1989 PLP 211 (PTD)

1966-67 288,975 Rs.1,32,095 1967-68 191,045 Rs.1,88,927 1968-69 549,173 Rs.96,067 The applicant claimed deduction of the aforestated interest paid to the bank against his dividend income. The Income-tax Officer held that the applicant was not entitled to the deduction of interest on the amounts invested in acquiring shares from the moneys borrowed from the company as no interest was paid on it. The Income-tax Officer allowed interest on investment made from 9-2-1969 when the bank loan had been obtained by him. In this view of the matter the following deductions were allowed:- Assessment year 1965-66 Rs.4,237 Assessment year 1966-67 Rs.40,

604. Assessment year 1967-68 Rs.63,163 Assessment year 1968-69 Rs.38,519 The applicant filed appeal against the disallowance which was heard by the Tribunal and rejected. The applicant then filed application under section 66(1) of the Income-tax Act for reference to the High Court the aforestated question which was rejected on the ground that no question of law arises from the order. Mr. Ali Athar, the learned counsel for the applicant has contended that the shares were acquired from the loan taken from the company but as after borrowing loan from the bank company's loan were repaid, the bank loan became the source of investment. Therefore, the applicant was entitled to deduction under section 12(2) of the Act. The Income-tax Officer found that during the assessment year 1963-64, 1964-65 and 1965-66 the applicant had borrowed from the company amount of Rs.3,97,415, Rs.17,31,503 and Rs.8,16,473 respectively and invested in purchase of shares Rs.2,50,000, Rs.7,35,600 and Rs.6,08,520 respectively. Thus, the applicant had drawn loan from the company of an amount which was much higher than the amount he had invested in acquiring shares. The applicant was a debtor of the company. The investment made in acquiring shares did not change the' character of that amount. While assessing the income from other sources the income profits and gains are computed after making allowance for the amount of interest paid in respect of money borrowed for the purposes of acquisition of the part of the shares capital of the company. Section 12(2) of the Income-tax Act grants this relief to the assessee to the extent of interest paid by him on the amount borrowed by him and invested in purchasing the share capital of a company. Therefore, it seems proper to construe that interest will-be an admissible allowance which has been paid in respect of loan borrowed for the purpose of acquisition of shares. This also implies that the shares have not been purchased before taking the loan. The borrowing should precede the acquisition of shares. Therefore, the question which falls for consideration is whether the amount has been borrowed by the assessee from which he has purchased the share. In the present case the applicant has adopted a different procedure. He had borrowed interest free loan from the company, purchased the shares and after sometime he borrowed loan from the bank and paid it to the company which had a large debit balance against him. As the amount borrowed from the bank was equal to the sum the applicant had invested in the purchase of shares, he claims that this amount has been invested in purchase of shares and he is entitled to the allowance in respect of interest paid by him. The applicant was maintaining a debit account and once he deposited Rs.16,00,000 with the company it was adjusted in the debit account. Therefore, the loan borrowed from the bank was for the purpose of paying the debt the applicant had obtained from the company irrespective of the fad whether part of the debt was invested in purchasing the share and part of the debt was for his own personal expenses. In this, view of the matter it is difficult to conclude that the applicant had borrowed money from the bank for the purposes of acquiring share of a company. It is not the applicant's case that he had purchased the shares on credit basis and paid at the price on receipt of loan from the bank. He had already acquired the shares worth Rs.9,85,600 much before obtaining the loan from the bank. Mr. Shaikh Haider has rightly pointed out that there should be a nexus between the transaction of loan and purchase of shares. Here entire borrowing was for the purpose of clearing the debt taken from the company. The assessee can claim benefit under section 12(2) provided interest has been paid on a loan which was obtained with the sole object of purchasing the share. Therefore, the Tribunal was justified in rejecting the application under section 66(1) as no question of law arises from the order of the Tribunal. The entire controversy revolves round the fact whether the loan taken from the bank was for the purpose of acquiring share. The view taken by the Tribunal is correct and, therefore, we dismiss the application. M.BA'./M-639/K Application dismissed.