# R. DALMIA v. C.I.T., DELHI, NEW DELHI

- **Citation:** [1978] 1 S.C.R. 537
- **Court:** Supreme Court of India
- **Decided:** 1977-09-21
- **Case number:** Civil Appeal No. 1519 of 1971
- **Bench:** P. N. Bhagwati, S. Murtaza Fazal Ali
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/r-dalmia-v-c-i-t-delhi-new-delhi-7291
- **Pages:** 10

## Headnote

537
lnco1ne Tax Act 1922, s.
I2(2)-.1~ssessee borrowed money from a bank
and bought shares-Agreement prol'icled that divid'!nd etc., on shares declared
after a certain date shall be held by the bank for the benefit of the assesseeShares not taken delivery of by the assessee by the stipulated date-Dividend
declared, if accrued to tile assessee.
Sec/ion 12(2), scope of-lnrerest paid 011 loa11 and da1nages paid-If pcrA
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!ni~sible deduction.
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The assessee borrowed a hirge sum of money from a bank and purchased
~hares from it; but did not tale delivery of the transfer forms and share certificates by making payment of the purchase price. Clause (3) of the agreement, however, stipulated that if the shares were not taken delivery of by a
certain date, dividends, right-, bonuses etc.
which might be
declared after
that date Vi'ould be held by the bank for the benefit of the assessee; and that
the assessce wu1_;ld be liable to pay interest on the purchase price. Clause ( 4)
provided that 1f the assessec did not take delivery of the shares by a certain
J)
Llate, the banh. would be al liberty to sell the undelivered shares and to hold the
:-13Sessee liable for the difference in the price fetched by the shares.
The assessec paid to the bank over hvo lacs of rupees by way of interest
a11·d more than a lac of rupees by way of damages for failure to take delivery
of the shares. A su1n of Rs. 95,000 odd was earned as dividend by the assessee
(~n the shares.
The Income Tax Officer disallo\ve<l the claim of the assessee for deduction
under s. 12(2) of the Indian Income Tax Act 1922 of the interest on the loan
and damages paid by him to the bank but incJuded the dividend earned on
the shares in his total income.
On appeal the Appellate Assistant Commissioner
affirmed the vie'" of the Income Tax Officer. The Tribunal, on the other hand,
held that since there was no transfer of equitable title in the shares to the
<.1ssessee, h<:! was not entitled to any deduction of interest; di.sallowed the deduction of <lamages paid by the assessee but excluded the dividend from his total
income on the ground that it was not dividend earned by him. On reference, the
l ligh Court affirmed the findings of the Tribunal.
,i\lJ.owing the appeal in part,
HELD: (1) The High Court and the Tribunal were wrong in taking
the
vic\v that the Income Tnx Officer rightly disallowed the interest claimed by the
~essec. This amount was a permissible deduction under s.12(2) ot the Act
and should have been allowed. There is a direct nexus between the amount paid
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hy the assessce as -interest and the earning of the clividend income.
[546 A-B]
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(2) In the Bank of llldia v. J. A. II. Chinoy A.LR. 1950 P.C. 90 nt 97,
the Privy Councii held that even though 3! transaction may not an1ount to an
;1cquisition of equitable interest, yet as between the vendor and the purchaser a
term regarding payment of the declared dividend would be fully effective because
once the t!ividend:J arc declared, they will be deemed to have accrued to the
purchaser even though_ there may not have been any tra·nsfer of equitable title
to the purchaser. Clause (3) of the agreement read in the light of this decision
shows that even if there was no transfer of equitable title to the assessee, since the
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dividend declared would be an additional source of income to him, the asscssee
would be entitled to deduct the interest paid on the learn for acquiring the
shares. [541 E & HJ
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538
SUPREME COURT REPORTS
[1978] l S.C.R.
