Commissioner of Income Tax vs Modi (P.) Ltd.

Mrs. Sujata Manohar, C.J.—The assessee is Modi (P.) Ltd. The assessment years involved are 1960-61 to 1963-64. The assessee, at the material time, was a private limited company incorporated on 21-9-1946. The assessee-company was appointed managing agent of a public limited company known as Western India Theatres Ltd., for a period of 20 years from 26-9-1946. Ordinarily, the managing agency agreement would have come to an end on 26-9-1966. However, by virtue of section 330 of the Companies Act, 1956, the date of expiry was advanced to 15-8-1960. The assesee-company had purchased blocks of shares of Western India Theatres Ltd., by resorting to borrowings. Its total shareholding in Western India Theatres Ltd., as on 31-6-1962, stood at 18,425 shares of the value of Rs. 5,58,080 out of a total of 87, 872 shares of Western India Theatres Ltd. In the accounting year 1962-63, the assessee purchased a further block of 1,314 shares of Western India Theatres Ltd., as also a majority of shares of another company known as Associated Bombay Cinemas (P.) Ltd., which was running the Strand Cinema at Bombay. These investments were made by resort to borrowings and the assessee incurred interest payments as under:-

Assessment year

Interest

Rs.

1959-60

19,908

1960-61

25,520

1961-62

25,125

1962-63

21,198

1963-64

68,471

The assessee claimed that the interest payments were eligible for set-off against the managing agency commission either u/s 10(1) or u/s 10(2)(iii) or section 20(2)(xv) of the Indian income tax Act, 1922 (''the 1922 Act''), or equivalent provisions of the income tax Act, 1961 (''the 1961 Act''). Without prejudice, it was also claimed that the payments constituted admissible deductions u/s 12(2) of the 1922 Act, or the corresponding provision of the 1961 Act.

The Tribunal held that the transaction of acquisition of shares was closely related to the carrying on of the assessee''s business and should be viewed as an integral part of the conduct of the assessee''s business. It, therefore, held that the interest paid by the assessee-company on its borrowings was business expenditure and was allowed as a deduction either u/s 10(2)(xv) of the 1922 Act, or u/s 37(1) of the 1961 Act. These observations were made in connection with the interest paid on borrowings for purchasing shares of Western India Theatres Ltd., of which the assessee was the managing agent. In respect of interest paid on monies borrowed to purchase the shares of Associated Bombay Cinemas (P.) Ltd., the Tribunal held that the claim of the assessee should be allowed u/s 57(iii) of the 1961 Act, since it could not be denied that the monies were borrowed for the purpose of purchasing shares from which the assessee expected to receive dividends. The Tribunal stated that the expectation of receiving dividends was always there. Hence, this expenditure was, in its opinion, clearly laid out or expended wholly or exclusively for the purpose of making or earning the dividend income.

From the above facts and circumstances, the following question is referred to us u/s 256(1) of the 1961 Act:

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing the interest of Rs. 25,520, Rs. 26,047, Rs. 25,836, Rs. 68,471 in the assessment years 1960-61, 1961-62, 1962-63, 1963-64, respectively?

In respect of interest paid on borrowings for the purpose of purchasing shares of Western India Theatres Ltd., the matter has been considered at length in the assessee''s own case in income tax Reference No. 93 of 1965 by the Division Bench of Vimadalal and S.K. Desai, JJ., in their judgment (per Desai, J.) dated 31-12-1984. This judgment has been followed by the Tribunal and we do not see why we should take a different view.

In respect of the interest paid on borrowings for the purpose of acquiring the shares of Associated Bombay Cinemas (P.) Ltd., also, we are in agreement with the Tribunal that the assessee is entitled to deduction of the interest payment under the provisions of section 57(iii) since that expenditure has been laid out or expended wholly and exclusively for the purpose of making or earning income.

In the premises, the question is answered in the affirmative and in favour of the assessee. There will be no order as to costs.