Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX, WEST BENGAL III, CALCUTTA
Vs.
RESPONDENT:
RAJENDRA PRASAD MOODY, CALCUTTA ETC.
DATE OF JUDGMENT04/10/1978
BENCH:
BHAGWATI, P.N.
BENCH:
BHAGWATI, P.N.
PATHAK, R.S.
TULZAPURKAR, V.D.
CITATION:
1979 AIR 373 1979 SCR (1)1047
1979 SCC (1) 250
CITATOR INFO :
F 1987 SC1723 (6)
ACT:
Allowable expenditure-Whether interests on monies
borrowed for investment in shares is allowable expenditure,
when the shares have not yielded any return in the shape of
dividend during the relevant assessment year-Interpretation
of Sec. 57(iii) of Income-tax Act. 1961.
HEADNOTE:
The respondents assessees in the two references are
brothers and each of them had borrowed monies for the
purpose of making investments in shares of certain companies
and during the assessment year 1965-66 for which the
relevant accounting year ended on 10th April 1965, each of
the two assessees paid interest on the monies borrowed but
did not receive any dividend on the shares purchased with
those monies. Each of the two assessees made a claim for
deduction of the amount of interest paid on the borrowed
monies but this claim was negatived by the Income Tax
Officer and on appeal by the Appellate Assistant
Commissioner on the ground that during the relevant
assessment year the shares did not yield any dividend and,
therefore, interest paid on the borrowed monies could not be
regarded as expenditure laid out or expended wholly and
exclusively for the purpose of making or earning income
chargeable under the head "Income From Other Source" so as
to be allowable as a permissible deduction under Sec.
57(iii). The Tribunal, however on further appeal, disagreed
with the view taken by the Taxing Authorities and upheld the
claim of each of the two assessees for deduction under Sec.
57(iii).
Answering in favour of the assessees and against the
Revenue the question in the references the Court,
^
HELD : (1) The plain and natural construction of the
language of Sec. 57(iii) of the Income Tax Act 1961
irresistibly leads to the conclusion that to bring a case
within the section, it is not necessary that any income
should in fact have been earned as a result of the
expenditure. What Sec. 57(iii) requires is that the
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expenditure must be laid out or expended wholly and
exclusively for the purpose of making or earning income. It
is the purpose of the expenditure that is relevant in
determining the applicability of Sec. 57(iii) and that
purpose must be making or earning of income. Sec. 57(iii)
does not require that this purpose must be fulfilled in
order to qualify the expenditure for deduction. It does not
say that the expenditure shall be deductible only if any
income is made or earned. There is in fact nothing in the
language of Sec. 57(iii) to suggest that the purpose for
which expenditure is made should fructify into any benefit.
[1051 B-E]
Eastern Investments Ltd. v. Commissioner of Income-tax,
20 I.T.R. (SC) 1 applied.
(2) The contention of the Revenue that the expenditure
would disqualify for deduction only if no income results
from such expenditure in a particular assessment year but,
if there is some income, however small or meagre, the
expenditure
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would be eligible for deduction, would lead to a strange and
highly anomalous result and the legislature could never have
intended to produce such illogicality. Moreover when a
profit and loss account is cast in respect of any source of
income what is allowed by the statute as proper expenditure
would be debited as an outgoing and income would be credited
as a receipt and the resulting income or loss would be
determined. It would make no difference to this process
whether the expenditure is x or y or nil; whatever is the
proper expenditure allowed by the statute would be debited.
Equally, it would make no difference whether there is any
income and if so, what, since whatever it be, x or y or nil
would be credited. And the ultimate profit or loss would be
found. Whatever is proper outgoing by way of expenditure
must be debited irrespective whether there is receipt of
income or not. That is the plain requirement of proper
accounting and the interpretation of Sec. 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. [1051 G, H, 1052 A-D]
(3) It is true that the language of Sec. 37(i) of the
Act is a little wider than that of Sec. 5(iii). But that
cannot make any difference in the true interpretation of
Sec. 57(iii). The language of Sec. 57(iii) is clear and
unambiguous and it has to be construed according to the
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 Sec. 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 also accords with the principles of
commercial accounting. [1052 E-F, 1053 B]
Hughes v. Bank of New Zealand, 6 I.T.R. 636 quoted with
approval.
Appa Rao v. Commissioner of Income-tax, 46 ITR 511;
Mohamed Ghouse v. Commissioner of Income-tax, 49 ITR 127,
Ormerods (India) Pvt. Ltd. v. Commissioner of Income-tax, 36
ITR 329; Chhail Beharilal v. Commissioner of Income Tax, 39
ITR 696; Commissioner of Income-tax v. Dr. Fida Hussain G.
Abbasi, 71 ITR 314; M. N. Ramaswamy Iyer v. Commissioner of
Income-tax, 71 ITR 218; Commissioner of Income-tax v. Gopal
Chand Patnaik, 111 ITR 86 approved.
