( 1 ) THE assessee, a speculator in cotton and shares, also derives income from salary, properties and dividends. At the end of S. Y. 2014, corresponding to the assessment year 1959-60, his liabilities included an overdraft from the Bank of India Ltd. , Kalbadevi branch, in the sum of Rs. 1,63,904 and loans from sundry creditors amounting to Rs. 2,94,206. Among other items of income, he returned an income of Rs. 27,677 from dividends and claimed against it a deduction of Rs. 18,934 which was made up of interest at Rs. 9,408 paid to the bank and interest at Rs. 9,526 paid to the other creditors.
( 2 ) THE Income-tax Officer and the Appellate Assistant Commissioner allowed the whole of the deduction as a business loss under section 10 (2) (iii) and not under section 12 (2) of the Income-tax Act, 1922, as claimed by the assessee. By a cryptic order, the Tribunal has allowed the deduction to the extent of Rs. 9,408 only which amount was paid by the assessee to the bank by way of interest on the overdraft. The reason given by the Tribunal in support of its order is difficult to summarise and it is better that we set out its conclusion in its own words :
"in an overall appreciation of the balance-sheet position it is found that nearly half of the total assets are represented by shares. The interest payment includes Rs. 9,408 paid to the bank on an overdraft with these very shares offered as a security. In these circumstances, in our opinion, this amount paid to the bank is a proper deduction against the dividend income as there can be said to be a co-relation between the dividend income and the interest payment established through the bank account. "
( 3 ) THE application made by the Commissioner for reference to the High Court under section 66 (1) was rejected by the Tribunal. The High Court, however, directed the Tribunal to refer the following question for its opinion under section 66 (2) :
"whether, on the facts and in the circumstances of the case, interest payment of Rs. 9,408 on bank overdraft obtained by offering shares as security is inadmissible as a deduction from the dividend income under section 12 (2) of the Act ?"
( 4 ) SECTION 12 (1) of the Income-tax Act, 1922, provides that tax shall be payable by an assessee under the head "income from other sources" in respect of income, profits and gains of every kind which may be included in his total income if not included under any of the heads preceding. Under section 12 (1a), income from other sources includes income from dividends. Section 12 (2) under which the assessee claims deduction provides, to the extent material, that such income shall be computed after making allowance for any expenditure incurred solely for the purpose of earning such income.
( 5 ) THE question therefore which requires consideration is whether the interest paid by the assessee to the bank on the overdraft account is an expenditure incurred by him solely for the purpose of earning the dividends. The Tribunal has not applied its mind to the provisions of section 12 (2) at all and has allowed the deduction partially, on the ground that there can be said to be "a co-relation between the dividend income and the interest payment established through the bank account. " We regret to have to say that it is impossible to understand from the judgment of the Tribunal as to which bank account it had in its mind and what sort of co-relation it thought was established between the dividend income and the interest paid by the assessee to the bank.
( 6 ) IT was no part of the assessee's case at any stage that the overdraft account was created for the purpose of buying shares with the object of investing in those shares. It is clear from the orders of the Income-tax Officer and the Appellate Assistant Commissioner that the assessee justified the claim for deduction on the ground (1) that the overdraft account was secured by hypothecating the very shares on which the dividend was received, and (2) that, to liquidate his liabilities, he would have been forced to dispose of his holdings but he preferred that the liabilities should remain undischarged and, therefore, he had to pay interest on the liabilities in order to earn the dividend. There is no substance in either of these points, because the mere existence of a connection between the amount borrowed and the shares purchased by the assessee would not be sufficient to attract the application of section 12 (2 ). The key words of the sub-section are that the expenditure must have been incurred "solely" for the purpose of earning the income. Tax on dividends is assessed separately under section 12 and only such expenditure can be allowed as a deduction as is specifically provided for in the several sub-section of that section. In regard to the income earned from dividends what the law allows is a deduction of expenditure incurred solely for the purpose of earning the dividends and any reasonable sum paid by way of commission or remuneration to a banker or any other person realising the dividend on behalf of the assessee.
( 7 ) THE initial difficulty in the way of the assessee is that he failed to show that the overdraft account was created for the purpose of buying the shares. Consequently, he failed in establishing the important requirement that expenditure in the shape of payment of interest was incurred by him for the purpose of earning the dividend on the shares. The Tribunal was, therefore, in error in coming to the conclusion that a co-relationship was established between the dividend income and the interest paid to the bank. This is apart from the vital consideration that such a co-relationship is insufficient to attract the provisions of section 12 (2 ).
( 8 ) YEAR after year, the assessee was depositing various amounts in his bank account and those amounts were available to him, apart from his borrowings, for purchasing the shares which he subsequently hypothecated to the bank for securing the overdraft account. The connection, if any, between the dividend received by the assessee on the shares and the payment of interest on his borrowings is too tenuous to justify the allowance of interest in the computation of the dividend income.
( 9 ) WE might usefully draw attention to a judgment of a Division Bench of this court in Commissioner of Income-tax v. Jagmohandas J. Kapadia in which the facts were similar and the issue identical. It was held that the interest paid towards the general balance in the overdraft account of a person carrying on business as a share and stock-broker cannot be deducted from income from dividends but only from business income. According to the Division Bench, the emphasis in section 12 (2) is on the object or purpose of incurring the expenditure and it is therefore necessary that the exclusive object of incurring the expenditure in the shape of payment of interest has to be the making or earning of the dividend income :
"the mere fact that income by way of dividend has accrued and that the expenditure incurred is in some manner or other related to the accrual of the dividend income is not sufficient. "
( 10 ) AS in the case cited above so in the instant case, the borrowing of the assessee by way of overdraft from the bank was not for the purpose of acquiring shares with the object and purpose of earning dividend on those shares and therefore section 12 (2) can have no application. But, Mr. Dastoor appearing on behalf of the assessee argues that the trial balance-sheet which was produced in the assessment proceedings shows that though the assessee was, by and large, a speculator, he had purchased certain shares with the sole object of investing in those shares. We do not propose to deal with this contention on its merits, because such a contention cannot be entertained in the present proceedings. Mr. Dastoor's claim may perhaps stand scrutiny but it was never urged at any earlier stage of the present proceedings that, though the assessee was a speculator, he turned an investor at some stage of his business. Cases of speculators being driven to invest in the course of their business dealings are not unknown, but in order to hold that the assessee had purchased some shares with the object of investment, a case has to be made out on the facts. As such a case was never made out, we are unable to entertain the submission of the counsel.
( 11 ) OUR attention was drawn by Mr. Dastoor to a decision of the Kerala High
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Court in Commissioner of Income-tax v. M. K. Mackar Pillai and to two decisions of our court in B. R. Naik v. Commissioner of Income-tax and Hanmantram Ramnath v. Commissioner of Income-tax in which the matter was sent back to the Tribunal, because the facts necessary for the High Court for expressing its opinion were not found by the Tribunal. In our opinion, none of these cases can apply to the case before us. It is true that the Tribunal has not, with respect, given a satisfactory judgment. But the contention that the assessee had turned an investor not having been urged before it, the Tribunal was not called upon to deal with the contention. ( 12 ) FOR these reasons, we are of the opinion that the assessee is not entitled even to the limited deduction allowed in his favour by the Tribunal. We therefore answer the question in the negative. ( 13 ) THE assessee will pay to the Commissioner the costs of this reference.