# CALCUTTA v. RAJENDRA PRASAD MOODY, CALCUTTA ETC

- **Citation:** [1979] 1 S.C.R. 1047
- **Court:** Supreme Court of India
- **Decided:** 1978-10-04
- **Case number:** Tax References Nos. 1 and 2 • G of 1971
- **Bench:** P. N. Bhagwati, V. 0. TuLZAPURKAR, R. S. Pathak
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/calcutta-v-rajendra-prasad-moody-calcutta-etc-7490
- **Pages:** 7

## Headnote

Allowable expenditur~Whether interests on monies borrowed for investment in shares is allowable expenditure, when the shares have· not yielded any
return in the shape of dividend during the relevant assessment year-Interpretation of Sec. 57(iii) of Income-tax .Act. 1961.
The respondents assessees in the two references are brothers and each of them
had borrowed monies for the purpose of making investments in shares of certain
companies and during the assessment year 1965-66 for which the relevant account..
ing year ended on 10th April 1965, each of the two assessees paid interest on the
monies borrowed but did not receive any dividend on the shares purchased with
those monies.
Each of the two assessees made a claim for deduction of the
.amount of iaterest paid on the borrowed monies but this claim was negatived by
the Inconle Tax Officer and on appeal by the Appellate Assistant Commissioner
on the ground that during the relevant assessment year the shares did not yield
any dividend and, therefore, interest paid on the borrowed monies could not be
regarded as expenditure laid out or expended wholly and exclusively for the
purpose of making or earning income chargeable under the head "Income From
Other Source" so as to be allowable as a permissible deduction under Sec.
57(iii). The Tribunal, ho:wever on further appeal, disagreed with the view taken
by the Taxing Authorities and uph~d the claim of each of the two assessees for
deduction under Sec. 57(iii).
Answering in favour of the assessees and against the Revenue the question
in the references the Court,
HELD : (1) The plain and natural construction of the language of Sec.
57(iii) of the Income Tax Act 1961 irresistibly leads to the conclusion that to
bring a case within the section, it is not necessary that any income should in fact
have been earned as a result of the expenditure. What Sec. 57(iii) requires is
'
that the expenditure must be laid out or expended wholly and exclusively for the
purpose of making or earning income. It is the purpose of the expenditure that
is relevant in determining the applicability of Sec. 57 (iii) and that purpose must
be making or earning of income. Sec. 57(iii) does not require tl;tat this purpose
must be fulfilled in order to qualify the expenditure for deduction. It does not
say that the expenditure shall be deductible only if any income is made or earned.
There is in fact nothing in the language of Sec. 57 (iii) to suggest that the
purpose for which expenditure is made should fructify into any benefit. [1051
'
B-E]
Eastel'n Investm~nts Ltd. v. Commissioner of Income-tax, 20 l.T.R. (SC)
applied.
(2) The contention ef the Revenue that the expenditure would disqualify for
deduction only if no income resnlts from such expenditure in a particular assessment year but, if there is some income, however small or meagre, the expenditure
1047
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SUPREME COURT REPORTS
[1979] 1 s.c.R.
would be eligible for deduction, would lead to a strange and highly anomalous
result and the legislature could never have intended to produce such illogicality.
Moreover when a profit and loss account is cast in respect of any
source of
income what is allowed by the statute as proper expenditure \vould be debited as
an outgoing and income would be credited as a rece,ipt and the resulting income
or loss would be determined. It wquld make no difference to this process
whether the expenditure is x or y, or nil; whatever is the proper expenditure
allowed by the statute would be debited.
Equally, it would make no difference
whether there is any income and if so, what. since whatever it be, x or y or nil
would be credited. And the ultimate profit or loss would be found. Whatever
is proper outgoing by way of expenditure must be debited irrespective whether
there is receipt of income or not. That is the plain requirement of proper
accounting and the interpretation of Sec. 57(iii) cannot be different. The deduction of the expenditure cannot, in the c

## Text

COMMISSIONER OF INCOME TAX, WEST BENGAL III,
A
CALCUTTA
v.
