Calcutta H.C : The appellant was not entitled to deduction under Section 57(iii) of the Income Tax Act, 1961 in respect of the interest of Rs.13,49,356/- incurred on borrowed funds utilized for making investment in shares on which no dividend was received and the purported findings of the Tribunal in that behalf are arbitrary, unreasonable and perverse

High Court Of Calcutta

Sri Saytasai Properties & Investment (P.) Ltd. vs. CIT, Central-ii, Kolkata

Section : 57, 38

Girish Chandra Gupta And Tapash Mookherjee, JJ.

IT Appeal No. 257 Of 2003

February 10, 2014

ORDER

1. The Court : This appeal is directed against a judgment and order dated 31st March, 2003 passed by the learned Income Tax Appellate Tribunal. Aggrieved by the order, the assessee has come up in appeal.

2. The first question formulated at the time of admission of the appeal is as follows:

“(1) Whether the Tribunal was justified in law in holding that the appellant was not entitled to deduction under Section 57(iii) of the Income Tax Act, 1961 in respect of the interest of Rs.13,49,356/- incurred on borrowed funds utilized for making investment in shares on which no dividend was received and the purported findings of the Tribunal in that behalf are arbitrary, unreasonable and perverse?”

3. Mr. Khaitan, learned senior advocate appearing for the appellant assessee submitted that the question is covered by a judgment of the Apex Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519. He added that the Tribunal did, in fact, notice the judgment, but erred in understanding the true nature and purport thereof. In the aforesaid judgment, the Apex Court held as follows:

“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 of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of s.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 the income.

It is true that the language of s.37(1) is a little wider than that of s.57(iii), but we do not see how that can make any difference in the true interpretation of s.57(iii). The language of s.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 s.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 observations of Lord Thankerton in Hughes v. Bank of New Zealand [1938] 6 ITR 636 (HL), where the learned Law Lord said:

‘Expenditure in 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 does not require the presence of a receipt on the credit side to justify the deduction of an expense’.”

4. Mr. Khaitan submitted that the fact that the assessee borrowed money for the purpose of making investment in shares is not in dispute. The interest paid or incurred by the assessee is also not in dispute. The expenditure on account of interest was a proper expenditure under section 57 of the Income Tax Act, but the same has been disallowed by the Assessing Officer on the ground that investment cannot be said to have been made for earning dividend. The learned Tribunal endorsed that view of the Assessing Officer and reversed the views expressed by the CIT (Appeal). The case of the assessee has always been that :

“The assessee tried to explain out that it purchased the share of M/s. Pushpak Commercial Co. Ltd. at Rs.312 per share against NAV of Rs.8.63 as the said company owned an immovable property at 7, Loudon Street, Kolkata the value of which was much higher than the book value.”

5. Mr. Khaitan also drew our attention to a judgment of this Court in the case of CIT v. Model Mfg. Co. (P) Ltd. [1980] 122 ITR 767 wherein the following view was taken.

“We add that even if the motive of the assessee might have been to obtain control of another company, the consequent purchase of shares may still be treated as investment and the concurrent purpose of the assessee could well have been that of earning further income by acquiring the control of the other company”.

6. Mr. Khaitan, therefore, contended that the views of the learned Tribunal are clearly erroneous and should be set aside.

7. Mr. Nizamuddin, learned Advocate appearing for the Revenue submitted that the judgment in the case of Rajendra Prasad Moody (supra) is with regard to the expenditure incurred for the purpose of earning dividend. It is not a case where any investment was made for the purpose of earning dividend. Therefore, the judgment of the Supreme Court can have no manner of application. He added that the judgment in the case of Model Mfg. Co. (P) Ltd. (supra) does not apply to this case because admittedly the assessee purchased the shares at the rate of Rs.312 each when the net asset value of each share was Rs.8.63p. He, therefore, contended that in a case like this, there is no reason why this Court should interfere with the views expressed by the Tribunal.

8. We have considered the rival submissions advanced by the learned Advocates appearing for the parties. The provisions contained in sections 56 and 57 of the Income Tax Act are to be read together. Section 56 provides for income from other sources, and section 57 provides for allowable deduction.

9. Mr. Khaitan rightly contended that the expenditure on account of interest was a proper expenditure allowable under section 57. The reason which found favour both with the Assessing Officer and the Tribunal was that the investment was not for the purpose of earning dividend. It could not be followed as to how can it be said that earning of dividend can be the sole motive or the sole source for the purpose of making income from other sources. What is an income from other sources has not been put into any straight jacket formula. Even the legislature has not attempted to define the words expressly. Income from other sources is a very wide term. The legislature has advisedly expressed “without prejudice to the generality of the provision”. Therefore, there was no reason why a proper expenditure should have been disallowed only because the investment was not made for the purpose of earning dividend. There is no finding that the investment was made otherwise than for the purpose of making an income. We are, as such, of the opinion that both the Tribunal and the Assessing Officer were wrong in disallowing the expenditure. Accordingly, the question is answered in the negative and in favour of the assessee.

10. The second question formulated at the time of admission of the appeal is as follows:

“(2) Whether the Tribunal was justified in law in upholding the disallowance of 1/5th depreciation on motor cars hired out by the appellant by invoking Section 38(2) and its purported findings in that behalf are arbitrary, unreasonable and perverse?”

11. From the assessment order, it appears that the vehicle has been hired out. In other words, the vehicle is not used for the business of the company. The vehicle has been used for the purpose of earning money by way of hiring charges. In such a case, the order disallowing any part of the depreciation on account of personal use of the directors, under section 38(2), does not appear to have been passed upon application of mind. The question of personal use might have arisen if the vehicle had been used for the business of the assessee. The vehicle has not been used for the business of the assessee at all. On the contrary, the vehicle has been hired out. The assessee, in return, is making profit. Therefore, the directors or any director of the assessee company is not likely to get any opportunity to use the car. The car was in the use of the hirer. When the director had no opportunity to use the car, the question of disallowing any part of depreciation on account of directors’ personal use appears to be altogether misconceived. Therefore, the second question is also answered in the negative and in favour of the assessee.

12. The appeal is thus disposed of.

[Citation : 361 ITR 641]