(3) An analysis of s.12(2) of the Indian Income Tax Act 1922 shoWll f.bftt
before this provision could apply, the following conditions must be fulfilled:
(i) the expenditure must have been incurred solely and exclusively for the pwpose of earning income or making profit; (ii) the expenditure should not be fa
the nature of a capital expenditure; (iii) the amount in question should not l5c
in the nature of personal expenses of the atisessee; (iv) the expenditure should
be incurred in the accou

## Text

R. DALMIA
v.
C.I.T., DELHI, NEW DELHI
September 21, 1977
[P. N. BHAGWATI AND S. MURTAZA FAZAL ALI, JJ.]
537
lnco1ne Tax Act 1922, s.
I2(2)-.1~ssessee borrowed money from a bank
and bought shares-Agreement prol'icled that divid'!nd etc., on shares declared
after a certain date shall be held by the bank for the benefit of the assesseeShares not taken delivery of by the assessee by the stipulated date-Dividend
declared, if accrued to tile assessee.
Sec/ion 12(2), scope of-lnrerest paid 011 loa11 and da1nages paid-If pcrA
B
!ni~sible deduction.
('
The assessee borrowed a hirge sum of money from a bank and purchased
~hares from it; but did not tale delivery of the transfer forms and share certificates by making payment of the purchase price. Clause (3) of the agreement, however, stipulated that if the shares were not taken delivery of by a
certain date, dividends, right-, bonuses etc.
which might be
declared after
that date Vi'ould be held by the bank for the benefit of the assessee; and that
the assessce wu1_;ld be liable to pay interest on the purchase price. Clause ( 4)
provided that 1f the assessec did not take delivery of the shares by a certain
J)
Llate, the banh. would be al liberty to sell the undelivered shares and to hold the
:-13Sessee liable for the difference in the price fetched by the shares.
The assessec paid to the bank over hvo lacs of rupees by way of interest
a11·d more than a lac of rupees by way of damages for failure to take delivery
of the shares. A su1n of Rs. 95,000 odd was earned as dividend by the assessee
(~n the shares.
The Income Tax Officer disallo\ve<l the claim of the assessee for deduction
under s. 12(2) of the Indian Income Tax Act 1922 of the interest on the loan
and damages paid by him to the bank but incJuded the dividend earned on
the shares in his total income.
On appeal the Appellate Assistant Commissioner
affirmed the vie'" of the Income Tax Officer. The Tribunal, on the other hand,
held that since there was no transfer of equitable title in the shares to the
<.1ssessee, h<:! was not entitled to any deduction of interest; di.sallowed the deduction of <lamages paid by the assessee but excluded the dividend from his total
income on the ground that it was not dividend earned by him. On reference, the
l ligh Court affirmed the findings of the Tribunal.
,i\lJ.owing the appeal in part,
HELD: (1) The High Court and the Tribunal were wrong in taking
the
vic\v that the Income Tnx Officer rightly disallowed the interest claimed by the
~essec. This amount was a permissible deduction under s.12(2) ot the Act
and should have been allowed. There is a direct nexus between the amount paid
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hy the assessce as -interest and the earning of the clividend income.
[546 A-B]
G
(2) In the Bank of llldia v. J. A. II. Chinoy A.LR. 1950 P.C. 90 nt 97,
the Privy Councii held that even though 3! transaction may not an1ount to an
;1cquisition of equitable interest, yet as between the vendor and the purchaser a
term regarding payment of the declared dividend would be fully effective because
once the t!ividend:J arc declared, they will be deemed to have accrued to the
purchaser even though_ there may not have been any tra·nsfer of equitable title
to the purchaser. Clause (3) of the agreement read in the light of this decision
shows that even if there was no transfer of equitable title to the assessee, since the
If
dividend declared would be an additional source of income to him, the asscssee
would be entitled to deduct the interest paid on the learn for acquiring the
shares. [541 E & HJ
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538
SUPREME COURT REPORTS
[1978] l S.C.R.