RAJENDRA PRASAD MOODY, CALCUTTA ETC.
October 4, 1978
[P. N. BHAGWATI, V. 0. TuLZAPURKAR AND R. S. PATHAK, JJ.J
Allowable expenditur~Whether interests on monies borrowed for investment in shares is allowable expenditure, when the shares have· not yielded any
return in the shape of dividend during the relevant assessment year-Interpretation of Sec. 57(iii) of Income-tax .Act. 1961.
The respondents assessees in the two references are brothers and each of them
had borrowed monies for the purpose of making investments in shares of certain
companies and during the assessment year 1965-66 for which the relevant account..
ing year ended on 10th April 1965, each of the two assessees paid interest on the
monies borrowed but did not receive any dividend on the shares purchased with
those monies.
Each of the two assessees made a claim for deduction of the
.amount of iaterest paid on the borrowed monies but this claim was negatived by
the Inconle Tax Officer and on appeal by the Appellate Assistant Commissioner
on the ground that during the relevant assessment year the shares did not yield
any dividend and, therefore, interest paid on the borrowed monies could not be
regarded as expenditure laid out or expended wholly and exclusively for the
purpose of making or earning income chargeable under the head "Income From
Other Source" so as to be allowable as a permissible deduction under Sec.
57(iii). The Tribunal, ho:wever on further appeal, disagreed with the view taken
by the Taxing Authorities and uph~d the claim of each of the two assessees for
deduction under Sec. 57(iii).
Answering in favour of the assessees and against the Revenue the question
in the references the Court,
HELD : (1) The plain and natural construction of the language of Sec.
57(iii) of the Income Tax Act 1961 irresistibly leads to the conclusion that to
bring a case within the section, it is not necessary that any income should in fact
have been earned as a result of the expenditure. What Sec. 57(iii) requires is
'
that the expenditure must be laid out or expended wholly and exclusively for the
purpose of making or earning income. It is the purpose of the expenditure that
is relevant in determining the applicability of Sec. 57 (iii) and that purpose must
be making or earning of income. Sec. 57(iii) does not require tl;tat this purpose
must be fulfilled in order to qualify the expenditure for deduction. It does not
say that the expenditure shall be deductible only if any income is made or earned.
There is in fact nothing in the language of Sec. 57 (iii) to suggest that the
purpose for which expenditure is made should fructify into any benefit. [1051
'
B-E]
Eastel'n Investm~nts Ltd. v. Commissioner of Income-tax, 20 l.T.R. (SC)
applied.
(2) The contention ef the Revenue that the expenditure would disqualify for
deduction only if no income resnlts from such expenditure in a particular assessment year but, if there is some income, however small or meagre, the expenditure
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SUPREME COURT REPORTS
[1979] 1 s.c.R.
would be eligible for deduction, would lead to a strange and highly anomalous
result and the legislature could never have intended to produce such illogicality.
Moreover when a profit and loss account is cast in respect of any
source of
income what is allowed by the statute as proper expenditure \vould be debited as
an outgoing and income would be credited as a rece,ipt and the resulting income
or loss would be determined. It wquld make no difference to this process
whether the expenditure is x or y, or nil; whatever is the proper expenditure
allowed by the statute would be debited.
Equally, it would make no difference
whether there is any income and if so, what. since whatever it be, x or y or nil
would be credited. And the ultimate profit or loss would be found. Whatever
is proper outgoing by way of expenditure must be debited irrespective whether
there is receipt of income or not. That is the plain requirement of proper
accounting and the interpretation of Sec. 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances be held to be conditional
upon the making or earning of t!le inrome. [1051 G, H, 1052 A-DJ
(3) It is true that tho language of Sec. 37(i) of the Act is a littlo wider than
that of Sec. 5(iii\. But that cannot ma.ko any difference in the true interpretation of Sec. 57(iii). The languago of Sec. 57(iii) is clear and unambiguous and
it has to be construed according to tho plain natural meaning and merely because:
a slightly wider phraseology is employed in another section which may take in
something more~ it does not mean that Sec. 57(iii) should be given a narrow and
constricted meaning not warranted by tho language of the section and in fact
contrary to such language. This view also accord! with the principles of commercial accounting.
