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PETITIONER: COMMISSIONER OF INCOME TAX, WEST BENGAL III, CALCUTTA

       Vs.

RESPONDENT: RAJENDRA PRASAD MOODY, CALCUTTA ETC.

DATE OF JUDGMENT04/10/1978

BENCH: BHAGWATI, P.N. BENCH: BHAGWATI, P.N. PATHAK, R.S. TULZAPURKAR, V.D.

CITATION:  1979 AIR  373            1979 SCR  (1)1047  1979 SCC  (1) 250  CITATOR INFO :  F          1987 SC1723  (6)

ACT:      Allowable  expenditure-Whether   interests  on   monies borrowed for  investment in shares is allowable expenditure, when the  shares have not yielded any return in the shape of dividend during  the relevant assessment year-Interpretation of Sec. 57(iii) of Income-tax Act. 1961.

HEADNOTE:      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 accounting  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 interest  paid on  the borrowed monies but  this claim  was  negatived  by  the  Income  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, 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 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

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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 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  Sec. 57(iii)  to suggest  that the  purpose for which expenditure  is made should fructify into any benefit. [1051 B-E]      Eastern Investments Ltd. v. Commissioner of Income-tax, 20 I.T.R. (SC) 1 applied.      (2) The  contention of the Revenue that the expenditure would disqualify  for deduction  only if  no income  results from such  expenditure in  a particular assessment year but, if there  is some  income,  however  small  or  meagre,  the expenditure 1048 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 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  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 the income. [1051 G, H, 1052 A-D]      (3) It  is true  that the language of Sec. 37(i) of the Act is  a little  wider than  that of  Sec. 5(iii). But that cannot make  any difference  in the  true interpretation  of Sec. 57(iii).  The language  of Sec.  57(iii) is  clear  and unambiguous and  it has  to be  construed according  to  the 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 the language of  the  section  and  in  fact  contrary  to  such language. This  view also  accords with  the  principles  of commercial accounting. [1052 E-F, 1053 B]      Hughes v. Bank of New Zealand, 6 I.T.R. 636 quoted with approval.      Appa Rao  v. Commissioner  of Income-tax,  46 ITR  511; Mohamed Ghouse  v. Commissioner  of Income-tax,  49 ITR 127, Ormerods (India) Pvt. Ltd. v. Commissioner of Income-tax, 36 ITR 329;  Chhail Beharilal v. Commissioner of Income Tax, 39 ITR 696;  Commissioner of  Income-tax v. Dr. Fida Hussain G. Abbasi, 71  ITR 314; M. N. Ramaswamy Iyer v. Commissioner of Income-tax, 71  ITR 218; Commissioner of Income-tax v. Gopal Chand Patnaik, 111 ITR 86 approved.      Maharajadhiraj Sir  Kameshwar Singh  v. Commissioner of Income-tax, 32 ITR 377; Madanlal Sohanlal v. Commissioner of Income-tax, 47 ITR 1 overruled.

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JUDGMENT:      CIVIL APPELLATE  JURISDICTION :  Tax References  Nos. 1 and 2 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 (I.T.A. No. 12127 of 66-67) R.A.  No. 777  (Cal.) 69-70  (R.T.A. No. 12125 of 66- 67).      V. S. Desai and Miss A Subhashini for the Appellant.      Anil B.  Divan, N.  R. Khaitan,  S. R.  Agarwal, U.  K. Khaitan, P. V. Kapur and Praveen Kumar for the Respondent. 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  the decisions of High Courts on  the question  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  dividend  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 hence 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 sufficient  to state  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 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 interest paid on the borrowed monies but  this claim  was  negatived  by  the  Income  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  section 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 following question of law, namely:-           "Whether on the facts, and in the circumstances of      the case,  interest on money borrowed for investment in      shares which had not yielded any dividend is admissible      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. 1050      The determination  of the  question before  us turns on

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the true  interpretation 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 sections 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      capital expenditure)  laid down  or expended wholly and      exclusively for  the purpose  of making or earning such      income". 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  expenditure would  not be deductible under that section. The  Revenue relied  strongly on  the  language  of section 37(1)  and contrasting  the phraseology  employed in section 57(iii) with that in section 37(1), pointed out that the Legislature  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  used  in  section  37(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, 1051 they cannot  be given  the same wide meaning as the words in section 37(1) 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 contention of the Revenue undoubtedly found favour with two High Courts but we do not think we can accept it. Our reasons for saying so are as follows.      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  expenditure   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

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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 year,  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.  1/-,  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 1052 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 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.  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 cannot, in the circumstances, be held to be conditional upon the making or earning of the income.      It is  true that  the language  of section  37(1) is  a little wider than 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

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the observations of Lord Thankerton 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 does 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 Income tax, and Mohamed Ghouse v. Commissioner of Income-tax, the Bombay High Court  in Ormerods (India) Private Ltd. v. Commissioner of Income-tax, the Allahabad High Court in Chhail Beharilal 1053 v. Commissioner of Income-tax, the Madhya Pradesh High Court in Commissioner of Income-tax v. Dr. Fida Hussain G. Abhasi, the  Kerala   High  Court   in  M.   N.  Ramaswamy  Iyer  v. Commissioner of  Income-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 taken by the  Patna High  Court in  Maharajadhiraj  Sir  Kameshwar Singh v.  Commissioner of  Income-tax and  the Calcutta High Court in  Madanlal Sohanlal  v. Commissioner  of  Income-tax must in the circumstances be held to be incorrect.      We accordingly  answer the  question referred to us for our opinion 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. S.R.             References answered in favour of assessees. 1054