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SUPREME COURT OF INDIA
P.N. BHAGWATI AND S. MURTAZA FAZAL ALI, JJ.
Seth R. Dalmia, Appellant
Versus
The Commissioner of Income Tax, Delhi, Respondent.
Civil Appeal No. 1519 of 1971,
D/- 21-9-1977.
Advocates Appeared
Mr. Bishamber Lal, Advocate, for Appellant; Mr. V. P. Raman, Addl. Sol-Gen. (Mr. J. Ramamurthi, Advocate, with him), for Respondent.
Income-tax Act, 1922 – Section 12 (2) – Claim of compensation - Transfer of equitable title of shares - Acquisition of equitable interest - Whether on facts and in circumstances of case tribunal rightly rejected assesses claim for deduction of interest payment - Whether on facts and in circumstances of case tribunal rightly held that revenue was not stopped from disallowing claim for deduction of interest amount in view of allowance of such claim in past - Whether on facts and in circumstances of case tribunal rightly disallowed loss in respect of preference shares of Investment Company Ltd - Whether on facts and in circumstances of case tribunal rightly held that dividend amount did not constitute income of assessed - Whether or not appellant is entitled to a deduction can be decided without touching or affecting question of transfer of equitable title to assessed - Assessed filed an appeal before Appellate Assistant Commissioner who affirmed order of Income-tax Officer though on slightly different grounds with which court are not concerned here - Thereafter assessed filed an appeal before Tribunal which gave a finding that under facts and circumstances of present case there was no transfer of equitable title in shares to assessed and therefore he was not entitled to any deduction of interest paid by him on capital amount which constituted purchase money of shares - Tribunal further held that interest paid was of a capital nature and did not fall within ambit of Section 12 (2) of Act - As regards assesses claim to dividend income Tribunal held that as said income had been credited to account of assessed in terms of cl. of agreement it had not been actually earned by assessed and receipt of dividend by Bank was only taken into account for finalization of price - Tribunal accordingly directed deletion of this amount from total income of assessed - As regards third point namely sum which assessed paid as damages to Bank Tribunal held that as assessed was not doing business exclusively in shares he was not entitled to set off interest paid by him as revenue loss – Held, Assessed has clearly established that expenditure aforesaid was incurred solely and wholly for purpose of earning bonuses and dividend income - As shares were not stock-in-trade of appellant it could not be said that interest paid by assessed to Bank was an expenditure of a capital nature nor was there any material to show that expenditure incurred by assessed amounted to his personal expenses - Court are satisfied that case of appellant in paying interest amounting to falls clearly within S. 12 (2) of Act and conditions of aforesaid provision being fulfilled assessed was in law entitled to deduction of amount under Section 12 (2) of Act - Court are therefore of opinion that High Court and Tribunal were wrong in taking view that Income-tax authorities rightly disallowed amount as claimed by assessed - Court are clearly of opinion that this amount was a permissible deduction under S. 12 (2) of Act and should have been allowed by Income-tax Authorities - In these circumstances therefore court hold on question No. (1) That both Tribunal and High Court should have held that assesses claim for deduction of interest amounting was wrongly rejected by Income-tax Authorities - Court have already pointed out that assesses main business was not dealing in shares and therefore damages paid were due to his own default and would therefore be a capital expenditure rather than a revenue one - High Court and Tribunal were right in disallowing this amount - High Court also agreed with Tribunal and answered this question in affirmative against Revenue - Learned counsel for Revenue has however submitted that if court are of opinion that appellant should be entitled to deduction of Rupees under S. 12 (2) of Act then it automatically follows that he cannot claim exemption in respect of dividend income - In court opinion argument of learned counsel for Revenue is well founded and must prevail - Even appearing for assessed/appellant was fair enough to concede that if court hold that interest of was a permissible deduction under Section 12 (2) of Act then he would not press his claim before Income-tax Authorities for deletion of dividend income and he would have no objection if this Court sets aside this deletion - In this view of matter court set aside order of High Court as also that of Tribunal deleting the amount which will be included in total income of assessed - Appeal partly allowed
Judgment
FAZAL, ALI, J. - In this appeal by special leave, the assessee who is an individual had purchased a large number of shares from the Bharat Bank Ltd. for Rs. 44,14,990/- by borrowing this amount from the Bharat Bank and he paid interest of Rs. 2,04,744/- on the said amount. 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 p. 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 S. 12 (2) of the 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.
2. 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 S. 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 cl. (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 f
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