[1052 E-F, 1053 BJ
llughes v. Bank of New Zealand, ' l.T.R. 636 quoted with approval.
Appa Rao v. Commissioner of Incomt-tax, 46 ITR 511; Mohamed Ghouse
v. Comrnissioner of Income-tax, 49 ITR 127, Ormerods (India)
Pvt. Ltd. v.
Co1nmissioner of Income-tax, 36 ITR 329; Chhail Beharilal v. Co1nmissioner of
Income Tax, 39 ITR 696; Con11nissioner of Income-tax v. Dr. Fida
Hussain
G. Abbasi, 11 ffR 314; M. N. Ramaswamy Iyer v. Commissioner of lncometax, 71 ITR 218; Commissioner of Income·tax v. Gopal Chand Patnaik,
111
ITR 86 approved.
., l
Maliarajadhiraj Sir Knmeshwar Singh v. Commi'ssioner of Income-tax, 32 y--
JTR 377; Madanlal Sohanlal v. Commissioner of Income-tax, 41 ITR 1 overmled.
'
CIVIL APPELLATE JURISDICTION : Tax References Nos. 1 and 2
•
G
of 1971.
H
Income Tax Reference under section 257 of the
Income
Tax
Act, 1961 made by the Income Tax Appellate Tribunal, Calcutta in
R.S. No. 775 (Cal.) 69-70 (LT.A. No. 12127 of 66-67) R.A. No.
777 (Cal.) 69-70 (R.T.A. No. 12125 of 66-67).
V. S. Desai and Miss A Subhashini for the Appellant.
Anll B. Divan, N. R. Khaitan, S. R. Aganval,
U. K.
Khf<itan,
P. V. Kapur and Praveen Kumar for the Respondent.
c. I. T. v. R. P. MOODY (Bhagwati, J.)
1049
The Judgment of the Court was delivered by
BHAGWATI, J.-These are two references made by the
Tribunal
to this Court under
section 257 of the Income Tax Act, 1961
in
view of a conflict in tho decisions of High Courts on the
questio-a
as to whether interest on monies borrowed for investment in shares
is allowable expenditure under Section 57 (iii) when the shares have
not yielded any return in the shape of divide·ad during the relevant
assessment year.
The preponderance of judicial opinion is in favour
of the view that such interest is admissible, even though no dividend
is received on the shares, but there are two High Courts which have
taken a different view and he~1ce it is necessary for this
Court to
set the controversy at rest by finally deciding the
question.
Since
the question is purely one of law turning on the true interpretation
of section 57 (iii), it is not necessary to set out the facts giving rise
to these two references in any detail.
It would be snfficient to stare
that the assessees in these two references are brothers and each of
them had borrowed monies for the purpose of making investment in
shares of certain companies and during the assessment year 1965-66
for which the relevant accounting year ended on 10th April, 1965,
each of the two assessees paid interest on the monies borrowed bnt
did not receive any dividend on the shares purchased with
those
monies.
Each of the two assessees made a claim for dednction of
the amount of interest paid on the borrowed monies bnt this claim
was negatived by the Income Tax Officer and on appeal
by
the
Appellate Assistant Commissioner OIJl the gronnd that during
the
relevant assessment year the shares did not yield any dividend and,
therefore, interest paid on the borrowed monies could not be regarded
as exp~nditure laid ont or expended wholly and exclvsively for the
purpooe of making or earning income chargeable under the Head
"Income From Other Source" so as to be allowable as a permissible
deduction under S"--Ction 57 (iii). The Tribunal, however, on further
appeal, disagreed with the view taken by the taxing authorities and
upheld the claim of each of the two assessees for deduction under
section 57 (iii). The Revenue being aggrieved by the decision of the
Tribunal made an application in each case for reference of the following question of law, namely :-
"Whether on the facts, and in the circumstances of the
case, interest o:i. money borrowed for investment in shares
which had not yielded any dividend is
~dmissible under
section 57(iii) ?"
and since there was divergence of judicial opinion on this question,
the Tribunal referred it directly for the opinion of this Court.
