LexR. DALMIA versus C.I.T., DELHI, NEW DELHI
Open in Lexace · Ask the AI about this caseJudgment (excerpt)
R. DALMIA
v.
C.I.T., DELHI, NEW DELHI
September 21, 1977
[P. N. BHAGWATI AND S. MURTAZA FAZAL ALI, JJ.]
537
lnco1ne Tax Act 1922, s.
I2(2)-.1~ssessee borrowed money from a bank
and bought shares-Agreement prol'icled that divid'!nd etc., on shares declared
after a certain date shall be held by the bank for the benefit of the assessee-
Shares not taken delivery of by the assessee by the stipulated date-Dividend
declared, if accrued to tile assessee.
Sec/ion 12(2), scope of-lnrerest paid 011 loa11 and da1nages paid-If pcr-
A
B
!ni~sible deduction.
('
The assessee borrowed a hirge sum of money from a bank and purchased
~hares from it; but did not tale delivery of the transfer forms and share certi-
ficates by making payment of the purchase price. Clause (3) of the agree-
ment, however, stipulated that if the shares were not taken delivery of by a
certain date, dividends, right-, bonuses etc.
which might be
declared after
that date Vi'ould be held by the bank for the benefit of the assessee; and that
the assessce wu1_;ld be liable to pay interest on the purchase price. Clause ( 4)
provided that 1f the assessec did not take delivery of the shares by a certain
J)
Llate, the banh. would be al liberty to sell the undelivered shares and to hold the
:-13Sessee liable for the difference in the price fetched by the shares.
The assessec paid to the bank over hvo lacs of rupees by way of interest
a11·d more than a lac of rupees by way of damages for failure to take delivery
of the shares. A su1n of Rs. 95,000 odd was earned as dividend by the assessee
(~n the shares.
The Income Tax Officer disallo\ve<l the claim of the assessee for deduction
under s. 12(2) of the Indian Income Tax Act 1922 of the interest on the loan
and damages paid by him to the bank but incJuded the dividend earned on
the shares in his total income.
On appeal the Appellate Assistant Commissioner
affirmed the vie'" of the Income Tax Officer. The Tribunal, on the other hand,
held that since there was no transfer of equitable title in the shares to the
<.1ssessee, h<:! was not entitled to any deduction of interest; di.sallowed the deduc-
tion of <lamages paid by the assessee but excluded the dividend from his total
income on the ground that it was not dividend earned by him. On reference, the
l ligh Court affirmed the findings of the Tribunal.
,i\lJ.owing the appeal in part,
HELD: (1) The High Court and the Tribunal were wrong in taking
the
vic\v that the Income Tnx Officer rightly disallowed the interest claimed by the
~essec. This amount was a permissible deduction under s.12(2) ot the Act
and should have been allowed. There is a direct nexus between the amount paid
E
hy the assessce as -interest and the earning of the clividend income.
[546 A-B]
G
(2) In the Bank of llldia v. J. A. II. Chinoy A.LR. 1950 P.C. 90 nt 97,
the Privy Councii held that even though 3! transaction may not an1ount to an
;1cquisition of equitable interest, yet as between the vendor and the purchaser a
term regarding payment of the declared dividend would be fully effective because
once the t!ividend:J arc declared, they will be deemed to have accrued to the
purchaser even though_ there may not have been any tra·nsfer of equitable title
to the purchaser. Clause (3) of the agreement read in the light of this decision
shows that even if there was no transfer of equitable title to the assessee, since the
If
dividend declared would be an additional source of income to him, the asscssee
would be entitled to deduct the interest paid on the learn for acquiring the
shares. [541 E & HJ
A
B
c
538
SUPREME COURT REPORTS
[1978] l S.C.R.
(3) An analysis of s.12(2) of the Indian Income Tax Act 1922 shoWll f.bftt
before this provision could apply, the following conditions must be fulfilled:
(i) the expenditure must have been incurred solely and exclusively for the pw-
pose of earning income or making profit; (ii) the expenditure should not be fa
the nature of a capital expenditure; (iii) the amount in question should not l5c
in the nature of personal expenses of the atisessee; (iv) the expenditure should
be incurred in the accounting year; and (v) there must be a clear nexus between
the expenditure incurred and the income sought to be earned. [542 E-G]
In the instant case (i) a genuine and bona fide contract had been enteced
into between the assessee and the bank for transfer of a large number of sbRm
to the assessee; (ii) the assExcerpt shown. Read the full judgment & AI analysis in Lexace.