(3) An analysis of s.12(2) of the Indian Income Tax Act 1922 shoWll f.bftt
before this provision could apply, the following conditions must be fulfilled:
(i) the expenditure must have been incurred solely and exclusively for the pwpose of earning income or making profit; (ii) the expenditure should not be fa
the nature of a capital expenditure; (iii) the amount in question should not l5c
in the nature of personal expenses of the atisessee; (iv) the expenditure should
be incurred in the accounting year; and (v) there must be a clear nexus between
the expenditure incurred and the income sought to be earned. [542 E-G]
In the instant case (i) a genuine and bona fide contract had been enteced
into between the assessee and the bank for transfer of a large number of sbRm
to the assessee; (ii) the assessee, in pursuance of this agreement raised the Iou.
from the bank and paid interest for this purpose; ood (iii) under cl.(3) of the
agreement the dividends, rights and bonuses etc., were held by the ba-nk for tbe
benefit of the assessee after they were declared.
Eastern ,fnvcstments Ltd. v. Conunissioner of Income Tax, West Bengal 20
LT.R. 1 and Bonzbay Steam Navigation Co. (1963) Private Ltd. v. Commissioner
of Income-tax, Bombay 56 I.T.R. 52, 59, followed.
J. K. Commercial Corporation Ltd. v. Commissioner of Income-tax,
u-.P.
72. I.T.R. 296 and Commissioner of Income-tax, Bombay City l
v.
H.
H.
Maharani Vijaykuverba Saheb of Morvi 100 I.T.R. 67, approved.
Ormerods (India) Private Ltd. v. Commissioner of Income-tax,
Bomba)'
City 36 I.T.R. 329 and Smt. Nirma[a M. Doshi v. Con1missioner of ·Income-tax,
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Bombay City JI 82 J.T.R. 648, referred to.
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( 4) Since the assessee's main business was not dealing in shares, damages
were paid by him due to his own default. The damages paid would, therefore.
he capital expenditure. [546 CJ
(5) The dividend earned by the a')sessee should be included in his to(HI
income. [546 Fl
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1519 of 1971.
Appeal by Special Leave from the Judgment and Order dated
22-1-1971 of the Delhi High Contt in I. T. Reference No. 25 of 1966.
Bishamber Lal for the Appellant.
V. P. Raman, Addl. Sol. Genl. and J. Ramamurthi for the Respondent.
The Judgment of the Court was delivered by
FAZAL ALI, J. In this appeal by special leave, the assessee who is
an individual had purchased a large number of shares from the Bhar&t
Baak Ltd. for Rs. 44,14,990/- by borrowing this amount from the
Bharat Bank and he paid interest of Rs.
2,04,744/-
on the said
amount.
In fact four years back i.e. in 1944-45 the joint family
of which the assessee was a member had sold these very shares along
with other shares to the Bharat Bank Ltd.
The agreement by which
the assessee purchased these shares is dated February 5, 1948 and is to
be found at Annexure A on p. 19 of the Paper Book. In spite of the
fact that the assessee had agreed to buy the shares from the Bharat
Bank Ltd. he did not take delivery of the transfer forms and the share
certificates by making payment of the purchase price.
Under the agree-
R. DALMIA v. c. !. T. (Fazal Ali, J.)
539'
ment dated February 5, 1948 it was agreed that the shares would be
{aken delivery of on or before March 31, 1948. It was further agreed
that if the shares were not taken delivery of by this date, the dividends,
rights, bonuses etc. which may be declared after that date, namely,
March 31, 1948 will be held by the Bank for the benefit of the assessee
and the assessee would be liable to pay interest at the rate of 6% p.a.
on the purchase price from April l, 1948 till actual delivery of the
shares.
Clause ( 4) of the agreement provided that if for any reason
the shares were not taken delivery of by March 31, 1951, the Bank
will be at liberty to sell the then undelivered shares and to hold the
assessee liable for the difference in the price fetched by the shares. The
assessee did not take delivery of some of the shares until March 31, 1951
and paid a sum of Rs. 1,05,000/- as damages for his failure to take
delivery as stipulated in the agreement between the parties.
