K.K. Khemka Vs. Assistant Commissioner of - Court Judgment

Excerpt:
1. in this assessee's appeal the only issue which requires to be decided is whether the interest on borrowed monies utilised for purchase of shares can be claimed as a deduction under section 57(iii) of the income-tax act while computing dividend income under the head 'income from sources'.2. the brief facts are that the assessee earned dividend income of rs. 16,030 from few companies. the assessee also purchased 40,000 shares in m/s universal paper mills ltd. which he purchased from out of monies borrowed from outside agencies. the assessee claimed a sum of rs. 62,819 as interest from the dividend income which is to be assessed under the head 'income from other sources'. the assessing officer negatived the claim of the assessee on the ground that the motive of the assessee was to acquire controlling interest in m/s universal paper mills ltd. and that the said company was financially not sound and viabi.e., the assessing officer examined the accounts and assessment records of m/s universal paper mills ltd. to find out the financial position of the company. it is also observed by the assessing officer that immediately after acquiring the shares the brother of the assessee was appointed as managing director of that company. therefore, the claim of interest for deduction while computing the dividend income was not allowable and he, therefore, did not allow. not being satisfied with the decision of the assessing officer the assessee carried the matter before the cit(a) who while dismissing the appeal of the assessee agreed with the reasoning given by the assessing officer for not allowing interest claim from dividend income.3. it is against this order of the cit(a) the assessee being aggrieved has filed second appeal before us. the counsel for the assessee, sri pranab pal, contends that the assessee had rightly claimed deduction of interest from the dividend income and the same had the sanction of section 57(iii) of the income-tax act. the assessing officer was wholly unjustified, says assessee's counsel, in disallowing the claim on the ground of motive of the assessee namely; acquiring controlling interest of the company. according to the counsel for the assessee whether or not there is income from dividend which is to be assessed under the head 'income from other sources' the claim is allowabi.e., in support of his contention the counsel for the assessee has relied on the decision of the supreme court in the case of cit v. rajendra prasad moody [1978] 115 itr 519 and of the calcutta high court in the case of cit v. model mfg. co. (p.)ltd. [1980] 122 itr 767. the revenue's representative while strongly relying on the order of the authorities below submitted that the assessee had no right to claim deduction of the interest paid on the monies borrowed for acquiring shares in m/s universal paper mills ltd. particularly when no dividend has been earned by the assessee from that company. according to the learned departmental representative a plain reading of section 57(iii) clearly lays down that the deduction of expenditure is to be allowed only if the same is laid out or expended wholly and exclusively for the purpose of making or earning such income. as there was no income to the assessee from m/s universal paper mills ltd. interest cannot be allowed as deduction from the dividend income earned from other companies.thus, the departmental representative submits that the assessing officer and the cit(a) did not commit any error in negativing the claim of the assessee towards the interest of rs. 62,819.4. we have heard the rival submissions made before us and also perused the relevant papers including the case law cited before us which we rely to enable the assessee to succeed in this appeal.5. according to the provisions of section 57(iii) any expenditure (which is not in nature of capital expenditure) and which has been laid out or expended wholly and exclusively for the purpose of making or earning such income is allowabi.e., therefore, it has to be seen whether the expenditure which has been incurred by the assessee is wholly and exclusively for the purpose of making or earning such income. the argument of the revenue's representative is that unless the expenditure which is sought to be deducted results in making or earning of such income it could not be said to be laid out or expended wholly for the purpose of making or earning such income. to put it in simple words according to the revenue the making or earning of income is essential or sine qua non for allowability of expenditure in terms of section 57(iii) and thus if in a particular assessment year there was no income then the expenditure incurred or made would not be deductible under the provisions of section 57(iii). a plain reading of section 57(iii) reveals that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. it, therefore, follows that the "purpose" of expenditure that is relevant in determining the application of the provision of section 57(iii) and that "purpose" must be making or earning of income. but the provision of section 57(iii) does not lay down as a condition precedent that this "purpose" should be fulfilled by an assessee in order to enable him to claim expenditure as a deduction. this section does not say in clear terms that the expenditure will be only deductible if any income is made or earned. we find nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure has been made or incurred should and must result into some benefit or income to an assessee. the ordinary and simple construction of the language employed in section 57(iii) irresistably leads to the conclusion that in order to bring a case within its ambit it is not necessary at all that any income should in fact, have been made or earned as a result of the expenditure. in our view it is not necessary for an assessee to show or demonstrate that the expenditure which has been incurred or made by him was a profitable one or that in fact any profit was made or earned by him. the interesting argument advanced by the revenue's representative, that the expenditure would not qualify for deduction if no income results from such expenditure, but if there is some income, whatever small or meagre it may be, then the expenditure would qualify and be eligible for deduction. we elaborate this argument by taking a hypothetical instance, let us say, there is an expenditure of rs. 100 and if there is an income re. 1 then the expenditure would be deductible and there would be a resulting loss of rs. 99 under the head 'income from other sources'. but if there is no income at all then on the basis of the argument advanced by the departmental representative the expenditure cannot be considered as an allowable expenditure. in our view such an argument if accepted would indeed, give very curious and strange results and we think the legislature could have never intended that the provision of section 57(iii) should produce such results. deduction of the expenditure, therefore, cannot in the circumstances be held to be conditional upon making or earning of such income. by now it is trite law that any expenditure which has been incurred in the course of trade, though un-remunerative or does not produce or result in any income is nonetheless a proper deduction if the same is incurred and laid out wholly and exclusively for the purpose of trade or for the purpose of earning any income or making profit. we do not think that it requires the presence of a receipt on the credit side to justify the deduction of an expense made on the debit side. in our view, therefore, the assessee, irrespective of the motive is entitled to claim deduction of the interest of rs. 62,819 from the dividend income in respect of other companies under the head 'income from other sources' though the assessee had not earned any dividend income from m/s universal paper mills ltd. the view which we have taken is not only justified by the language employed in section 57(iii) of the income-tax act, 1961 but also is in conformity with the decision of the supreme court and that of the calcutta high court which have been cited and relied upon by the assessee's counsel.6. we, therefore, direct the assessing officer to deduct the sum of rs. 62,819 from out of the dividend income declared by the assessee from other companies for computing the income under the head 'income from other sources'.

