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Income‑tax ‑

Deduction‑Amount borrowed and invested in hares‑No dividend received Interest paid on money borrowed-- Whether allowable‑Reference‑Application for reference by Commissioner‑Assessee requiring reference of other questions arising out of order without separate application ‑ Whether Tribunal justified in referring such questions raised by assessee -Indian Income‑tax Act, 1922, Ss. 10 & 66(1).

The assessee, a shareholder and director of a private limited company, borrowed moneys and invested the same in the shares of the said company. Though, as a director, he received salary and sitting fees, no dividend was received from the shares. In his assessment, he claimed the interest paid on his borrowals as a deduction under section 12 of the Act. Though the officer and the Appellate Assistant Commissioner negatived this claim, the Tribunal allowed the same.

Held, the Tribunal was right. The interest can be allowed under section 12 of the Act. All that section 12(2) requires is that the expenditure should be incurred solely for the purpose of earning income or making profits or gains, that it is not required that it should be fruitful and that interest found to have been paid on money borrowed for investing in shares in a company is a legitimate deduction under section 12(2) of the Act. In the instant case, there is income from which the expenditure is deductible. [Their Lordships did not express any opinion about a case where there is no income.]

In reply the application by the Commissioner for a reference against the order of the Tribunal, the assessee, without filing a separate application for reference, required another question of law also to be referred.

Held, the said question could not have been referred to the High Court without application by the assessee under section 66(1).

Commissioner of Income‑tax v. Jiwaji Rao Sugar Co. Ltd. (1969) 71 I T R 319 fol.

Appa Rao (K.) v. Commissioner of Income‑tax (1962) 46 I T R 511 ; Chhail Behari Lal v. Commissioner of Income‑tax (1960) 39 I T R 696 ; Eastern Investments Ltd. v. Commissioner of Income‑tax (1951) 20 I T R 1 (S C) ; Educational and Civil List Reserve Fund No. 1 v. Commissioner of Income‑tax (1964) 51 I T R 112 ; Girdhardas do Co. Ltd. v. Commissioner of Income‑tax (1957) 31 I T R 82 ; Kameshwar Singh v. Commissioner of Income-tax (1957) 32 I T R 377 ; Madanlal Sohanlal v. Commissioner of Income‑tax (1963) 47 I T R 1 ; Mohamed Ghouse v. Commissioner of Income‑tax (1963) 49 I T R 127 and Ormerods (India) (Private) Ltd. v. Commissioner of Income‑tax (1959) 36 I T R 329 ref.

M. Adhikari for the Commissioner.

K. A. Chitaley and V. S. Dabir for the Assessee.

P. V. DIXIT, C. J.

‑On an application made by the Com missioner of Income‑tax, the Income‑tax Appellate Tribunal, Bombay, has referred, under section 66(1) of the Indian Income tax Act, 1922, the following questions of law for the opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the case, the interest paid on loans borrowed for investment in the shares of Ratlam Straw Board Mills (Private) Ltd.. which did not yield any dividend income, is allowable as deduction under section 12 of the Income‑tax Act. 1922

(2) Whether, on the facts and in the circumstances of the case, the amount of Rs. 9,422 credited to the account of the assessee in the books of account of Regal Cinema Ltd., East Africa, has been rightly included in the income of the assessee and subject to tax "

The material facts as appearing from the statement of the case are these. The assessee is a shareholder and director of Ratlam Straw Board Mills (Private) Limited, Ratlam. He holds 225 shares of Rs. 1,000 each. He had borrowed Rs. 20,000 from Abdul Hussain Ismailji in December 1953, and deposited that amount with the company in two instalments on January 19, 1954, and February 1, 1954. He had borrowed another sum of Rs. 15,000 from Asghar Ali Kamruddin on July 17, 1954, and deposited the amount with the company on the same day. These amounts in deposit were adjusted against the shares which were allotted to the assessee, who paid in the relevant account year (1955‑56) Rs. 2,850 as interest as follows:

There was no dividend income on these shares. Even so, the assessee had received Rs. 3,600 as his salary as a director and Rs. 150 as sitting fees. He claimed Rs. 2,850 as a deduction on account of interest on the money borrowed for investment in the shares of the company. Differing from the Income‑tax Officer and the Appellate Assistant Commissioner the Tribunal, following the view taken in Ormerads (India) (Private) Ltd. v. Commissioner of Income‑tax ((1959) 36 I T R 329), allowed the deduction. There upon, the Commissioner of Income‑tax made an application under section 66(1) of the Act for referring to this Court two questions of law. In his reply to that application, the assessee desired another question of law also to be referred. Although the Departmental Representative objected to the question on the ground that the assessee had not made any application under section 66(1) of the Act within time, the Tribunal, relying upon Girdhardas & Co. Ltd. v. Commissioner of Income‑tax ((1957) 31 I T R 92), included the second question too in the reference made by it.