It is also
the admitted case of the parties that the assessee earned a dividend income of Rs. 95,664/-. The assessment year in the instant case is
1953-54 i.e. the previous year ending September 30, 1952.
The
assessee claimed that he was entitled to deduct the interest paid for
acquiring the shares worth Rs. 44,14,990/- and, therefore, a sum of
Rs. 2,04,744/- was deductible under s. 12(2) of the Income-tax Act,
1922-hereinafter referred to as 'the Act'. It was further alleged by
the assessee that even the damages amounting to Rs. 1,05,000/- which
he had paid to the Bharat Bank for not taking delivery of the shares
were also deductible because this was a business expenditure. Finally.
the assessee also claimed that the sum of Rs. 95,664/ being the dividend income was not to be included in the total income of the asscssee.
The Income-tax Officer rejected all the pleas taken by the assessee and
disallowed the deductions claimed by the assessee as mentioned above.
The Income-tax Officer also included the sum of Rs. 95,664/- in the
total income of the assessee.
The assessee filed an appeal before the Appellate Assistant Commissioner who affirmed the order of the Income-tax Officer, though on
slightly different grounds with which we are not concerned here. Thereafter the assessee filed an appeal before the Tribunal which gave
a
finding that under the facts and circumstances of the present case there
was no transfer of equitable title in the shares to the assessee and,
therefore, he was not entitled to any deduction of the interest pa;d by
him on the capital amount which constituted the purchase money of
the shares.
The Tribunal further held that the interest paid was of a
capital nature and did not fall within the ambit of s. 12(2) of the Act.
As regards the assessee's claim to the dividend income of Rs. 95,664/-,
the Tribunal held that as the said income had been credited to the
account of the assessee in terms of cl. (3) of the agreement dated
February 5, 1948 it had not been actually earned by the assessee and
the receipt of the dividend by the Bank was only taken into account for
finalisation of the price.
The Tribunal accordingly directed deletion
of this amount from the total income of the assessee.
As regards the
third point, namely, the sum of Rs. 1,05,000/- which the assessee paid
as damages to the Bank, the Tribunal held that as the assessee was
not doing business exclusively in shares he was not entitled to set off
the interest paid by him as revenue loss.
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540
SUPREME COURT REPORTS
[1978] ! S.C.R
Thereafter the appellant moved the Tribunal for making a reference
to the High Court and after hearing counsel for the parties the Tribunal
referred the following questions for the opinion of the High Court :
"(!) Whether on the facts and in the circumstances of
case the tribunal rightly rejected the assessee's claim for deduction of the interest payment of Rs. 2,04,744/-?
(2) Whether on the facts and in the circumstances of
the case the tribunal rightly held that the revenue was not
estopped from disallowing the claim for the deduction of the
interest amount in view of the alJowance of such claim in the
past?
(3) Whether on the facts and in the circumstances of the
case the tribunal rightly disallowed the loss of Rs. 1,05,000/-
in respect of 7500 preference shares of the Dalmia Investment Company Ltd. ?
( 4) Whether on the facts and in the circumstances of the
case the tribunal rightly held that the dividend amount oi
Rs. 95,664/- did not constitute the income of the assessee?
Out of these questions, Question No. (2) has not been pressed by llie
appellant because it is well settled that there is no question of estuppcl
or res judicata in relation to the assessment of different years.
Thus
tile only question' that were to be determ:ned by the High Court were
Questbns Nos. ( l), (3) and ( 4). The Hig,'1 Court agreed with the
Tribunal that in •he facts and circumstances of the case there was no
transfer of equitable title of the shares to the assessee and, therefore.
he was not crytitled to claim deduction of Rs. 2,04,744/-.
The finding o[ the Tribunal on Question No. ( 3) was also upheld and the High
Court agreed that the 105', of Rs. 1,05,000/- was rightly disallowed. On
Question No. ( 4) the High Court, also agreed with tlY; view of the
Tribunal and held that this amount could not be included in the total
incoine of the usscssc~. The assessec has cor.1c up to this c·ourt., affct
ob1tinin~ special leave from this Court.
