Interest paid on an overdraft account used to purchase shares is not deductible from dividend income under section 12(2) of the Income-tax Act, 1922, unless the overdraft was created solely for the purpose of earning the dividend income.

JUDGMENT - Chandrachud, J.

1. The assessee, a speculator in cotton and shares, also derives income from salary, properties and dividends. At the end of S. Y. 2014, corresponding to the assessment year 1959-60, his liabilities included an overdraft from the Bank of India Ltd., Kalbadevi branch, in the sum of Rs. 1,63,904 and loans from sundry creditors amounting to Rs. 2,94,206. Among other items of income, he returned an income of Rs. 27,677 from dividends and claimed against it a deduction of Rs. 18,934 which was made up of interest at Rs. 9,408 paid to the bank and interest at Rs. 9,526 paid to the other creditors.

2. The Income-tax Officer and the Appellate Assistant Commissioner allowed the whole of the deduction as a business loss under section 10(2) (iii) and not under section 12(2) of the Income-tax Act, 1922, as claimed by the assessee. By a cryptic order, the Tribunal has allowed the deduction to the extent of Rs. 9,408 only which amount was paid by the assessee to the bank by way of interest on the overdraft. The reason given by the Tribunal in support of its order is difficult to summarise and it is better that we set out its conclusion in its own words :

"In an overall appreciation of the balance-sheet position it is found that nearly half of the total assets are represented by shares. The interest payment includes Rs. 9,408 paid to the bank on an overdraft with these very shares offered as a security. In these circumstances, in our opinion, this amount paid to the bank is a proper deduction against the dividend income as there can be said to be a co-relation between the dividend income and the interest payment established through the bank account."

3. The application made by the Commissioner for reference to the High Court under section 66(1) was rejected by the Tribunal. The High Court, however, directed the Tribunal to refer the following question for its opinion under section 66(2) :

"Whether, on the facts and in the circumstances of the case, interest payment of Rs. 9,408 on bank overdraft obtained by offering shares as security is inadmissible as a deduction from the dividend income under section 12(2) of the Act ?"

4. Section 12(1) of the Income-tax Act, 1922, provides that tax shall be payable by an assessee under the head "Income from other sources" in respect of income, profits and gains of every kind which may be included in his total income if not included under any of the heads preceding. Under section 12(1A), income from other sources includes income from dividends. Section 12(2) under which the assessee claims deduction provides, to the extent material, that such income shall be computed after making allowance for any expenditure incurred solely for the purpose of earning such income.

5. The question therefore which requires consideration is whether the interest paid by the assessee to the bank on the overdraft account is an expenditure incurred by him solely for the purpose of earning the dividends. The Tribunal has not applied its mind to the provisions of section 12(2) at all and has allowed the deduction partially, on the ground that there can be said to be "a co-relation between the dividend income and the interest payment established through the bank account." We regret to have to say that it is impossible to understand from the judgment of the Tribunal as to which bank account it had in its mind and what sort of co-relation it thought was established between the dividend income and the interest paid by the assessee to the bank.

6. It was no part of the assessees case at any stage that the overdraft account was created for the purpose of buying shares with the object of investing in those shares. It is clear from the orders of the Income-tax Officer and the Appellate Assistant Commissioner that the assessee justified the claim for deduction on the ground (1) that the overdraft account was secured by hypothecating the very shares on which the dividend was received, and (2) that, to liquidate his li

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