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Income Tax Laws – I

Notes the assessee there is no correlation between the purchase of shares and the amounts
standing to the credit of the accounts of Palghat Financing Company (Private) Ltd., etc.”

We are not quite able to follow what the Appellate Tribunal has meant by saying that
“there is no direct connection between the money borrowed and the purchase of shares”,
and that “there is no correlation between purchase of shares and the amounts standing to
the credit of the accounts of Palghat Financing Company (Private) Ltd., etc.” In paragraph
10 of the statement of the case in I.T.R. No. 19 of 1967, the Appellate Tribunal said.
“The Income-tax Officer disallowed the above sums for the reasons that the above were
sister concerns of the assessee, that the amounts on which interest had been paid had been
used in the purchase of shares, and that these amounts had not been used for the purpose
of the business.”

The Appellate Assistant Commissioner has dealt with the character of the investment; and
it concluded as follows:
“From the history of the investment given above it will be seen that the share is not a
business transaction nor is it a regular investment. It follows that the interest payment
attributable to the borrowal utilised in the investment is not a permissible deduction
either under section 10(2)(iii) or under section 10(2)(xv).”
Dealing with the assessee’s contention that the two amounts concerned in these cases
would fall under clause (iii) or (xv) of section 10(2) of the Act, the Appellate Tribunal stated
as follows in its order in the assessee’s appeals:
“Now it is no doubt true that purchase of shares is a normal activity for a person carrying
on banking business. But in the circumstances of the case, we are not satisfied that the
purchase of shares in the Palghat Financing Company (Private) Ltd., Palghat Investment
Corporation Ltd., M. N. Ramaswamy Iyer & Co. Ltd., were in the course of the normal
banking business. Even according to the assessee the purchase of the shares was to prevent
some scare. We may mention here that beyond making this claim, no material was placed
before us to show that there was a real threat to any of the businesses.
The pattern of investment shows the preference to shares in which the assessee’s family
was interested. Except a sole purchase of a share in Nedungadi Bank Ltd., the assessee had
not made any investment in any other industrial shares, or shares in other companies.
Normally a banker invests in shares with a view to supplant his income but in this case it
cannot be said that the purchase of these shares had been made with any such purpose.
In our opinion the investment of ` 6,69,243 in the year ending December 31, 1957, and
` 6,81,633 in the year ending December 31, 1958, was not for the purpose of business and,
therefore, the interest paid on moneys corresponding to that amount cannot be allowed as
a deduction”.
It is, therefore, not in dispute that the sums of ` 18,525 and ` 17,514 which the assessee
claimed for the assessment years 1958–59 and 1959–60 respectively represented the interest
attributable to the amounts invested on shares. This is the basis on which the claim of the
assessee in respect of the said amounts has been dealt with by the Appellate Tribunal, and
the subordinate authorities.
It is not disputed that, if the assessee earned any dividend on the shares held by the
assessee, it would be income under the head “other sources”. Admittedly, during the two
previous years concerned in these cases, the assessee did not receive any dividend; but it
had incurred expenditure by way of interest paid on amounts borrowed for acquiring
shares. The question for determination is whether the said expenditure is allowable under

Contd...

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