Both the "I"ribunal and the High c·ourt have gone into the question
o[ transfer of equitable title at very great length, but in the facts and
circu1nstanccs of this case aftzr hearing the parties and going through
the record we feel that the question of tramfcr of equitable title is a
vexed question of law and is not free from difficulty.
Having regard
to the peculiar faces of this case, it is not necessary for the Court hi
decide the question of equitable transfer in order to give relief to the
appe11ant on Question No. (I). In other words, we arc of the opinion
tliat the quest.on as to whether or no·: the appellant is entitled to a
deduction of Rs. 2,04,744/- can be decided without touching or affecting the question of transfer of equitable tit1e to the asscssce.
This can
be done by examining :he scope and ambit of s. 12(2) of the Act in
order to find out ii the assessce·s case for payment of interest can come
within the four corners of that section. In these c;rcumstances we do
not propose to go into the question of transfer of equitable title which
had occupied a greater part of the judgments of the High Court and
R. DALMIA I'. c. J. T. (Fazal Ali, J.)
541
'the Tribunal.
We would, however, like to make it clear that we
A
sho!_Jld not be taken to have affirmed the decision of the High Court
on this point, but we refrain from expressing any opinion thereon in
the view that we take in the present case.
In Bank of India v. !.A.H. Chinoy,('), Lord MacDermott pointmg ont the extent of the doctrine of transfer of equitable title to a purchaser observed as follows :
B
"Their Lordships do not desire to cast doubt on the proposition that in India a purchaser of shares (which under the
Indian Sale of Goods Act come within the definition of
"goods") does not acquire an equitable interest by virtue of
the contract of sale.
But they cannot agree with the application of this proposition which commended itself to the
C
Appellate Court.
No doubt as between a company and a
purchaser of shares therein the date of completion is all important.
But as between vendor and purchaser, where the contract does not otherwise provide, the term to be implied as lo
dividends is not confined to dividends still to be declared in
respect of a period or periods prior to the contract.
It
includes such dividends but that is not because the period in
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which they were earned is crucial: what is crucial is the date
or dates of declaration."
It would appear from the observations of the Privy Council that even
though the transaction may not amount to acquisition of equitable
interest, yet between the vendor and the purchaser the term regarding
payment of the declared dividend would be fully effective because
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once the dividends are declared they will be
deemed to have
accrued
to
the purchaser even though there may not have
been any transfer of equitable title to the purchaser. In the instant
case, cl. (3) of the agreement by which the assessee purported to acquire shares from the Bank runs thus :
"That if the shares are not taken delivery of by 31-3-48
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the dividends, rights, bonuses, etc., that may be declared after
that date, will be for your benefit, but you will be liable to
pay interest at 6% from 1-4-1948 till the date of actual delivery on the price of the shares calculated at the rates above
mentioned."
A perusal of the statement made in this paragraph manifestly reveals
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that even if the shares are not taken delivery of by the assessce the
dividends, rights, bonuses etc. which may be declared after that' date
were to be held by the Bank for the benefit of the purchaser. Thus
the principle which is deducible from the decision of the Privy Coundl in J.A .. H. Chinoy's case (supra) folly applies to the facts of the
present cage. H follows, as a logical corollary, therefore, that even if
there was μo transfer of equitable title to the assessee, since a ComH
· pany declared the dividend etc. which would be an additional source
(I) A.l.R.1950P.C90 .. 97.
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542
SUPREME COURT REPORTS
[ l 978] I s.c.R.
of income to the assessee, would he. not be entitled to deduct a sum
of Rs. 2,04, 7 44 /- being the interest paid on the loan for acqniring the
shares? The position will become clear if we extract s. 12(2) of the
Act as it stood at the relevant time :
"(2) Such income, profits and gains shall be computed
after making allowance for any expenditure incurred solely
for the purpose of making or earning such income, profits or
gains provided that no allowance shall be made on account
of-
(a) any personal expenses of the assessees, or
(b) any interest chargeable under this Act which is payable without the taxable territories, not being interest on a
loan issued for public subscription before the !st day of April,
1938, or not being in'.ercst on which tax has been paid or
from which tax has been deducted under section 18, or
( c) any payment which is chargeable under the head
"Salaries" if it is payable without the taxable territories and
tax has not been paid thereon nor deducted therefrom under
section 18."
