The purpose of the expenditure is relevant, not the motive, and the absence of dividend does not negate the purpose of making or earning income. The deduction under Section 57(iii) is available to all investors, not just those dealing in shares as a business.

S.J. VAZIFDAR, J.

This is an appeal against the order of the Tribunal confirming the order of the Commissioner of Income Tax (Appeals) enhancing the appellant/assessee’s income. The appeal pertains to the Assessment Year 1997-98. The Assessing Officer had disallowed interest of Rs.9,45,675/- out of the total claim of interest of Rs.18,91,335/-.

2. By an order dated 29.10.2007, the appeal was admitted on the following substantial questions of law:-

“i. Whether under the facts and circumstances of the case the interest on money borrowed for investment in shares in M/s M. Gulab Singh & Sons (P) Ltd. which had not yielded any dividend is admissible deduction?

ii. Whether under the facts and circumstances of the case, Tribunal is justified that the shares have been purchased by appellant to acquire controlling interest and hence not allowable deduction?”

3. The assessee had claimed a deduction of Rs.18,91,335/- on account of interest paid to the Ashok Kumar Malhotra HUF. Ashok Kumar Malhotra is the assessee’s husband and the assessee is a member of the said HUF. The assessee claimed that she had borrowed funds from the HUF during the Assessment Year 1987-88 to purchase shares of M/s M. Gulab Singh & Sons Pvt. Ltd. (hereafter referred to as the “Company”) and M/s M.B.D. Enterprises Pvt. Ltd. The Assessing Officer asked the assessee to furnish details of the investment out of the borrowed funds. As the assessee did not furnish the details, the Assessing Officer assumed that out of the borrowed funds investment to the extent of 50 per cent had been made for the purchase of the shares in these companies. He accordingly disallowed 50 per cent of the interest amounting to Rs.9,45,660/- out of the total interest claimed.

4. The CIT(A) observed that the entire borrowed funds of Rs.18,91,355/- had been used by the assessee for acquiring shares of the company M/s M. Gulab Singh & Sons Pvt. Ltd. and no part thereof was utilised for purchasing shares of M/s M.B.D. Enterprises Pvt. Ltd. Having held that the shares were purchased to acquire control of the company and not as an investment, the CIT (A) disallowed the entire amount of Rs.18,91,355/-. The CIT (A) accordingly enhanced the assessee’s income by Rs.9,45,660/- and ordered initiation of penalty proceedings under Section 271 (1)(C) for furnishing inaccurate particulars of income.

5. The Tribunal agreed with the CIT (A) that the entire funds were utilized for the purpose of purchasing the shares of the company and confirmed the order of the CIT (A) enhancing the income. The assessment order and the order of the CIT (A) did not furnish the details of the assessee’s holding. The Tribunal’s order, however, furnishes the details of the assessee’s holdings.

6. The facts necessary for the determination of this appeal are these:

Ashok Kumar Malhotra HUF, Ashok Kumar Malhotra as an individual, M/s M.B.D. Enterprises Pvt. Ltd. and the assessee purchased 2459, 1495, 945 and 1933 equity shares in the company, respectively, aggregating to 6832 shares. The entire share capital of the company is held by them. The assessee, thus, purchased 28.29 per cent of the equity shares of the company. She is the wife of Ashok Kumar Malhotra and a member of his HUF as also a share-holder and a Director in M/s M.B.D. Enterprises Pvt. Ltd. She borrowed money from the Ashok Kumar Malhotra HUF for the purchase of these shares on interest. For the assessment year in question, she paid interest of Rs.18,91,355/- in respect of which she claimed a deduction under Section 57 (iii).

7. Section 57 (iii), as it then stood, read as under:-

“57. The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely:- …. ….. ……. ……. …….

(iii) any other expenditure (not being in the nature of capital expenditure)laid out or expended wholly and exclusively for the purpose of making or earning such income;”

Re: Question (i):

8. The Tribunal firstly held that the assessee had not cl