In regard to the first question, we are of opinion that the view taken by the Tribunal is correct. What was in contest before the income‑tax authorities was whether the assessee had borrowed any money, as claimed by him, for investing in shares of the company. It was not in dispute that money was invested solely for the purpose of making or earning income, profits or gains. The Department, however, contended that, since there was no income from the investment in the shape of dividends, interest paid on money borrowed for making the investment could not be allowed. The Tribunal did not accept that contention and stated:

"We agree with the assessee's submissions. We have been following the decision of Ormerods (India) (Private) Ltd. v. Commissioner of Income‑tax (1959) 36 I T R 329 in other cases that came up before the Tribunal. There is no decision of the Madhya Pradesh High Court on this point so that we would be bound by that view. We, therefore, respectfully follow the view of the Bombay High Court in Ormerods (India) (Private) Ltd. and the other decisions following the same which have been set out in the order of the Appellate Assistant Commissioner. We agree with the assessee's contention that the amount is liable to be allowed as deduction."

In Ormerods (India) Private Ltd. v. Commissioner of Income‑tax the Bombay High Court retie' anon the observations of the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income‑tax ((1951) 20 I T R 1 (S C)) and stated:

"In that case, their Lordships held that the transaction before them was of such a nature as would fall within the purview of section 12(2) and the interest paid would be an allowable deduction under the subsection. In the course of the judgment, it has been observed:

'It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned:

Subsection (2) does not, say that the deduction is permissible when any income has been earned or profits or gains made.

All that it speaks of is that the expenditure must have been laid out solely for the purpose of earning income."

This view was accepted in Chhail Behari Lal v. Commissioner of Income‑tax ((1960) 39 I T R 696), K. Appa Rao v. Commissioner of Income‑tax ((1962) 46 I T R 511) and P. V. Mohamed Ghouse v. Commissioner of Income‑tax ((1963) 49 I T R 127). In the last‑mentioned case the High Court dissented from the contrary view indicated in Maharajadhipaj Sir Kameshwar Singh v. Commissioner of Income‑tax ((1957) 32 I T R 377) and Madanlal Sohanlal v. Commissioner of Income‑tax ((1963) 47 I T R 1).

In our opinion, all that section 12(2) requires is that the expenditure should be incurred solely for the purpose of earning income or making profits or gains, that it is not required that it should be fruitful and that interest found to have been paid on money borrowed for investing in shares in a company is a legitimate deduction under section 12(2) of the Act. In the' instant case, there is income from which the expenditure is deductible. We should not, however, be regarded as expressing any opinion about a case where there is no income.

In regard to the second question, we are of opinion that it could not have been referred to this Court without an application duly made by the aasessee under section 66(1) of the Act. We had occasion to consider an identical question in Commissioner Income‑tax v. Jiwaji Rao Sugar Co. Ltd. ((1969)71 I T R 319). We stated:

"So far as the second question is concerned, we are unable to share the opinion of the Bombay High Court in Girdhardas & Co. Ltd. v. Commissioner of Income‑tax (1957) 31 I T R 82 which was later followed by the Rajasthan High Court in Educational & Civil List Reserve Fund No. 1 v. Commissioner of Income‑tax (1964) 51 I T R 112, to the effect that, where a losing party applies under section 66(1) of the Act for a reference, the other party also may ask for a reference of other questions of law which arise from the order of the Tribunal. Before a reference can be made, there must be an application which is made within the period of limitation prescribed by section 66(1). Secondly, where it is made by an assessee, it must be accompanied by a deposit of Rs. 100. Thirdly, the application itself has to be made in the form prescribed by rule 22‑A of the Income‑tax Rules, which must not only be signed by the assessee or by the authorised representative but must also state the question of law arising out of the order that is desired to be referred to the High Court. Finally, the Rules of this Court require that the amount deposited under section 66(1) should continue to be there till the reference is answered. It is plain enough that, in this particular case, the assessee could have applied for referring the second question but it did not choose so to do. That being so, we see no good reason why the requirements of law should be dispensed with in favour of such an assessee and it should be allowed to derive the advantage of such a reference. We are not here concerned with a winning party who could never apply for a reference and we should not be regarded as expressing any opinion on the question whether it could ask for such a reference without a regular application under section 66(1). In our opinion, the second question could not have been referred to this Court without an application under section 66(1) duly made by the assessee and we decline to answer it."

In the view we have taken of the two questions, our answer to the first question is that the amount paid as interest by the assessee on loans which he invested in shares of the company is allowable as a deduction under section 12(2) of the Act. We decline to answer the second question. In the circumstances, we leave the parties to bear their own costs.

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