) (xv), and observed as follows :\n<\/p>\n
\t      “But  in\tour judgment interest  paid  by\t the
\n\t      assessee-company\tis a  permissible  deduction
\n\t      under Section 10(2) (xv)
\n\t      (1)   56 I.T.R. 52. 59.\n<\/p><\/blockquote>\n
\t      544<\/span><\/p>\n
\t      which  permits  any expenditure not  being  an
\n\t      allowance\t of the nature described in  any  of
\n\t      the  clauses  (i) to (xiv) inclusive  and\t not
\n\t      being in the nature of capital expenditure  or
\n\t      personal expenses of the assessee laid out  or
\n\t      expended\t wholly\t and  exclusively  for\t the
\n\t      purpose\tof  such  business,  profession\t  or
\n\t      vocation”\t as a permissible allowance  in\t the
\n\t      computation,  of\tprofits\t or  gains  of\t the
\n\t      business\t carried   on\tin   the   year\t  of
\n\t      account……  The  expenditure  was  incurred
\n\t      after  the commencement of the business.\t The
\n\t      expenditure is not for any private or domestic
\n\t      purposes\tof the assessee-company.  It  is  in
\n\t      the capacity of a person carrying on- business
\n\t      that this interest is paid.”\n<\/p><\/blockquote>\n
\t      This Court further observed
\n\t      “Whether\ta particular expenditure is  revenue
\n\t      expenditure   incurred  for  the\tpurpose\t  of
\n\t      business must be determined on a consideration
\n\t      of all the facts and circumstances, and by the
\n\t      application   of\tprinciples   of\t  commercial
\n\t      trading.\t The question must be viewed in\t the
\n\t      larger   context\tof  business  necessity\t  or
\n\t      expediency.  If the outgoing or expenditure is
\n\t      so  related to the carrying on or\t conduct  of
\n\t      the  business, that it may be regarded  as  an
\n\t      integral\tpart of the profit–earning  process
\n\t      and not for acquisition of an asset or a right
\n\t      of  a permanent character, the  possession  of
\n\t      which is a condition of the carrying on of the
\n\t      business,\t the expenditure may be regarded  as
\n\t      revenue expenditure.”\n<\/p><\/blockquote>\n
Apart  from  these  decisions of this  Court,  a  number  of
\ndecisions of the High Courts have also taken the same  view.
\nIn Ormerods (India) Private Ltd. v. Commissioner of  Income-
\ntax,  Bombay City(1), the Bombay High Court allowed  certain
\nsums  of money paid as interest on borrowed capital for\t the
\npurchase of shares and held that the word ”  purpose” in the
\nexpression  “expenditure incurred solely for the purpose  of
\nmaking\tor  earning such income, profits or gains”  did\t not
\nmean  motive  for  the transaction, much less  can  it\tmean
\nulterior motive, or ulterior object.  The Court held that as
\nthe investments were made for the purpose of earning income,
\nthe interest paid thereon would be deductible under s. 12(2)
\nof the Act.\n<\/p>\n
A  similar  view was taken by the Allahabad High  Court\t in.
\nJ.K. Commercial Corporation Ltd. v. Commissioner of  Income-
\ntax, U.P.(2) where it was held that any expenditure incurred
\nfor  preservation  or  protection of  a\t capital  asset\t was
\nrevenue in nature.  The Court held that legal and travelling
\nexpenses  incurred by the assessee for\tprotecting  dividend
\nincome and to ensure the prospective dividend earning  capa-
\ncity  were clearly allowable under S. 12(2) of the Act.\t  We
\nfind ourselves in complete agreement with the view taken  by
\nthe Allahabad High Court in that case.\n<\/p>\n
(1)  36 I.T.R. 329.\n<\/p>\n
(2)  72 I.T.R. 296.\n<\/p>\n
54 5
\nIn  Smt.   Nirmala K. Doshi v. Commissioner  of\t Income-tax,
\nBombay\tCity II(1), the Bombay High Court held that  payment
\nof interest for earning dividend income was deductible under
\ns. 12(2) of the Act.\n<\/p>\n
 Commissioner  of  Income-tax,\tBombay\tCity  I\t v.   H.  H.
