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C.I.T. V. RAJENDRA PRASAD MOODY (1978) 115 I.T.R. 519 (SC)

C.I.T. V. RAJENDRA PRASAD MOODY (1978) 115 I.T.R. 519 (SC)

FACTS

  • The case involved two brothers who borrowed money to invest in shares but didn't receive dividends.
  • They claimed deduction for the interest paid on the borrowed money.
  • The taxing authorities denied the deduction as no dividends were received.
  • Claim for deduction of interest negatived by the ITO and AAC but upheld by the Tribunal
  • The argument of the revenue was that unless the expenditure sought to be deducted resulted in the making or earning of income, it could not be said to be laid out or expended for the purpose of making or earning such income.
  • Two High Courts have Conflict in decisions regarding the allowability of interest on borrowed money for investment in shares.
  • Hence, reference made to Supreme Court.

ISSUE

  • Whether interest on money borrowed for investment in shares, without any dividend yield, is admissible under s. 57(iii) I.T. Act, 1961.

RULE

  • SEC 57(iii) - The expenditure to be deductible under s. 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. 
  • It is not necessary that any income is being earned as a result of expenditure to claim deduction u/s 57(iii) I.T. Act, 1961.

HELD

  • The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of expenditure.
  • In Eastern Investments Ltd. v. CIT [(1951) 20 ITR 1, 4 (SC)], court, observed: It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned.
  • In Hughes v. Bank of New Zealand [(1938) 6 ITR 636, 644 (HL)], where the learned Law Lord said: Expenditure in course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense.
  • This view is eminently correct as it is not only justified by the language of s. 57(iii) but it also accords with the principles of commercial accounting.
  • Issue decided in favour of the assessee and against the revenue.

COMMENTARIES RATIO/NOTE

In CIT v. Murli Manohar [(1998) 148 CTR 116, 120 (All)], interest paid on borrowings has been held allowable even though the investments made out of such borrowings did not yield any positive income.

But where there is no possibility of income from a particular source, expenditure incurred in relation to such investment cannot be allowed as a deduction [CIT v. Sujani Textiles P. Ltd., (1985) 151 ITR 653 [LNIND 1983 MAD 412] (Mad), special leave petition granted by the Supreme Court : (1995) 211 ITR 3 (St.) (SC) ].