Commissioner of Income Tax, West Bengal III, Calcutta v. Rajendra Prasad Moody, Calcutta

COMMISSIONER OF INCOME TAX, WEST BENGAL III, A CALCUTTA _v._ RAJENDRA PRASAD MOODY, CALCUTTA ETC. _October_ 4, 1978 [P. N. BHAGWATI, V. 0. TuLZAPURKAR AND R. S. PATHAK, JJ.J _Allowable_ expenditur~Whether _interests on monies borrowed for invest-_ _ment in shares is allowable expenditure, when the shares_ _have·_ _not yielded any_ _return_ _in_ _the shape_ _of dividend during the relevant assessment year-Interpreta-_ _tion_ _of Sec._ 57(iii) _of_ _Income-tax_ _.Act._ 1961. 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 account.. ing 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 iaterest paid on the borrowed monies but this claim was negatived by the Inconle 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, ho:wever on further appeal, disagreed with the view taken by the Taxing Authorities and uph~d 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 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 tl;tat 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] _Eastel'n_ Investm~nts _Ltd._ v. _Commissioner_ _of_ _Income-tax,_ 20 l.T.R. (SC) applied. (2) The contention ef the Revenue that the expenditure would disqualify for deduction only if no income resnlts from such expenditure in a particular assess ment year but, if there is some income, however small or meagre, the expenditure 1047 B ##### c D E F G H A B ### c D E ~+. 1048 SUPREME COURT REPORTS [1979] 1 s.c.R. 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 \vould be debited as an outgoing and income would be credited as a rece,ipt and the resulting income or loss would be determined. It wquld 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 t!le inrome. [1051 G, H, 1052 A-DJ (3) It is true that tho language of Sec. 37(i) of the Act is a littlo wider than that of Sec. 5(iii\. But that cannot ma.ko any difference in the true interpretation of Sec. 57(iii). The languago of Sec. 57(iii) is clear and unambiguous and it has to be construed according to tho 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 tho language of the section and in fact contrary to such language. This view also accord! with the principles of commercial accounting. [1052 E-F, 1053 BJ _llughes_ v. _Bank_ _of_ _New Zealand,_ ' l.T.R. 636 quoted with approval. _Appa Rao_ v. _Commissioner_ _of_ _Incomt-tax,_ 46 ITR 511; _Mohamed Ghouse_ v. _Comrnissioner_ _of_ _Income-tax,_ 49 ITR 127, _Ormerods_ _(India)_ _Pvt. Ltd._ v. _Co1nmissioner_ _of_ _Income-tax,_ 36 ITR 329; _Chhail Beharilal_ v. _Co1nmissioner_ _of_ _Income Tax,_ 39 ITR 696; _Con11nissioner_ _of_ _Income-tax_ v. _Dr. Fida_ _Hussain_ _G. Abbasi,_ _11_ ffR 314; _M. N. Ramaswamy Iyer_ v. _Commissioner_ _of_ _lncome-_ _tax,_ 71 ITR 218; _Commissioner_ _of_ _Income·tax_ v. _Gopal Chand Patnaik,_ 111 ITR 86 approved. ., l _Maliarajadhiraj Sir Knmeshwar Singh_ v. _Commi'ssioner_ _of_ _Income-tax,_ 32 _y--_ JTR 377; _Madanlal Sohanlal_ v. _Commissioner_ _of_ _Income-tax, 41_ ITR 1 overmled. ###### ' CIVIL APPELLATE JURISDICTION : Tax References Nos. 1 and 2 G 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 (LT.A. No. 12127 of 66-67) R.A. No. 777 (Cal.) 69-70 (R.T.A. No. 12125 of 66-67). H _V._ _S._ _Desai_ and _Miss A_ _Subhashini_ for the Appellant. _Anll_ _B. Divan, N._ _R._ _Khaitan,_ S. _R._ _Aganval,_ _U._ _K._ _Khf<itan,_ _P._ _V. Kapur_ and _Praveen Kumar_ for the Respondent. c. I. _T._ _v._ R. P. MOODY _(Bhagwati,_ J.) 1049 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 tho decisions of High Courts on the questio-a 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 divide·ad 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 he~1ce 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 snfficient to stare 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 bnt did not receive any dividend on the shares purchased with those monies. Each of the two assessees made a claim for dednction of the amount of interest paid on the borrowed monies bnt this claim was negatived by the Income Tax Officer and on