An analysis of this sub-section would show that in computing the
incorue under this head the assessee is entitled to deduction in respect
of the expenditure incurred solely for the purpose of earning such
income, provided the expenditure is not of a capital nature and docs
not include any personal expenses incurred by the assessee.
In other
words, before this provision could apply the following conditions mmt
be fulfilled :
(i) the expenditure must have been incurred solely and
exclusively for the purpose of earning income or making profit;
(ii) the expenditure should not be in the nature o!
a
capital expenditure;
(iii) the amount in question should not be in the nature o!
personal expenses of the assessee;
(iv) that the expenditure should be incurred in the accounting year; and
( v) there must be a clear nexus between the expenditure
incurred and the income sought to be earned~
In Eastern
Investments Ltd. v. Commissioner of Income-ta.,
West Bengal(') the facts were that the assessee which was an Investment Company was formed for acquiring. holding and dealing in shares
and Government securities belonging to C.
C died and S was appointed Administrator of his estate and in that capacity he sold 50,000 ordiH · nary shares. Money was required by the Executor of C and he entered
into an agreement with the assessee Company by which the
asses~ee
(1) 20 I.T.R. I
•
R. DALMIA v. c. I. T. (Fazal Ali, J.)
agreed to reduce its share capital by Rs. 50 lakhs by taking over from
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lhe Administrator 50,000 shares at Rs. 100/- per share and to receive
instead debentures of the face value of Rs. 50 lakhs carrying interest at
5 % per annum.
The agreement was sanctioned by the High Court and
was ultimately carried out.
The transaction was held to be genuine.
The Appellate Tribunal and the Calcutta High Court took the view
that in computing the income of the assessee the interest paid on the
debentures could not be deducted under s. 12(2) of the Act as this was
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notan expenditure for the purpose of earning the income.
This Court,
while reversmg the judgment of the Calcutta High Court, held that once
the transaction was held to be a genuine one it clearly fell within the
purview of s. 12(2) of the Act and the interest paid by the assessee was
a permissible deduction under s. 12 (2) of the Act.
In this connection,
this Court observed as follows :-
"On a full review of the facts it is clear that this transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the company and was
made on the ground of commercial expediency.
It therefore
falls within the purview of Section 12(2) of the Income-tax
Act, 1922, before its amendment.
This being an investment company, if it borrowed money
ai1d utilised the same for its investments on which it earned
income, the interest paid by it on the loans will clearly be a
permissible deduction under Section 12(2) of the Incom<
tax Act."
The aforesaid case appears to be on all fours with the facts in the prcoent case.
In the instant case also it is not disputed before us that the
agreement entered into between the parties was a genuine one. In fact
the Tribunal had also held that the agreement was actually acted upon.
Once this was so, then the interest which the assessee paid on the loan
of Rs. 44,14,990/- which came to Rs. 2,04,744/- was really paid for
the purpose of earning income, namely, the dividends, bonuses etc.
which were held by the Bank for the benefit of the assessee.
The
interest of Rs. 2,04,744/- paid by the appella11t could not be said to be
of a capital nature, nor could it be deemed to be personal expenses
incurred by the assessee.
In these circumstances, therefore, the essential ingredients of s. 12(2) are fully satisfied in this case and on the
authority of this Court in Eastern Investments Ltd.'s case (supra) the
appellant's case squarely falls within the four corners of s. 12(2) as a
result of which the ainount of interest of Rs. 2,04,744/- was a permissible deduction under s. 12(2) of the Act.