\nMaharani Vijaykuverba Saheb of Morvi(2), a Division Bench of
\nthe  Bombay  High  Court held that the\tdeduction  which  is
\npermissible  under  sub-s. (2) of s. 12 is  all\t expenditure
\nincurred  solely  for the purpose of making or\tearning\t the
\nincome\twhich  has been subjected to tax  and  the  dominant
\npurpose of the expenditure incurred must be to earn  income.
\nIt  was\t further  held\tthat  the  connection  between\t the
\nexpenditure  and the earning of income need not\t be  direct,
\nand  even  an  indirect connection  could  prove  the  nexus
\nbetween\t the expenditure incurred and the income.  We  fully
\nagree with the view taken by the Bombay High Court.
\nIn  view  of the direct decision of this  Court\t in  Eastern
\nInvestments Ltd.’s case (supra), it is not necessary for  us
\nto  multiply authorities.  Summarising therefore, the  facts
\nof  the\t present  case, the position  which  emerges  is  as
\nfollows
\n\t      (1) that a genuine and bona fide contract\t had
\n\t      been entered into between the assessee and the
\n\t      Bank for transfer of large number of shares to
\n\t      the assessee;\n<\/p>\n
\t      (2)   that  the assessee in pursuance of\tthis
\n\t      agreement had raised a loan of Rs’ 44,14,990\/-
\n\t      from  the Bank in order to acquire the  shares
\n\t      and  had paid interest of Rs.  2,04,744\/-\t for
\n\t      this purpose-, and
\n\t      (3)   as\t  a   result   of   the\t   aforesaid
\n\t      acquisition,  under cl. (3) of  the  agreement
\n\t      the  dividends, rights,  bonuses\t\tetc.\n<\/p>\n
\t      held by the Bank were held for the benefit  of
\n\t      the  assessee after they were declared. it  is
\n\t      obvious  that if the assessee would  not\thave
\n\t      paid the interest on the loan raised by him he
\n\t      would  not have been able to get the  dividend
\n\t      income.\n<\/p>\n
In these circumstances, therefore, there was a\t direct nest
\nbetween\t the expenditure of Rs. 2,04,744\/- incurred  by\t the
\nassessee as interest and the earning of the dividend income.
\nThe  assessee has clearly established that  the\t expenditure
\naforesaid was incurred solely and wholly for the purpose  of
\nearning the bonuses and dividend income.  As the shares were
\nnot the stock-in-trade of the appellant it could not be said
\nthat  the interest paid by the assessee to the Bank  was  an
\nexpenditure of a capital nature, nor was there any  material
\nto  show  that\tthe expenditure\t incurred  by  the  assessee
\namounted to his personal expenses.  In these  circumstances,
\nwe  are satisfied that the case of the appellant  in  paying
\nthe  interest  amounting  to Rs.  2,04,744\/-  falls  clearly
\nwithin\ts.  12(2)  of  the Act and  the\t conditions  of\t the
\naforesaid provision being fulfilled the assessee was in\t law
\nentitled to deduction of the amount of
\n(1)  82 I.T.R. 648.\n<\/p>\n
(2)  1 00 I.T.R. 67.\n<\/p>\n
11-930SCI\/77
\n546<\/span>
\nRs.  2,04,744\/-\t under-\t s.  12 (2) of\tthe  Act.   We\tare,
\ntherefore,  of\tthe  opinion that the  High  Court  and\t the
\nTribunal  were wrong in taking the view that the  Income-tax
\nauthorities rightly disallowed the amount of Rs.  2,04,744\/-
\nas  claimed by the assessee.  We are clearly of the  opinion
\nthat this amount was a permissible deduction under s.  12(2)
\nof  the Act and should have been allowed by  the  Income-tax
\nauthorities.  In these circumstances, therefore, we bold  on
\nquestion  No. (1) that both the Tribunal and the High  Court
\nshould have held that the assessee’s claim for deduction  of
\ninterest  amounting to Rs. 2,04,744\/was wrongly rejected  by
\nthe Income-tax authorities.\n<\/p>\n
So  far\t as  Question  No. 3  relating\tto  damages  of\t Rs.
