G.T. Nanavati, J.
1. The Income-tax Appellate Tribunal, Ahmedabad Bench, has referred the following question under Section 256(1) of the Income-tax Act, 1961, for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming disallowance of interest of Rs. 2,87,096 relatable to purchase of shares of Swastik Oil Mills Ltd. ?'
2. The assessee in this case is Sarabhai Sons (P) Ltd, which derives income from investments, profit from systronics division, manufacturing electric and electronic equipment and from its marketing division dealing in purchasing and selling of products of sister concerns. The assessee was a shareholder of Swastik Oil Mills Ltd. (hereinafter referred to as 'SOML') and was also its managing agents. The assessee held 11,264 shares. The other two groups, viz., Kasturbhai group and Patel group held 24,975 shares and 12,373 shares, respectively. These three groups of shareholders decided amongst themselves that, in the larger interest of SOML, the shares of SOML should be held by one of the groups. The assessee decided to take over the shares from the other shareholders so that it could hold 100% shares in SOML and implement the expansion projects of SOML. It appears that this decision was taken in September, 1967. The assessee agreed to purchase shares at the rate of Rs. 197.5 per share. Payment of price was spread over a period of two years. 10% of the price was to be paid on the date of purchase and the balance amount was to be paid in instalments ranging from 12 to 24 months with interest at 9% to be paid on the outstanding amount. The assessee met with some difficulties in acquiring 2,522 shares as there was resistance from the owners of those shares. Meanwhile, a proposal was put forward by Karamchand Premchand Pvt. Ltd. (hereinafter referred to as 'KPPL') to purchase all the shares of SOML. Pursuant to that proposal, the assessee sold 46,454 equity shares of SOML to KPPL on April 15, 1968, at the same purchase price, viz., Rs. 197.5 per share. The purchase price was to be paid by KPPL partly in cash at the time of delivery of shares and the balance amount was to be paid in two instalments. Interest at the rate of 9% was to be paid by KPPL on the balance amount. During the financial year which ended on March 31, 1969, the assessee paid by way of interest Rs. 6,05,291 to the shareholders from whom it had purchased shares. It received Rs. 3,18,195 as interest from KPPL for the unpaid price of the shares which it had sold to KPPL. The assesseeclaimed net deficiency in the interest account calculated on the basis of interest paid by the assessee to the shareholders of the SGML on the unpaid purchase price and interest received on unpaid sale price by the KPPL as a deduction in computing its income from other sources.
3. The Income-tax Officer was of the view that the expenditure in question was of capital nature. He also held that the shares were acquired with a view to hand over the same to KPPL and as such the expenditure incurred towards interest could not be said to have been incurred for the assessee's business or for earning income from other sources. Taking this view, the Income-tax Officer rejected the claim of the assessee for deduction of Rs. 2,87,096 under Section 36 and also under Section 57(iii) of the Income-tax Act, 1961.
4. The assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner was of the view that payment of interest was an integral part of the purchase price of all the shares of SGML and, therefore, the expenditure was of capital nature. He further held that, for that reason, it was not an allowable deduction under Section 36. He also held that the assessee's alternative claim for deduction under Section 57(iii) was untenable as the said expenditure could not be said to have been incurred wholly and exclusively for the purpose of earning such income.
5. The assessee then carried the matter in appeal before the Tribunal. The Tribunal held that payment of interest was not an expenditure of capital nature as it was not possible to say that the assessee had derived any enduring benefit by purchase of the shares which were held by it for a very short period, from October, 1967, to April, 1968. The Tribunal also held that payment of interest was not an integral part of the purchase price but the liability to pay interest arose because the assessee was unable to make payment of the full purchase price at the time of purchasing the shares. The Tribunal rejected the claim made under Section 36 as it found that the assessee was already the managing agent of SGML and purchase of the shares had nothing to do with the managing agency. But, as regards the claim for deduction made under Section 57(iii), the Tribunal held that, for the assessment year 1968-69, its claim was well-founded as it had derived dividend income ; however, the assessee's claim for a similar deduction for the assessment year 1969-70 was not tenable as the assessee had not received any dividend during that year and, secondly, because the obligation of the assessee to make payment of interest to the shareholders of SOML was independent of the right to receive interest from KPPL and,therefore, it was not possible to say that payment of interest was required to be made by it to the shareholders of SGML in order to earn or derive income by way of interest from KPPL. The Tribunal, therefore, dismissed the appeal.