Judgment:
1. In this assessee's appeal the only issue which requires to be decided is whether the interest on borrowed monies utilised for purchase of shares can be claimed as a deduction under Section 57(iii) of the Income-tax Act while computing dividend income under the head 'income from sources'.

2. The brief facts are that the assessee earned dividend income of Rs. 16,030 from few companies. The assessee also purchased 40,000 shares in M/s Universal Paper Mills Ltd. which he purchased from out of monies borrowed from outside agencies. The assessee claimed a sum of Rs. 62,819 as interest from the dividend income which is to be assessed under the head 'income from other sources'. The Assessing Officer negatived the claim of the assessee on the ground that the motive of the assessee was to acquire controlling interest in M/s Universal Paper Mills Ltd. and that the said company was financially not sound and viabi.e., The Assessing Officer examined the accounts and assessment records of M/s Universal Paper Mills Ltd. to find out the financial position of the company. It is also observed by the Assessing Officer that immediately after acquiring the shares the brother of the assessee was appointed as Managing Director of that company. Therefore, the claim of interest for deduction while computing the dividend income was not allowable and he, therefore, did not allow. Not being satisfied with the decision of the Assessing Officer the assessee carried the matter before the CIT(A) who while dismissing the appeal of the assessee agreed with the reasoning given by the Assessing Officer for not allowing interest claim from dividend income.

3. It is against this order of the CIT(A) the assessee being aggrieved has filed second appeal before us. The counsel for the assessee, Sri Pranab Pal, contends that the assessee had rightly claimed deduction of interest from the dividend income and the same had the sanction of Section 57(iii) of the Income-tax Act. The Assessing Officer was wholly unjustified, says assessee's counsel, in disallowing the claim on the ground of motive of the assessee namely; acquiring controlling interest of the company. According to the counsel for the assessee whether or not there is income from dividend which is to be assessed under the head 'income from other sources' the claim is allowabi.e., In support of his contention the counsel for the assessee has relied on the decision of the Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 and of the Calcutta High Court in the case of CIT v. Model Mfg. Co. (P.)Ltd. [1980] 122 ITR 767. The revenue's representative while strongly relying on the order of the authorities below submitted that the assessee had no right to claim deduction of the interest paid on the monies borrowed for acquiring shares in M/s Universal Paper Mills Ltd. particularly when no dividend has been earned by the assessee from that company. According to the learned departmental representative a plain reading of Section 57(iii) clearly lays down that the deduction of expenditure is to be allowed only if the same is laid out or expended wholly and exclusively for the purpose of making or earning such income. As there was no income to the assessee from M/s Universal Paper Mills Ltd. interest cannot be allowed as deduction from the dividend income earned from other companies.