In Bombay Steam Navigation Co. (1953) Private Ltd. v. Commi3sioner of Income-tax Bombay('), in somewhat similar circumstances,
this Court allowed the expenditure as a deduction under s. 10(2) (xv).
and observed as follows :
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"But in our judgment interest paid by the assessee-comH
pany is a permissible deduction under Section
10(2) (xv)
(I) 56 I.T.R. 52. 59.
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544
SUPREME COURT REPORTS
f 1978] 1 S.l'. R.
which permits "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" as a permissible allowance in the computation of
profits or gains of the business carried on in
the year uf
account. . . . . . The expenditure was incurred after the commencement of the business.
The expenditure is not for any
private or domestic purposes of the assessee-company. lt is
in the capacity of a person carrying on business that this
interest is paid."
This Court further observed :
"Whether a particular expenditure is revenue expenditure
incurred for the purpose of business must be determined on
a consideration of all the facts and circumstances, and by the
application of principles of commercial trading.
The question must be viewed in the larger context of business necessity
or expediency.
If the outgoing or expenditure is so related to
the carrying on or conduct of the business, that it may be
regarded as an integral part of the profit--carning process and
not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying
on of the business, the expenditure may be regarded as revenue expenditure."
Apart from these decisions of this Court, a number of decisions of the
High Courts have also taken the same view.
In Ormerods
(Ir.dial
Private Ltd. v. Commissioner of lncome-tax, Bombay City('),
the
Bombay High Court allowed certain sums of money paid as interest < "'
borrowed capital for the purchase of shares and held that the word
"purpose" in the expression "expenditure incurred solely for the purpose of making or earning such income, profits or gains" did not mean
motive for the transaction, much less can it mean ulterior motive '''
ulterior object.
The Court held that as the investments were made fnr
the purpose of earning income, the interest paid thereon
would
be·
deductible under s. 12(2) of the Act.
A similar view was taken by the Allahabad High Court in J. K
Commercial Corporation Ltd. v. Commissioner of Income-tax, U.P.( 2 )
where it was held that any expenditure incurred for preservation or
pr(;tection ot a capital asset was revenue in nature.
The Court held
that legal and uavelling expenses incurred by the assessee for protecting
dividend income and to ensure the prospective dividend earning capacity were clearly allowable under s. 12(2) of the Act.
We find ourselves in complete agreement with the view taken by the
Allahabad
High Court in that case.
(I) J6l.T.R.329.
t2) 721.T.R. 296.
R. DALMIA v. c. I. T. (Faza/ Ali, !.)
54 5
In Smt. Nirmala K. Doshi v. Commillsioner of Income-tax, BornA
bay City II('), the Bombay High Court held that payment of interest
for earning dividend income was deductible under s. 12(2) of the Act.
In Commissioner of Income-tax, Bombay City I v. H. H. Mahar?ni
Vijaykuverba Saheb of Morvi( 2), a Division Bench of the Bombay High
Court held that the deduction which is permissible under sub-s. (2) of
B
s. 12 is an expenditure incurred solely for the purpose of makin!'; or
earning the income which has been subjected to tax ~nd the dommant
purpuse of the expenditure incurred must be to earn mcome.
It was
further held that the connection between the expenditure and the earning of income need not be direct, and even an indirect connection
could prove the nexus between the expenditure incurred and the income.
We fully agree with the view taken by the Bombay High Court.
C
In view of the direct decision of this Court in Eastern Investments
Ltd.'s case (supra), it is not necessary for us to multiply authorities.
Summarising, therefore, the facts of the present case, the position which
emerges is as follows : ·-
(1)
(2)
that a genuine and bona fide contract halll been entered into between the assessee and the Bank for transfer
of large number of shares to the assessee;
that the assessee in pursuance of this agreement had
raised a loan of Rs. 44,14,990/- from the Bank in
order to acquire the shares and had paid interest of
Rs. 2,04,744/- for this purpose; and
(3) as a result of the aforesaid acquisition, under cl. (3)
of the agreement the dividends, rights, bonuses etc.
held by the Bank were held for the benefit of the
assessee after they were declared. It is obvious that
if the assessee would not have paid the interest on the
loan raised by him he would not have been able to get
the dividend income.