\n1,05,000\/paid  to the Bank by the assessee for\tnon-delivery
\nof  the\t shares is concerned, we are unable  to\t agree\twith
\ncounsel\t for  the  appellant  that  this  was  a  deductible
\nexpenditure.\tWe  have  already  pointed  out\t  that\t the
\nassessee’s  main  business was not dealing  in\tshares\tand,
\ntherefore, the damages paid were due to his own default\t and
\nwould,\ttherefore,  be a capital expenditure rather  than  a
\nrevenue one.  The High Court and the Tribunal were right  in
\ndisallowing this amount.\n<\/p>\n
As  regards  question  No.  (4)\t the  position\tis  somewhat
\nobscure.   While the Tribunal had deleted the amount of\t Rs.
\n95,664\/-  from\tthe total income of the assessee,  the\tHigh
\nCourt  also  agreed  with the  Tribunal\t and  answered\tthis
\nquestion  in the affirmative against the  Revenue.   Learned
\ncounsel\t for the Revenue has, however, submitted that if  we
\nare of the opinion that the appellant should be entitled  to
\nthe  deduction of Rs. 2,04,744\/- under S. 12(2) of the\tAct,
\nthen it automatically follows that he cannot claim exemption
\nin  respect  of\t the dividend income.  In  our\topinion\t the
\nargument of Mr. V. P. Raman, learned counsel for the Revenue
\nis  well founded and must prevail.  Even Mr. ‘Bishamber\t Lal
\nappearing  for\tthe assessee\/appellant was  fair  enough  to
\nconcede that if we hold that the interest of Rs.  2,04,744\/-
\nwas  a permissible deduction under S. 12(2) of the Act\tthen
\nhe   would  not\t press\this  claim  before  the\t  Income-tax
\nauthorities  for  deletion  of the dividend  income  of\t Rs.
\n95,664\/- and he would have no objection if this.  Court sets
\naside  this  deletion.\tIn this view of the  matter  we\t set
\naside  the  order  of the High Court as\t also  that  of\t the
\nTribunal  deleting the amount of Rs. 95,664\/- which will  be
\nincluded in the total income of the assessee.
\nThe  result  is that the appeal is allowed in part  and\t our
\nfinding\t on Question No. (1) is that the High Court and\t the
\nTribunal  were\twrong in disallowing the  deduction  of\t Rs.
\n2,04,744\/-  as\tclaimed by the assessee.  The  assessee\t is,
\ntherefore,  entitled to a deduction of this amount from\t his
\ntotal  income.\tWe affirm the judgment of the High Court  in
\ndisallowing  the  claim of Rs. 1,05,000\/-  which  forms\t the
\nbasis  of  Question No. (3).  As the  appeal  has  partially
\nsucceeded and partially failed, we leave the parties to bear
\ntheir own costs in this Court.\n<\/p>\n
P.B.R.\t\t\t\t Appeal allowed in part.\n547<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India R. Dalmia vs C.I.T., Delhi, New Delhi on 21 September, 1977 Equivalent citations: 1977 AIR 2394, 1978 SCR (1) 537 Author: S M Fazalali Bench: Fazalali, Syed Murtaza PETITIONER: R. DALMIA Vs. RESPONDENT: C.I.T., DELHI, NEW DELHI DATE OF JUDGMENT21\/09\/1977 BENCH: FAZALALI, SYED MURTAZA BENCH: FAZALALI, SYED MURTAZA BHAGWATI, P.N. CITATION: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-185295","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nR. 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