1990 PLP 244 (PTD)

SAEEDUZZAMAN SIDDIQUI, J.

The above-noted two Income-tax References have been filed by the applicant directly in this Court under Section 66(2) of the Income-Tax Act after the Income Tax Appellate Tribunal refused to refer the case under section 66 (1) of the Act. The questions on which decision of this Court is sought are as follows:- (1) Whether on the facts and the circumstances of the case the Tribunal was legally justified in holding that the claim of interest at Rs.119,846 paid to banks on loans borrowed for the acquisition of part of the share capital of M/s. Nishat Mills Ltd. was not an allowable expense under subsection (2) of section 12 of the Income-tax Act, 1922, against income from dividend? (2) Whether on the facts and in the circumstances of the case the Tribunal was legally justified in bolding that the interest payments on the joint family loans at Rs.4,500,000 were not made against the cost of the shares from which dividend income was derived and hence the-. Income Tax Officer was justified in not allowing these payments under section 12(2) of the Income Tax Act, 1922? (3) Whether on the facts and in the circumstances of the case the Tribunal was legally justified in holding that the payment by the applicant and his other family members at Rs.4,500,000 through loan from bank, was only to acquire the controlling shares of Nishat Mills Ltd. and was not a payment in respect of the cost of the aforesaid shares and on that score it amounted to a benefit of enduring nature and, therefore, the interest on the aforesaid loan could not be allowed against income from dividend under subsection (2) of section 12 of the Income Tax Act, 1922? (4) Whether on the facts and in the circumstances of the case the Tribunal was legally justified in holding that the deposits of Rs.790,032 in the bank accounts of the applicant were unexplained case credits meriting addition to the applicant's income? (5) Whether on the facts and in the circumstances of the case the Tribunal was legally justified in discarding the applicant's contention and evidence, including affidavits of his mother and sisters adduced before the income Tax Officer, in explanation of a part of the credits appearing in the bank accounts of the applicant? (6) Whether on the facts and in the circumstances of the case the Tribunal was legally justified in not taking into consideration the applicant's contention that only peak credits in the bank account should have been considered if at all the deposits therein were not found to be genuine credits? At the hearing of the reference, the learned counsel for the applicant stated that he is not pressing questions Nos.4 to 6 and prayed that only questions . Nos.1 to 3 may be decided. The decision on questions Nos. 1 to 3 mentioned above rests solely on the determination that whether interest paid by the applicant on the borrowed sum of Rs.45,00,000 for the purposes of acquiring shares of Nishat Mills was allowable expenditure under Section 12(2) of the Income-Tax Act, 1922. The Income-Tax Officer dealt with the cases of applicant for the assessment years 1973-74 and 1974-75 disallowed the adjustment of interest paid on the borrowed sum of Rs.45,00,000 on the ground that amount of Rs.45,00,000 spent by the applicant for the purposes of acquiring shares of Nishat Mills was motivated with the object of getting control of the Company and as such it was not an allowable expenditure under Section 12(2) of the Act. The Income-Tax Tribunal also concurred with the Income-tax Officer and further held that as against the ruling prices of shares at Rs.7 per share at the relevant period, the applicant had paid an extra amount of Rs.45,00,000 which clearly indicated that the object of acquiring the shares by the applicant was to get the control of the Company and as such it did not come within the scope of Section 12(2) of the Income Tax Act. Mr. Rehanul Hassan Naqvi, learned counsel for the applicant contended before us that where the expenditure has been made by the assessee for the purposes of making or earning income, profit and gains, the Income Tax Officer cannot disallow such expenditure on the ground of motive for such expenditure. In support of his contention the learned counsel relied on the case of Omerods (India) Private Ltd. v. Commissioner of Income-Tax, Bombay City (1959) 1-Tax (III)

459. The learned counsel also referred to the case of Eastern Investment Ltd. v. Commissioner of Income-tax (AIR (38) 1951 S.C.138. In the last noted case, the Indian Supreme Court while determining the scope of section 12(2) of the Income Tax Act held as follows: "The decision of this appeal rests on the true construction of section 12 (2). In our opinion, the law on this point has been correctly summarised in the judgment of the High Court. The following principles are relevant: (a) though the question must be decided on the facts of each case the final conclusion is one of law. Indian Radio & Cable Communications Ltd. v. Commissioner of Income Tax, Bombay, 1937 I.T.R.270 and Tata Hydro-Electric Agencies Ltd. v. The Commissioner of Income-tax, Bombay 19571.T.R.202. (b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned. John Moore v. Stewart & Lloyds Ltd. (1906) 6 Tax Cas 501 and Usher Wittshire Brewery Ltd. v. Bruce, 1915 AC 433; (c) it is enough to show that the money was expended "not of necessity and with a view to a direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business;" British Insulated & Helsby Cables Ltd. v. Artherton, 1926 A.C.205 at pp.221 and 235; and (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word "solely". In the case before us the sole ground on which Income Tax Officer as well as Income Tax Appellate Tribunal disallowed adjustment of interest paid by the applicant on the borrowed sum wits that the shares were acquired by the applicant for the purposes of getting the control of the Company, namely, Nishat Mills. In our view, the above object of the applicant is neither prohibited under any provision of the Income Tax Act nor it was an unlawful object. The above expenditure by the assessee was undoubtedly on account of commercial expediency and in order to facilitate the carrying on of the business effectively. The fact that the applicant had paid higher price for acquisition of shares as compared to prevailing prices at that time, in our view, could not be a ground for disallowing the adjustment of interest on the borrowed sum under section 12(2) of the Income Tax Act as there is no finding that the transaction was not genuine. We accordingly answer questions Nos. 1 to 3 referred to us in the negative but there will be no order as to costs. M.B.A./M-1002/K Order accordingly.