Maharajadhiraj Sir Kameshwar Singh v. Commissioner of
Income-tax, 32 ITR 377; Madanlal Sohanlal v. Commissioner of
Income-tax, 47 ITR 1 overruled.
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JUDGMENT:
CIVIL APPELLATE JURISDICTION : Tax References Nos. 1
and 2 of 1971.
Income Tax Reference under section 257 of the Income
Tax Act, 1961 made by the Income Tax Appellate Tribunal,
Calcutta in R.S. No. 775 (Cal.) 69-70 (I.T.A. No. 12127 of
66-67) R.A. No. 777 (Cal.) 69-70 (R.T.A. No. 12125 of 66-
67).
V. S. Desai and Miss A Subhashini for the Appellant.
Anil B. Divan, N. R. Khaitan, S. R. Agarwal, U. K.
Khaitan, P. V. Kapur and Praveen Kumar for the Respondent.
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The Judgment of the Court was delivered by
BHAGWATI, J.-These are two references made by the
Tribunal to this Court under section 257 of the Income Tax
Act, 1961 in view of a conflict in the decisions of High
Courts on the question as to whether interest on monies
borrowed for investment in shares is allowable expenditure
under Section 57 (iii) when the shares have not yielded any
return in the shape of dividend during the relevant
assessment year. The preponderance of judicial opinion is in
favour of the view that such interest is admissible, even
though no dividend is received on the shares, but there are
two High Courts which have taken a different view and hence
it is necessary for this Court to set the controversy at
rest by finally deciding the question. Since the question is
purely one of law turning on the true interpretation of
section 57 (iii), it is not necessary to set out the facts
giving rise to these two references in any detail. It would
be sufficient to state that the assessees in these two
references are brothers and each of them had borrowed monies
for the purpose of making investment in shares of certain
companies and during the assessment year 1965-66 for which
the relevant accounting year ended on 10th April, 1965, each
of the two assessees paid interest on the monies borrowed
but did not receive any dividend on the shares purchased
with those monies. Each of the two assessees made a claim
for deduction of the amount of interest paid on the borrowed
monies but this claim was negatived by the Income Tax
Officer and on appeal by the Appellate Assistant
Commissioner on the ground that during the relevant
assessment year the shares did not yield any dividend and,
therefore, interest paid on the borrowed monies could not be
regarded as expenditure laid out or expended wholly and
exclusively for the purpose of making or earning income
chargeable under the Head "Income From Other Source" so as
to be allowable as a permissible deduction under section
57(iii). The Tribunal, however, on further appeal, disagreed
with the view taken by the taxing authorities and upheld the
claim of each of the two assessees for deduction under
section 57(iii). The Revenue being aggrieved by the decision
of the Tribunal made an application in each case for
reference of the following question of law, namely:-
"Whether on the facts, and in the circumstances of
the case, interest on money borrowed for investment in
shares which had not yielded any dividend is admissible
under section 57(iii) ?"
and since there was divergence of judicial opinion on this
question, the Tribunal referred it directly for the opinion
of this Court.
1050
The determination of the question before us turns on
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the true interpretation of section 57(iii) and it would,
therefore, be convenient to refer to that section, but
before we do so, we may point out that section 57(iii)
occurs in a fasciculus of sections under the heading ’F-
Income From Other Sources’. Section 56 which is the first in
this group of sections enacts in sub-section (1) that income
of every kind which is not chargeable to tax under any of
the heads specified in section 14, Items A to E shall be
chargeable to tax under the head ’Income From Other Sources’
and sub-section (2) includes in such income various items
one of which is ’dividends’. Dividend on shares is thus
income chargeable under the head ’Income From Other
Sources’. Section 57 provides for certain deductions to be
made in computing the income chargeable under the head
"Income From Other Sources" and one of such deductions is
that set out in clause (iii) which reads as follows:
"Any other expenditure (not being in the nature of
capital expenditure) laid down or expended wholly and
exclusively for the purpose of making or earning such
income".
The expenditure to be deductible under section 57(iii) must
be laid out or expended wholly and exclusively for the
purpose of making or earning such income. The argument of
the Revenue was that unless the expenditure sought to be
deducted resulted in the making or earning of income, it
could not be said to be laid out or expended for the purpose
of making or earning such income. The making or earning of
income, said the Revenue, was a sine qua non to the
admissibility of the expenditure under section 57(iii) and,
therefore, if in a particular assessment year there was no
income, the expenditure would not be deductible under that
section. The Revenue relied strongly on the language of
section 37(1) and contrasting the phraseology employed in
section 57(iii) with that in section 37(1), pointed out that
the Legislature had deliberately used words of narrower
import in granting the deduction under section 57(iii).
