In Both Appeals v. Darashaw & Co. Pvt. Ltd

bsb IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 2627 OF 2011ALONG WITH INCOME TAX APPEAL NO. 2628 OF 2011 The Commissioner of Income Tax-4 … Appellant in both appeals. v/s Darashaw & Co. Pvt. Ltd. … Respondent in both appeals. Mr.Vimal Gupta, senior advocate with Ms.Padma Divakar for the appellant in both appeals. Mr.J.D. Mistry, senior advocate with Mr.Madhur Agarwal with Shabnam Shaikh i/by Khaitan & Co. for the respondent in both appeals. CORAM: S.C. DHARMADHIKARI & G.S. KULKARNI, JJ. DATED : 7TH MAY, 2014 P. C. : 1These appeals by the revenue challenge the order passed in Income Tax Appeal Nos.135/Mum/2009 and 733/Mum/2009 which have been disposed of by an order of the Income Tax Appellate Tribunal on 23[rd] February, 2011. 2Mr.Gupta, the learned senior counsel appearing on behalf of the appellant submits that the appeal raises substantial questions of law and which have been formulated for this Court's consideration at paragraph 4, page 4 of the paper book. 3Mr.Gupta submits that the questions of law framed as substantial are arising from the fact that, in the relevant assessment year 2005-2006 the Assessing Officer noticed that the assessee had debited an amount of Rs.5,10,00,148/- as interest incurred on funds borrowed for the purpose of investment in Maharashtra State Road Development Corporation ( 'MSRDC 2018 Bonds' for short). It was also noticed that the assessee Company sold 3563 number of these bonds and claimed the profit thereon as 'Long Term Capital Gains'. That was assessed by the Assessing Officer as 'Short Term Capital Gains'. The Assessing Officer disallowed the interest of Rs.5,06,44,796/- incurred by the assessee in relation to bonds sold during the year as there was no provision for allowing interest on funds borrowed in the computation of income under the head 'Capital Gains'. Further, the disallowance was also made by the Assessing Officer for the reason that the bonds were transferred before the end of the year and the only income that can accrue on these bonds was 'Short Term Capital Gains. Mr.Gupta, therefore, submits that the disallowance and various additions which were made by the Assessing Officer were challenged by the assessee before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) confirmed the disallowance of Rs.5,06,44,796/- made by the Assessing Officer being interest on bonds that had been sold during the relevant previous year and which income had been assessed under the head “Capital Gains”. The order passed by the Commissioner of Income Tax (Appeals) dated 12[th] November, 2008 was challenged by the assessee and the revenue both. These have been disposed of by the order of the Income Tax Appellate Tribunal. 4Mr.Gupta submits that the question relates to the interpretation of Section 36 and Section 57 of the Income Tax Act, 1961. Mr.Gupta submits that the wording of Section 57(iii) would indicate that the income chargeable under the head 'income from other sources' shall be computed after making the deductions, inter alia, “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”. Mr.Gupta submits that 4Mr.Gupta submits that the question relates to the interpretation of Section 36 and Section 57 of the Income Tax Act, 1961. Mr.Gupta submits that the wording of Section 57(iii) would indicate that the income chargeable under the head 'income from other sources' shall be computed after making the deductions, inter alia, “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”. Mr.Gupta submits that the distinguishing feature in the case of the assessee and for the current assessment year is that the assessee may have borrowed moneys for the purpose of investment in the bonds. The assessee may have been paying interest on the borrowings. However, so long as the assessee held the bonds and for the purposes of eventual benefits on their same being redeemed together with interest, that the subject deduction was permissible. The moment the assets have been sold, the deduction as claimed was rightly disallowed. The section therefore requires purposive interpretation. The purpose of the expenditure therefore cannot be lost sight of. For all these reasons, it is submitted that the present appeals be admitted as they raise substantial question of law. 5Mr.Mistry, learned senior counsel appearing on behalf of the assessee submits that same contentions were raised by the revenue in two appeals being Income Tax Appeal Nos.2620 of 2010 and 5571 of 2010. These appeals concern the same assessee. Four questions of law formulated in its order dated 22[nd] July, 2011 in Income Tax Appeal No.2620 of 2010 reveal that identical issue and controversy was raised. The Division Bench of this Court following the judgment of the Supreme court in the case of Commissioner of Income Tax, West Bengal-III v/s Rajendra Prasad Moody, reported in 115 ITR 519, held that the expenditure incurred was only exclusive for the purpose of making investment and was, therefore, allowable. Mr.Mistry submits that the controversy is covered by the two judgments of the Supreme Court. Reliance is rightly placed on the case of Moody (supra) because discussing the same sections, namely, Section 36 and section 57, the Hon'ble Supreme court held that there is absolutely no scope for reading into this provision something which is expressly not provided therein. The plain natural construction of the language leads to the conclusion that to bring a case within the section, namely, Section 57(iii) it is not necessary that any income