appeal by the Appellate Assistant Commissioner OIJl the gronnd 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 exp~nditure laid ont or expended wholly and exclvsively for the purpooe of making or earning income chargeable under the Head "Income From Other Source" so as to be allowable as a permissible deduction under S"--Ction 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 follow##### ing question of law, namely : "Whether on the facts, and in the circumstances of the case, interest o:i. money borrowed for investment in shares which had not yielded any dividend is ~dmissible 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. **A** ' **B** ## c **D** **E** **F** **G** **H** **A** **B** # c c 1050 SUPREME COURT REPORTS (1979] l S.C.R. The determination of the question before us turns on the true interpertation 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 secticrns 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 **D** capital expenditure) laid down or expended wholly and exclusively for the purpose of making or earning such **income".** E **F** G **H** 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 expendi ture would not be deductible under that section. The Revenue relied strongly on the langui;ge of section 3 7 (1) and contrasting the phraseology employed in section 57(iii) with that in section 37(1), pointed out that the l"..egislature 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 tised in section 3 7 ( 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, c. I. T. _v._ R. P. MOODY _(Bhagwati,_ J.) 1051 they cannot be given the same wide meanrng as the words in sec tion 3 7 (I) 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 conte":J.tion of the Revenue undoubtedly found favour with two High Courts but we do not think we can accept it. Our reasons for saying so 11re as follows. A B # c D E F G B 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 expe":J.diture 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 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 y~ar, 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. 11-, 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 (I) 20 I. T. R. I. #### ' . **A** **B** #### c **D** **E** **F** **G** **H** 1052 SUPREME COURT REPORTS [1979] 1 s.c.R. 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 uo 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 ;f so, what, since _"'I_ 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 carmot, in the circumstances, be helU to be conditional npon the making or earning of the income. (I) 6 J.T.R. 636. (2) 46 I.T.R. _511._ (3) 49 I.T.R. 127. (4) 36 I,T.R. 329. ###### It is true that the language of section 37 (1) is a little wider !ban 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 the observa- _y_ tions of Lord Tuankerton 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 docs 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_ _lncome-_ _tax,(')_ and _Mohamed Ghouse_ v. _Commissioner_ _of_ _Income-tax,(_ _[3 ]_ _)_ the Bombay High Court in _Ormerods (India) Private Ltd._ v. _Commis-_ _sioner_ _of Income-tax,(')_ the Allahabad High Court in _Chhail Beharilal_ ## • ######, c. I. T. _v._ R. P. MOODY _(Bhagwati,_ _J.)_ 1053 v. _Commissioner of Income-tax,(')_ the Madhya Pradesh High Court in _Commissioner_ _of_ _Income-tax_ v. _Dr._ _Fida Hussain_ _G._ _Abhasi,(_ _[2 ]_ _)_ the Kerala High Court in _M._ _N. Ramaswamy Iyer_ v .. _Commissioner_ _of In-_ _come-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 talfen by the Patna High Court in _Maharajadhiraj Sir Kameshwar Singh_ v. _Commissioner_ _of_ _Income-tax(')_ and the Calcutta High Court in _Madan/al Sohan/al_ v. _Commissioner of lncome-tax(_ _[6 ]_ _)_ must in the circumstances be held to be incorrect. A B ### We accordingly answer the question referred to us for our opinion c 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. _References answered in_ _favour of assessees ._ ##### • S.R. (l) 39 I.T.R. 696. (2) 71 I.T.R. 314. (3) 71 I.T.R. 218. (4) 111 I.T.R. 86. (5) 32 I.T.R. 377. (6) 47 I.T.R. I.