Section 37(1) provided for deduction of expenditure laid out
or expended wholly and exclusively for the purpose of the
business or profession in computing the income chargeable
under the head ’Profits or gains of business or profession’.
The language used in section 37(1) was "laid out or
expended-for the purpose of the business or profession" and
not "laid out or expended-for the purpose of making or
earning such income" as set out in section 57(iii). The
words in section 57(iii) being narrower, contended the
Revenue,
1051
they cannot be given the same wide meaning as the words in
section 37(1) and hence no deduction of expenditure could be
claimed under section 57(iii) unless it was productive of
income in the assessment year in question. This contention
of the Revenue undoubtedly found favour with two High Courts
but we do not think we can accept it. Our reasons for saying
so are as follows.
What section 57 (iii) requires is that the expenditure
must be laid out or expended wholly and exclusively for the
purpose of making or earning income. It is the purpose of
the expenditure that, is relevant in determining the
applicability of section 57(iii) and that purpose must be
making or earning of income. Section 57(iii) does not
require that this purpose must be fulfilled in order to
qualify the expenditure for deduction. It does not say that
the expenditure shall be deductible only if any income is
made or earned. There is in fact nothing in the language of
section 57(iii) to suggest that the purpose for which the
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expenditure is made should fructify into any benefit by way
of return in the shape of income. The plain natural
construction of the language of section 57(iii) irresistibly
leads to the conclusion that to bring a case within the
section, it is not necessary that any income should in fact
have been earned as a result of the expenditure. It may be
pointed out that an identical view was taken by this Court
in Eastern Investments Ltd. v. Commissioner of Income tax,
where interpreting the corresponding provision in section
12(2) of the Income Tax Act, 1922 which was ipsissima verba
in the same terms as section 57(iii), Bose, J., speaking on
behalf of the Court observed: "It is not necessary to show
that the expenditure was a profitable one or that in fact
any profit was earned". It is indeed difficult to see how,
after this observation of the Court, there can be any scope
for controversy in regard to the interpretation of section
57(iii).
It is also interesting to note that, according to the
Revenue, the expenditure would disqualify for deduction only
if no income results from such expenditure in a particular
assessment year, but if there is some income, howsoever
small or meagre, the expenditure would be eligible for
deduction. This means that in a case where the expenditure
is Rs. 1000/-, if there is income of even Re. 1/-, the
expenditure would be deductible and there would be resulting
loss of Rs. 999/- under the head ’Income From Other
Sources’. But if there is no income, then, on the argument
of the Revenue, the expenditure would have to be ignored as
it would not be liable to be deducted. This would
1052
indeed be a strange and highly anomalous result and it is
difficult to believe that the Legislature could have ever
intended to produce such illogicality. Moreover, it must be
remembered that when a profit and loss account is cast in
respect of any source of income, what is allowed by the
statute as proper expenditure would be debited as an
outgoing and income would be credited as a receipt and the
resulting income or loss would be determined. It would make
no difference to this process whether the expenditure is X
or Y or nil; whatever is the proper expenditure allowed by
the statute would be debited. Equally, it would make no
difference whether there is any income and if so, what,
since whatever it be, X or Y or nil, would be credited. And
the ultimate profit or loss would be found. 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 whether there is
receipt of income or not. That is the plain requirement of
proper accounting and the interpretation of section 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 section 37(1) is a
little wider than that of section 57(iii), but we do not see
how that can make any difference in the true interpretation
of section 57(iii). The language of section 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 section 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
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the observations of Lord Thankerton in Hughes v. Bank of New
Zealand where the learned Law Lord said: "Expenditure in the
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." We find that the same view has been taken by the
Madras High Court in Appa Rao v. Commissioner of Income tax,
and Mohamed Ghouse v. Commissioner of Income-tax, the Bombay
High Court in Ormerods (India) Private Ltd. v. Commissioner
of Income-tax, the Allahabad High Court in Chhail Beharilal
1053
v. Commissioner of Income-tax, the Madhya Pradesh High Court
in Commissioner of Income-tax v. Dr. Fida Hussain G. Abhasi,
the Kerala High Court in M. N. Ramaswamy Iyer v.
Commissioner of Income-tax and the Orissa High Court in
Commissioner of Income-tax v. Gopal Chand Patnaik. This view
is eminently correct as it is not only justified by the
language of section 57(iii) but it also accords with the
principles of commercial accounting. The contrary view taken
by the Patna High Court in Maharajadhiraj Sir Kameshwar
Singh v. Commissioner of Income-tax and the Calcutta High
Court in Madanlal Sohanlal v. Commissioner of Income-tax
must in the circumstances be held to be incorrect.
We accordingly answer the question referred to us for
our opinion in each of these two references in favour of the
assessee and against the Revenue. The Revenue will pay the
costs of both the references to the assessee.
S.R. References answered in favour of assessees.
1054