6. Mr. K. C. Patel, learned counsel appearing for the assessee, at the outset stated that he was not pressing the claim for deduction under Section 36 of the Act and the claim of the assessee is now confined to Section 57(iii) only. He submitted that the first reason given by the Tribunal that, for the assessment year 1969-70, the source of income, viz., dividend was extinct and, therefore, the assessee was not entitled to any deduction under Section 57(iii) is bad as it has been held by the Supreme Court in CIT v. Rajendra Prasad Moody : [1978]115ITR519(SC) that to bring a case within Section 57(iii), it is not necessary that any income should in fact have been earned as a result of the expenditure. We find considerable substance in this contention and, therefore, it will have to be held that the Tribunal was not right in rejecting the assessee's claim for deduction under Section 57(iii) on the ground that, for the assessment year 1969-70, the source of income, viz., dividend was extinct. Learned counsel appearing for the Revenue has also not tried to support this reasoning of the Tribunal while supporting its decision.
7. It was next submitted that the Tribunal has put a very narrow interpretation on the expression 'such income'appearing in Section 57(iii) of the Act. He submitted that if there is a nexus between earning of income and incurring of the expenditure, then that should be regarded as sufficient for the purpose of attracting the said provision. He further submitted that the nexus need not be direct but, even if it is indirect or incidental, it would be sufficient for the purpose of attracting that provision. In this behalf, he first drew our attention to the assessment order wherein interest attributable to purchase of shares and interest received from KPPL have been treated under one head for the purpose of computing the assessee's income. He also drew our attention to the order of the Tribunal wherein it is observed that the assessee, in consultation with other interested parties, had decided to acquire all the shares held by other shareholders in order to improve the business of SGML. He also drew our attention to the fact that, for the previous assessment year, the assessee's claim for deduction of a substantial part of interest was allowed by the Tribunal and that the Department had not challenged the said decision. After referring to this factual aspect, he drew our attention to the decision of this court in Smt. Virmati Ramhrishna v. CIt : [1981]131ITR659(Guj) . He particularly relied uponproposition No. 3 which is to the effect that the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning 'income from other sources', and submitted that the expression 'such income'would, therefore, mean income from other sources and need not be confined to a particular type of income for which the expenditure was incurred. He then drew our attention to another decision of this court in Padmavati Jayhrishna v. CIT : [1981]131ITR653(Guj) wherein, after referring to the decision of the Supreme Court in Seth R, Dabnia v. CIT 0043/1977 : [1977]110ITR644(SC) it has been held that the connection between the expenditure and the earning of income need not be direct. He also relied upon another decision of this court in CIT v. Kasturbhai Lalbhai : [1968]70ITR267(Guj) wherein it has been held that, if, on the ground of commercial expediency and in order to indirectly facilitate the earning of income, expenditure is incurred, then it is an allowable deduction under Section 12(2) of the Indian Income-tax Act, 1922. He also relied upon the decision of the Supreme Court in T. S. Krishna v. CIT : [1973]87ITR429(SC) wherein, while dealing with the claim of the assessee for deduction of wealth-tax paid by him while computing his income from dividends and interest under Section 57(iii) of the Act, the following observation has been made (at page 436) :
'Even apart from the amendment disallowing the deduction, the very nature of the income from dividends in respect of which deduction of wealth-tax is claimed does not, as pointed out by the High Court, bear any relationship, direct or incidental, to the earning of that income and cannot, therefore, be said to be laid out or expended exclusively for the purpose of making or earning such income within the meaning of sub-Clause (iii) of Section 57 of the Act or under the corresponding provisions of Section 10(2)(xv) of the Indian Income-tax Act, 1922.'
