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

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 page 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 agreement dated February 5, 1948, it was agreed that the shares would be taken 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 1, 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 section 12(2) of the Indian 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 assessee. 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 paid 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 section 12(2) of the Act. As regards the assessees 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 clause (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 lossThereafter, 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"(1) Whether, on the facts and in the circumstances of the case, the Tribunal rightly rejected the assessees 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 allowance 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 7, 500 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 of Rs. 95, 664 did not constitute the income of the assessee ?"Out of these questions, question No. (2) has not been pressed by the appellant because it is well-settled that there is no question of estoppel or res judicata in relation to the assessment of different years. Thus, the only questions that were to be determined by the High Court were questions Nos. (1), (3) and (4). The High Court agreed with the Tribunal that in the facts and circumstances of the case there was no transfer of equitable title of the shares to the assessee and, therefore, he was not entitled to claim deduction of Rs. 2, 04, 744. The finding of the Tribunal on question No. (3) was also upheld and the High Court agreed that the loss of Rs. 1, 05, 000 was rightly disallowed. On question No. (4) the High Court, also agreed with the view of the Tribunal and held that this amount could not be included in the total income of the assessee. The assessee has come up to this court, after obtaining special leave from this courtBoth the Tribunal and the High Court have gone into the question of transfer of equitable title at very great length, but in the facts and circumstances of this case after hearing the parties and going through the record we feel that the question of transfer of equitable title is a vexed question of law and is not free from difficulty. Having regard to the peculiar facts of this case, it is not necessary for the court to decide the question of equitable transfer in order to give relief to the appellant on question No. (1). In other words, we are of the opinion that the question as to whether or not 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 title to the assessee. This can be done by examining the scope and ambit of section 12(2) of the Act in order to find out if the assessees case for payment of interest can come within the four corners of that section. In these circumstances 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 the Tribunal. We would, however, like to make it clear that we should 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.

Court's reasoning:
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.