should in fact have been earned as a result of the expenditure. He submits that, in the later decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax v/s Meghdoot Hotels (Pvt.) Ltd., reported in (1996) 220 ITR 185, referred by the Division Bench in Income Tax Appeal No.2620 of 2010, the asset in which the money was invested was eventually sold. However, for the purpose of acquisition of that asset, money was borrowed and thereafter invested. The Supreme Court formulated question No.1 and arrived at a conclusion that for the purpose of Section 36(1)(iii) of the Income Tax Act it is not necessary that the asset must be continued to be held. The asset can be disposed of or sold of. However, the deduction is on the liability to pay interest on the borrowings. As long as that liability subsists, the deduction is allowable. Mr.Mistry, therefore, submits that the view taken by the Tribunal cannot be said to be perverse or vitiated by any error of law apparent on the face of the record. Once it is in consonance with the principles laid down in the two Supreme Court decisions, then no substantial question of law arise for determination and consideration in this appeal. The appeal, therefore, deserves to be dismissed. necessary that the asset must be continued to be held. The asset can be disposed of or sold of. However, the deduction is on the liability to pay interest on the borrowings. As long as that liability subsists, the deduction is allowable. Mr.Mistry, therefore, submits that the view taken by the Tribunal cannot be said to be perverse or vitiated by any error of law apparent on the face of the record. Once it is in consonance with the principles laid down in the two Supreme Court decisions, then no substantial question of law arise for determination and consideration in this appeal. The appeal, therefore, deserves to be dismissed. 6With the assistance of the learned senior counsel appearing for both parties, we have perused the memo of appeal and annexures thereto including the impugned order. In relation to ground Nos.2 and 3, the Income Tax Appellate Tribunal held that they are inter-connected. The Tribunal noted the facts in paragraph 8. The facts are undisputed. It is not the case of the revenue that the borrowings and which have been invested in the MSRDC Bonds is not a liability. The dispute is also not raised about the fact that there is interest which is payable on these borrowings. The only question raised is that, for the purposes of Section 57(iii), the bonds being disposed of, the deduction as claimed was not allowable. The deduction was allowable so long as the bonds and shares were held for their eventual benefit. The benefit was that the bonds would be redeemed together with interest. The Tribunal noted these contentions and found that there is no merit in the revenue's stand. The Tribunal referred to the judgment cited by Mr.Mistry before us. 7We must, for the purpose of appreciation of the contentions refer to two provisions which have been brought to our notice by the learned senior counsel. Mr.Gupta would rely on Section 36 as also Section 57. Section 36 insofar as it is relevant, states that the deductions provided in the clauses following sub-section (1) shall be allowed in respect of matters dealt with therein in computing the income referred to in Section 28. The learned senior counsel appearing for the revenue submits that Clause (iii) in this sub-section provides for the amount of interest paid in respect of capital borrowed for the purpose of business or profession. 8The learned senior counsel then relied on section 57 of the said Act and would urge that the deductions therein referred to the income chargeable under the head “income from other sources'. That income shall be computed after deductions are made and one of the deductions is allowed in respect of an 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. 9In the first decision cited before us by Mr.Mistry, the Hon'ble Supreme Court dealt with a case of the assessees who were brothers. They borrowed moneys for the purpose of making investment in shares of certain companies and during the assessment year 1965-1966 for which the relevant accounting year ended on 10[th] April, 1965. Each of the two assessees paid interest on the moneys borrowed but did not receive any dividend on the shares purchased with those moneys. Each of the assessee made a claim of dividend on the borrowed money but this claim was negatived by the Income Tax Officer and equally in appeal on the ground that during the relevant assessment year the shares did not yield any dividend and, therefore, interest paid on the borrowed moneys could not be regarded as expenditure laid out or expended only on or exclusively for the purpose of making or earning income chargeable under the head “income from other sources”. The Tribunal on the assessees' appeal disagreed with the view taken by the authority and upheld : 9 : : 9 : the claim. Thus, deduction was allowed. The revenue sought a reference on the question of law formulated at page 521 of the report. In view of the divergence of judicial opinion, the Tribunal referred the question of law to the Hon'ble Supreme Court. 10In dealing with the identical argument as was raised before us and on interpretation of Section 57, the Hon'ble Supreme Court held as under :- “The determination of the question before us turns on 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 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 Cl.(iii), which reads as follows: “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”. 