Case: Seth R. Dalmia Vs. Commissioner of Income Tax, Delhi

296 (All) , where it was held that any expenditure incurred for preservation or protection of a capital asset was revenue in nature. The court held that legal and travelling expenses incurred by the assessee for protecting dividend income and to ensure the prospective dividend earning capacity were clearly allowable under section 12(2) of the Act. We find ourselves in complete agreement with the view taken by the Allahabad High Court in that case. 9. In Nirmala M. Doshi v. Commissioner of Income-tax [1971] 82 ITR 648 (Bom) , the Bombay High Court held that payment of interest for earning dividend income was deductible under section 12(2) of the Act. 10. In Commissioner of Income-tax v. H. H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom), a Division Bench of the Bombay High Court held that the deduction which is permissible under sub-section (2) of section 12 is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax and the dominant purpose of the expenditure incurred must be to earn income. 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. 11. In view of the direct decision of this court in Eastern Investments Ltds. case [1951] 20 ITR 1 (SC) , 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) that a genuine and bona fide contract had been entered into between the assessee and the bank for transfer of large number of shares to the assessee; (2) 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 clause (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." 12. 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, not was there any material to show that the expenditure incurred by the assessee amounted to his personal expenses. In these circumstances, we are satisfied that the case of the appellant in paying the interest amounting to Rs. 2, 04, 744 falls clearly within section 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 Rs. 2, 04, 744 under section 12(2) of the Act. We are, therefore, of the opinion that the High Court and the Tribunal were wrong in taking 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 section 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 both the Tribunal and the High Court should have held that the assessees claim for deduction of interest amounting to Rs. 2, 04, 744 was wrongly rejected by the income-tax authoritiesSo 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 in concerned, we are unable to agree with counsel for the appellant that this was a deductible expenditure. We have already pointed out that the assessees 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. 13. 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 section 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 section 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. 14.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]A perusal of the statement made in this paragraph manifestly reveals that even if the shares are not taken delivery of by the assessee, 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 Council in J. A. H. Chinoys case AIR 1950 PC 90   fully applies to the facts of the present caseAn analysis of this sub-section would show that in computing the income 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 does not include any personal expenses incurred by the assesseeIn the present 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 appellant 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 section 12(2) are fully satisfied in this case and, on the authority of this court in Eastern Investments Ltd.s case [1951] 20 ITR 1 (SC)  , the appellants case squarely falls within the four corners of section 12(2) as a result of which the amount of interest of Rs. 2, 04, 744 was a permissible deduction under section 12(2) of the ActIn view of the direct decision of this court in Eastern Investments Ltds. case [1951] 20 ITR 1 (SC)  , 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) that a genuine and bona fide contract had been entered into between the assessee and the bank for transfer of large number of shares to the) 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 clause (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 incomeIn 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, not was there any material to show that the expenditure incurred by the assessee amounted to his personal expenses. In these circumstances, we are satisfied that the case of the appellant in paying the interest amounting to Rs. 2, 04, 744 falls clearly within section 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 Rs. 2, 04, 744 under section 12(2) of the Act. We are, therefore, of the opinion that the High Court and the Tribunal were wrong in taking 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 section 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 both the Tribunal and the High Court should have held that the assessees claim for deduction of interest amounting to Rs. 2, 04, 744 was wrongly rejected by the income-tax authoritiesSo 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 in concerned, we are unable to agree with counsel for the appellant that this was a deductible expenditure. We have already pointed out that the assessees 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 amountAs 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 section 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 section 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.