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SUPREME COURT REPORTS
(1979] l S.C.R.
The determination of the question before us turns on the true
interpertation of section 57 (iii) and it would, therefore,
be convenient to refer to that section, but before we do so, we may point
out that section 57(iii) occurs in a fasciculus of _sections under the
heading 'F-Income From Other Sources'. Section 56 which is the
first in this group of secticrns enacts in sub-section ( 1) that income
of every kind which is not chargeable to tax under any of the heads
specified in section 14, Items A to E shall be chargeable to tax
under the head 'Income From Other Sources' and sub-section (2)
includes in such income various items one of which is
'dividends'.
Dividend on shares is thus income chargeable under the head 'Income
From Other Sources'. Section 57 provides for certain deductions to be
made in computing the income chargeable under the head "Income
From Other Sources" and one of such deductions is that set out in
clause (iii) which reads as follows :
"Any other expenditure (not being in the nature
of
D
capital expenditure) laid down or expended wholly and exclusively for the purpose of
making
or
earning
such
income".
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The expenditure to be deductible under section 57 (iii) must be laid
out or expended wholly and exclusively for the purpose of making
or earning such income.
The argument of the Revenue was
that
unless the expenditure sought to be deducted resulted in the making
or earning of income, it could not be said to be laid out or expended
for the purpose of making or earning such income.
The making or
earning of income, said the Revenue, was a sine qua non
to the
admissibility of the expenditure under section 57 (iii) and, therefore,
if in a particular assessment year there was no income, the expenditure would not be deductible under
that section.
The Revenue
relied strongly on the langui;ge of section 3 7 (1) and contrasting the
phraseology employed in section 57(iii) with that in section 37(1),
pointed out that the l"..egislature had deliberately used
words
of
narrower import in granting the deduction under section 57(iii).
Section 37(1) provided for deduction of expenditure laid
out or
expended wholly and exclusively for the purpose of the business or
profession in computing the income chargeable
under
the
head
'Profits or gains of business or profession'.
The language tised in
section 3 7 ( 1) was "laid out or expended-for the purpose of the
business or profession" and not "laid out or expended-for the purpose of making or earning such income" as set out in section 57 (iii) .
The words in section 57(iii) being narrower, contended the Revenue,
c. I. T. v. R. P. MOODY (Bhagwati, J.)
1051
they cannot be given the same wide meanrng as the words in section 3 7 (I) and hence no deduction of expenditure could be claimed
under section 57 (iii) unless it was productive of income in the
assessment year in question.
This conte":J.tion of the Revenue
undoubtedly found favour with two High Courts but we do not think
we can accept it.
Our reasons for saying so 11re as follows.
What section 57 (iii) requires is that the expenditure must
be
laid out or expended wholly and exclusively for the purpose of
~ making or earning income.
It is the purpose of the expe":J.diture that
is relevant in determining the applicability of section 57 (iii)
and
that purpose must be making or earning of income.
Section 57 (iii)
does not require that this purpose must be fulfilled in order to
qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There
is in fact nothing in the language of section 57 (iii) to suggest that the
purpose for which the expenditure is made should fructify into any
benefit by way of return in the shape of income.
The plain natural
construction of the language of section 57 (iii) irresistibly leads to the
conclusion that to bring a case within the section, it is not necessary
that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by
this Court in Eastern Investments Ltd. v. Commissioner of Incometax,(') where interpreting the corresponding provision in section 12(2)
of the Income Tax Act, 1922 which was ipsissima verba in the same
terms as section 57 (iii), Bose, J., speaking on behalf of the Court observed : "It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". It is indeed difficult
'
to see how, after this observation of the Court, there can be any scope
, for controversy in regard to the interpretation of section 57 (iii).
It is also interesting to note that, according to the Revenue, the
expenditure would disqualify for deduction only if no income results
from such expenditure in a particular assessment y~ar, but if there is
some income, howsoever small or meagre, the expenditure would be
eligible for deduction. This means that in a case where the expenditure is Rs. 1000/-, if there is income of even Re. 11-, the expenditure
would be deductible and there would be resulting loss of Rs.