In these circumstances, therefore, there was a direct nexus between the
expenditure of Rs. 2,04, 744/- incurred by the assessee as interest and
the earning of the dividend income.
The assessee has clearly established that the expenditure aforesaid was incurred solely and wholly for
the purpose of earning the bonuses and dividend income. As the shares
were not the stock-in-trade of the appellant it could not be said that
the interest paid by the assessee to the Bank was an expenditure of a
capital nature, nor was there any material to show that the expenditure
incurred by the assessee amounted to his personal expenses.
Jn these
circ~mstances, we a~e satisfied that the case of the appellant in paying
the mterest amountmg to Rs. 2,04,744/- falls clearly within s. 12(2)
of the Act and the conditions of the aforesaid provision being fulfilled
the assessee was in law entitled to deduction of the amount of
(!) 821.T.R. 648.
(2) 1001.T.R.67.
11-930SC!/77
D
F
G
H
546
SUPREME COURT REPORTS
[l 97SJ 1 S.C.R.
A
Rs. 2,04,744/- under s. 12(2) of the Act.
We are, therefore, of the
)
opinion that the High Court and the Tribunal were wrong in !aking the
view that the Income-tax authorities rightly disallowed the amount of
Rs. 2,04,744/- as claimed by the assessee.
We are clearly of the
opinion that this amount was a permissible deduction under s. 12 ( 2)
of the Act and should have been allowed by the Income-tax authorities.
In these circumstances, therefore, we hold on question No.
(1)
that
B
both the Tribunal and the High Court should have held !hat the
assessee's claim for deduction of interest amounting to Rs. 2,04,744/-
was wrongly rejected by the Income-tax authorities.
So far as Question No. 3 relating to damages of Rs.
1,05,000/-
paid to the Bank by the assessee for non-delivery of the shares is concerned, we aP~ unable to agree with counsel for the appellant that this
C
was a deductible expenditure. We have already pointed out that the
assessee's main business was not dealing in shares and, therefore, the
damages paid were due to his own default and would, therefore, be a
capital expenditure rather than a revenue one. The High Court and
the Tribunal were right in disallowing this amount.
D
E
1F
G
As regards question No. ( 4) the position is
somewhat obscure.
While the Tribunal had deleted the amount of Rs. 95,664/- from the
total income of the assessee, the High Court also agreed with the Tribunal and answered this question in the affirmative against the Revenue.
Learned counsel for the Revenue has, however, submitted that if we
are of the opinion that the appellant should be entitled to the deduction
of Rs. 2,04,744/- under s. 12(2) of the Act, then it automatically
follows that he cannot claim exemption in respect
of the dividend
income. In our opinion the argument of Mr. V. P. Raman, learned
counsel for the Revenue is well founded and must prevail. Even Mr.
Bishamber Lal appearing for the assessee/ appellant was fair enough to
concede that if we hold that the interest of Rs. 2,04,744/- was a permissible deduction under s. 12(2) of the Act then he would not press his
claim before the Income-tax authorities for deletion of the dividend
income of Rs. 95,664/- and he would have no objection if this. Court
sets aside this deletion. In this view of the matter we set aside the
order of the High Court as also that of the Tribunal deleting the amount
of Rs. 95,664/- which will be included in the total income of the
assessee.
The result is that the appeal is allowed in part and our finding on
Question No. (1) is that the High Court and the Tribunal were wrong
in disallowing the deduction of Rs. 2,04,744/-
as claimed by the
assessee.
The assessee is, therefore, entitled to a deduction of this
amount from his total income.
We affirm the judgment of the High
Court in disallowing the claim of Rs. 1,05,000/- which forms the basis
of Question No. (3). As the appeal has partially succeeded and partially failed, we leave the parties to bear their own costs in this Court.
P.B.R.
Appeal allowed in part.
•