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” and set out in section 57(iii). The words in Section 57(iii) being narrower, contended the revenue, 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 the High Court 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 fulfilled in order to qualify the 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 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/s CIT (1951) 20 ITR 1, 4(SC), where interpreting the corresponding provision in section 12(2) of the Indian I.T. 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 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 Rs.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 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 income 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 of 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.” 11In our view, after this authoritative pronouncement by the Hon'ble Supreme Court, there is no scope for any other construction and particularly as suggested by Mr.Gupta. We are of the opinion that this judgment of the Hon'ble Supreme Court answers the issue of interpretation of Section 57(iii) squarely and in favour of the assessee. More so, when no contrary judgment of the Hon'ble Supreme Court has been brought to our notice, the argument that this judgment has been misinterpreted and misread by the Tribunal does not commend to us. The Supreme Court has held that the words in Section 57(iii) speak of purpose of the expenditure and that is relevant. The argument of Mr.Gupta is that the purpose of the expenditure and in the present case, has a relation with the income that is to be eventually earned from the MSRDS bonds. That the bonds were disposed of means the income by way of interest thereon would not accrue any longer. Therefore, the deduction by way of interest on borrowings and which is stated to be a liability was not a permissible deduction. That is the precise argument which has been dealt with and the Hon'ble Supreme Court has clarified that the argument 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, howsoever small or meagre, the expenditure would be eligible for deduction. The Hon'ble Supreme Court gave an illustration in that regard and held that the 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. The Hon'ble Supreme Court held that how expenditure which is otherwise a proper expenditure can cease to be a such merely because there is no receipt of income, has not been explained by the revenue at all. It is in these circumstances the Hon'ble Supreme Court held that Section 57(iii) does not require that the purpose must be fulfilled so as to be expenditure qualified for deduction. The language of the section does not admit of a construction that the expenditure shall be debited only if any income is made or earned. The Hon'ble Supreme Court, therefore, has concluded the issue and in our opinion, in favour of the revenue. In doing that, the Hon'ble Supreme Court refers to the views of several High Courts including this Court and upholds them. 12Even with regard to section 36 and that is a deduction in relation to the computation of income under section 28, the Hon'ble Supreme Court in the case of Veecumsees v/s Commissioner of Income Tax, reported in (1996) 220 ITR 185, held that the cinema 12Even with regard to section 36 and that is a deduction in relation to the computation of income under section 28, the Hon'ble Supreme Court in the case of Veecumsees v/s Commissioner of Income Tax, reported in (1996) 220 ITR 185, held that the cinema house was eventually sold makes no difference so long as the liability by way of borrowings continues and subsists. The Hon'ble Supreme Court held that the revenue had during the years when the assessee carried on the business of cinematographic films permitted as a deduction under Section 36(1)(iii), the interest on loans obtained by the assessee for the purpose of constructing the said theatre shows that, at the time when the loans were obtained the said theatre was a part of the business of the assessee. It was interest on these loans borrowed for the purpose of the business of the assessee which was being paid in the years in question. The Tribunal's view that such interest has to be treated as deduction under Section 36(1)(iii), has thus been upheld by the Hon'ble Supreme Court. The particular part of the business for which the loans had been obtained, had been transferred or closed down, did not alter the fact that the loans had, when obtained, been for the purpose of the assessee's business. 13To our mind, when the Tribunal in the facts and circumstances of the present case applies this principle and allows the deduction by reversing the view taken by the Assessing Officer and the Commissioner of Income Tax (Appeals), then, we are of the opinion that the appeal does not raise any substantial question of law. The view taken by the Income Tax Appellate Tribunal in this case is clearly in consonance with the legal principles set out by us herein above. The Tribunal has adverted to the relevant and germane facts in relation to the assess's claim. It has, therefore, not committed any error of law apparent on the face of the record or perversity in reversing the order passed by the Commissioner of Income Tax (Appeals). 14As a result of the above discussion, the two appeals before us do not raise any substantial question of law. They are accordingly dismissed. No costs. (G.S. KULKARNI, J.) (S.C.DHARMADHIKARI, J.)