Thus, the departmental representative submits that the Assessing Officer and the CIT(A) did not commit any error in negativing the claim of the assessee towards the interest of Rs. 62,819.

4. We have heard the rival submissions made before us and also perused the relevant papers including the case law cited before us which we rely to enable the assessee to succeed in this appeal.

5. According to the provisions of Section 57(iii) any expenditure (which is not in nature of capital expenditure) and which has been laid out or expended wholly and exclusively for the purpose of making or earning such income is allowabi.e., Therefore, it has to be seen whether the expenditure which has been incurred by the assessee is wholly and exclusively for the purpose of making or earning such income. The argument of the revenue's representative is that unless the expenditure which is sought to be deducted results in making or earning of such income it could not be said to be laid out or expended wholly for the purpose of making or earning such income. To put it in simple words according to the revenue the making or earning of income is essential or sine qua non for allowability of expenditure in terms of Section 57(iii) and thus if in a particular assessment year there was no income then the expenditure incurred or made would not be deductible under the provisions of Section 57(iii). A plain reading of Section 57(iii) reveals that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It, therefore, follows that the "purpose" of expenditure that is relevant in determining the application of the provision of Section 57(iii) and that "purpose" must be making or earning of income. But the provision of Section 57(iii) does not lay down as a condition precedent that this "purpose" should be fulfilled by an assessee in order to enable him to claim expenditure as a deduction. This section does not say in clear terms that the expenditure will be only deductible if any income is made or earned. We find nothing in the language of Section 57(iii) to suggest that the purpose for which the expenditure has been made or incurred should and must result into some benefit or income to an assessee. The ordinary and simple construction of the language employed in Section 57(iii) irresistably leads to the conclusion that in order to bring a case within its ambit it is not necessary at all that any income should in fact, have been made or earned as a result of the expenditure. In our view it is not necessary for an assessee to show or demonstrate that the expenditure which has been incurred or made by him was a profitable one or that in fact any profit was made or earned by him. The interesting argument advanced by the revenue's representative, that the expenditure would not qualify for deduction if no income results from such expenditure, but if there is some income, whatever small or meagre it may be, then the expenditure would qualify and be eligible for deduction. We elaborate this argument by taking a hypothetical instance, let us say, there is an expenditure of Rs. 100 and if there is an income Re. 1 then the expenditure would be deductible and there would be a resulting loss of Rs. 99 under the head 'income from other sources'. But if there is no income at all then on the basis of the argument advanced by the departmental representative the expenditure cannot be considered as an allowable expenditure. In our view such an argument if accepted would indeed, give very curious and strange results and we think the Legislature could have never intended that the provision of Section 57(iii) should produce such results. Deduction of the expenditure, therefore, cannot in the circumstances be held to be conditional upon making or earning of such income. By now it is trite law that any expenditure which has been incurred in the course of trade, though un-remunerative or does not produce or result in any income is nonetheless a proper deduction if the same is incurred and laid out wholly and exclusively for the purpose of trade or for the purpose of earning any income or making profit. We do not think that it requires the presence of a receipt on the credit side to justify the deduction of an expense made on the debit side. In our view, therefore, the assessee, irrespective of the motive is entitled to claim deduction of the interest of Rs. 62,819 from the dividend income in respect of other companies under the head 'income from other sources' though the assessee had not earned any dividend income from M/s Universal Paper Mills Ltd. The view which we have taken is not only justified by the language employed in Section 57(iii) of the Income-tax Act, 1961 but also is in conformity with the decision of the Supreme Court and that of the Calcutta High Court which have been cited and relied upon by the assessee's counsel.

6. We, therefore, direct the Assessing Officer to deduct the sum of Rs. 62,819 from out of the dividend income declared by the assessee from other companies for computing the income under the head 'income from other sources'.