8. From the decisions referred to above, it can be said that the connection between the expenditure incurred and the income earned need not be direct. Even if the connection is indirect or incidental, that can be regarded as sufficient for the purpose of Section 57(iii). It is also equally clear that, for attracting Section 57(iii), it is not necessary that any income in fact should have been earned as a result of the expenditure. To the extent the Tribunal has taken a different view, it will have to be stated that its reasoning is not correct. Even then, we are of the opinion that the final decision of the Tribunal is correct.
9. This court while dealing with the claim for deduction under Section 12(2) of the 1922 Act, which provision is similar to Section 57(iii) of the1961 Act, in the case of Kasturbhai Lalbhai : [1968]70ITR267(Guj) has held as under (at page 273) :
'... in order to decide whether an expenditure is a permissible deduction under Section 12(2), we have to examine the nature of the expenditure. The purpose for which the expenditure is incurred must be in order to earn the income and here we must not confuse purpose with motive. What Section 12(2) emphasizes is the purpose for which the expenditure is incurred and the word 'purpose' does not mean motive for the transaction. The motive which may have operated on the minds of assessees in making the expenditure is quite irrelevant . . . Moreover, the purpose of making or earning the income must be the sole purpose for which the expenditure is incurred. If the expenditure is incurred for the purpose of making or earning the income as also for another purpose or, in other words, the purpose of making or earning the income is mixed up with another purpose in making of the expenditure . . . the expenditure would be outside the scope and ambit of Section 12(2) and would not be a permissible deduction under that Section. The expenditure in order to fall within Section 12(2) must, therefore, be incurred solely for the purpose of making or earning the income sought to be assessed . . .'
10. Again, in Smt. Virmati Ramkrishna's case : [1981]131ITR659(Guj) this court, after considering the case-law on the point, has stated the propositions which follow therefrom. One of the propositions so stated is that the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for a mixed purpose. Another proposition which is stated therein is that the distinction between purpose and motive must always be borne in mind, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee for incurring the expenditure.
11. Now, if we turn to the facts of this case, what is required to be noted is that the shares of SGML were held by the assessee along with two other groups of shareholders, viz., Kasturbhai group and Patel group. The assessee held 11,264 shares, Kasturbhai group held 24,975 shares and the Patel group held 12,737 shares. The assessee was also the managing agent of SGML. It was agreed amongst the shareholders that the assessee should purchase all the shares in order to improve the business of SGML by holding 100% shares of SGML, which would have enabled it to implement the expansion projects. Thus, the shares which were purchased by the assessee were notfor the purpose of earning income, though that can be regarded as the ultimate motive. The shares were purchased by the assessee with a clear purpose or object of getting 100% control over SOML. If the purpose was to earn income only, or even if that was the dominant purpose, it would not have sold the shares again to KPPL as, by that time, it had already acquired more than 90% shares, and that would have satisfied its object of earning more income by possessing more shares. The reason why the asses-see sold the shares was that it was not able to get 100% control by purchasing all the remaining shares. Thus, from the nature of the transaction, it becomes apparent that the expenditure which was incurred by the assessee was not for the purpose of earning income, but for the purpose of getting full control over SOML. Thus, applying the test as laid down in Kasturbhai Lalbhai's case : [1968]70ITR267(Guj) and Smt. Virmati Ramkrishna's case : [1981]131ITR659(Guj) to the facts of this case, it becomes clear that the dominant purpose for which expenditure was incurred was not to earn income. At the highest, it was a mixed purpose. For that reason, it will have to be held that the expenditure incurred in that behalf fell outside the purview of Section 57(iii) of the Act.
12. For the reasons stated above, we answer the question referred to us in the affirmative, that is, against the assessee and in favour of the Revenue. No order as to costs.