999 /-
under the head 'Income From Other Sources'. But if there is no
income, then, on the argument of the Revenue, the expenditure would
have to be ignored as it would not be liable to be deducted. This would
(I) 20 I. T. R. I.
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1052
SUPREME COURT REPORTS
[1979] 1 s.c.R.
indeed be a strange and highly anomalous result and it is difficult to
believe that the Legislature could have ever intended to produce such
illogicality. Moreover, it must be remembered that when a profit and
~
loss account is cast in respect of any source of income, what is allowed
by the statute as proper expenditure would be debited as an outgoing
and income would be credited as a receipt and the resulting income or "'
loss would be determined. It would make uo difference to this process
whether the expenditure is X or Y or nil ; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would
make no difference whether there is 'any income and ;f so, what, since "'I
whatever it be .. X or Y or nil, would be credited. And the ultimate
'
profit or loss would be found. We fail to appreciate how expenditure
which is otherwise a proper expenditure can cease to be such merely
because there is no receipt of income. Whatever is a proper outgoing
by way of expenditure must be debited irrespective whether there is
receipt of income or not. That is the . plain requirement of proper
accounting and the interpretation of section 57 (iii) cannot be different.
The deduction of the expenditure carmot, in the circumstances, be helU
to be conditional npon the making or earning of the income.
It is true that the language of section 37 (1) is a little wider !ban
that of section 57(iii), but we do not see how that can make any difference in the true interpretation of section 57 (iii). The language of
section 57 (iii) is clear and unambiguous and it has to be construed
according to its plain natural meaning and merely because a slightly
wider phraseology is employed in another section which may take in
something more, it does not mean that section 57 (iii) should be given
a narrow and constricted meaning not warranted by the language of the
section and in fact, contrary to such language.
This view which we are taking is clearly supported by the observay
tions of Lord Tuankerton in Hughes v. Bank of New
Zealand(') -
where the learned Law Lord said : "Expenditure in the course of the
trade which is unremunerative is none the less a proper deduction, if
wholly and exclusively made for the purposes of the trade. It docs not
require the presence of a receipt on the credit side to justify the deduction of an expense." We find that the same view has been taken by
the Madras High Court in Appa Rao v.
Commissioner of lncometax,(') and Mohamed Ghouse v. Commissioner of Income-tax,( 3 ) the
Bombay High Court in Ormerods (India) Private Ltd. v.
Commissioner of Income-tax,(') the Allahabad High Court in Chhail Beharilal
(I) 6 J.T.R. 636.
(2) 46 I.T.R. 511.
(3) 49 I.T.R. 127.
(4) 36 I,T.R. 329.
,
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•
c. I. T. v. R. P. MOODY (Bhagwati, J.)
1053
v. Commissioner of Income-tax,(') the Madhya Pradesh High Court in
Commissioner of Income-tax v. Dr. Fida Hussain G. Abhasi,(2 ) the
Kerala High Court in M. N. Ramaswamy Iyer v .. Commissioner of Income-tax(') and the Orissa High Court in Commissioner of Incometax v. Gopal Chand Patnaik.(') This view is eminently correct as it is
not only justified by the language of section 57(iii) but it also accords
with the principles of commercial accounting. The contrary view talfen
by the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v.
Commissioner of Income-tax(') and the
Calcutta High Court in
Madan/al Sohan/al v. Commissioner of lncome-tax( 6 ) must in the
circumstances be held to be incorrect.
A
B
We accordingly answer the question referred to us for our opinion c
in each of these two references in favour of the assessee and against
the Revenue. The Revenue will pay the costs of both the references
to the assessee.
S.R.
(l) 39 I.T.R.
696.
(2) 71 I.T.R.
314.
(3) 71 I.T.R.
218.
(4) 111 I.T.R.
86.
(5) 32 I.T.R.
377.
(6) 47 I.T.R. I.
References answered in
favour of assessees .