NOORUL ARFIN, J.-The Income-tax Appellate Tribunal, Karachi Bench, has referred to the High Court the following question : "Whether in the facts and circumstances of the case the Tribunal was right in holding that Interest of borrowed capital invested in the shares of Pakistan Welding Electrodes Limited is allowable only if those shares yield dividend income even if there was dividend income from other investments of the like nature within the meaning of subsections (1) and (2) of section 12 of the Income-tax Act?"
2. The assessee is a partner in the firm of Messrs Ameejee Valeejee & Sons. He purchased shares of the value of Rs. 1 lakh in Pakistan Welding Electrodes Limited with the money which was allegedly, drawn by, him from his firm, but on which he claimed to have paid interest, and therefore sought deduction of this interest, under section 12 (2) of the Income-tax Act, 1922 (XI of 1922). The Assessing Officer refused to allow this deduction. A direct appeal to the Tribunal from the order of the Assessing. Officer also failed. Accordingly, the assessee applied to the Tribunal for reference of the aforesaid question of law to this Court. In the statement of case, the Tribunal has noted the contention of the assessee that he had also made other invest--ments in shares which did yield income during the relevant assessm ent year and, as such, the interest claimed for moneys used in investment in the shares of the aforesaid company would be admissible deduction.
3. Before proceeding further with the discussion, it would be convenient to reproduce the relevant portion of section 12 of the Income-tax Act, 1922, which reads as under :-- "12(1).--The 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 preceding heads.
(2) Such income, profits and gain shall be computed after making allowance for any, expenditure (not being in the nature of capital expenditure) incurred: solely for the purpose of making or earning such income, profits or gain . . . . . ."
4. The appellate order of the Tribunal is based on the interpretation of section 12 (2) of the Income- tax Act adopted by the High Court of Patna m the case of Maharajadhiraj Sir Kameshwar Singh v.
Commissioner of Income-tax, Bihar & Orrisa ((1957) 32 I T R 377) and the High Court of Calcutta in the case of Messrs Madantal Sahanlal v. Commissioner of Income-tax, Calcutta ((1963) 47 I T R 1).
The main decision is that of the High Court of Calcutta. In the Patna decision, the, assessee held shares in a Company, which had ceased to yield any dividends but made a contribu--tion to the trustees for debenture-holders in the Company for expenses on litigation against the U. P.
Government, who revoked their undertaking to purchase the Company as a going concern and pressed for its winding up. The assessee also claimed deductions of interest paid on Bank over- drafts (1) for payment of income-tax, central and agricultural, (2) for payment of land revenue cess, and (3) for payment of call moneys on shares of Companies, which were found to be new and which had not declared dividends. The contribution to the trustees for debenture-holders was held to be expenditure which was not incurred for the purpose of making or earning any income. As regards over-drafts, it was held that income-tax and revenue cess being .Personal liabilities, interest thereon could not be treated as expenditure incurred for earning any income within the meaning of section 12 (2). As regards the payment of call moneys on shares, it was held that no deduction was permissible for interest on overdrafts taken for payment of call moneys on shares, as there was no income to the assessee from these shares. For the purpose of the present case, it is the opinion with regard to interest on overdrafts for payment of call moneys on shares which is relevant. The question of deduction of interest paid on investment in shares in a Company, which did not yield any income during the relevant years, then came up before the Calcutta High Court in Madan Lal Sohan Lal's case and it is this case which is the basis of the Tribunal's order before us.
The High Court of Calcutta based its decision on the comparative difference in the use of words in section 12(2) and section 10 (2) (xv), which latter provision corresponds to section 10 (2) (xvi) of the Income-tax Act in. Force in Pakistan. Section 10 (2) (xv) of the Indian Income-tax Act reads as under : "(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to
(xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vacation."
Following the Patna decision, the Calcutta High Court took the view that section 12 (2) is narrower than section 10 (2) (xv), as this latter provision speaks of expenditure which is laid out or expended wholly or exclusively for the purpose of business, profession or vocation, whereas section 12 (2) speaks of expenditure which is incurred wholly for the purpose of making or earning income, profits or gain. In the view of the High Courts of Patna and Calcutta, it is enough, under section 10 (2) (xv), if the expenditure is laid out or expended wholly and exclusively for the purpose of business, and it is not necessary that there should be any income, profits or gain out of such business. But under section 12 (2) there should be actual income before any deduction could be made there--from, even though after deductions the income may ultimately turn out to be loss, or be wiped out by the deductions, but nonetheless there must be some return. In our view, the opinions of the High Courts of Patna and Calcutta are erroneous. The two High Courts have laid much emphasis on the words "making or earning such income, profits or gains . . . . . ." in section 12 (2), ignoring the preceding words "for the purpose". The word "purpose" here would mean the "object". What subsection (2) of section 12 provides is that the expenditure should have been incurred with the object of making or earning income, profits or gain. It is not necessary that this object should have in fact been achieved by yield to the assessee of any income, profits or gain. The language of subsection (2) of section 12 does not justify any such conclusion. The decision of the Calcutta High Court, on which the order of the Tribunal has proceeded, has made much of the difference in the language used in section 12(2) and section 10(2)(xv). Section 10(2)(xv) of the Indian Income-tax Act should be read with the opening words of subsection (2) of section 10, which are to this effect :- "Such profits or gains shall be computed after making the following allowances . . . . .'"
This identical expression also occurs in section 12(2). There is consensus that this provision for deductions in the computation of profits and gain does not mean that then, should actually be profit or gain before deductions could be allowed. What is to be ascertained is whether the expenditure is really an outlay towards profit. In other words, if the object of the outlay was to make profit, then actual ac,-real of profit is nut necessary for the purpose of making deductions of permissible allowances. We may here refer to some English decisions. The first is that of John Moore (Surveyor of Taxes) v. Stewarts & Lloyds Ltd. ((1911-1915) 6 Tax Cas. 505) and another case is that of Hughes (Inspector of Taxes) v. Bank of Newzealand ((1938) 6 I T R 636). In these two cases, the discussion turned on the provisions of the English Income tax Act corresponding to section 10
(2) (xv) of the Indian Act and section 10(2) (xvi) of our Act. In the first case, it was held that what is to be seen is whether the expenditure was really an outlay to earn profit and that the real question was not whether or what profit has in fact resulted from the Invest--ment, but to what purpose the expenditure was applied, and that the statute did not require the party claiming the deduction to show that any profit was in fact earned the expenditure in question. It may be noted that in this case a certain sum of money was paid under an agreement which was intended to prevent the cutting down of price by competition. No specific portion of the assessee's profits could be ascribed to this agreement. Still, it was held that the expenditure was laid out for the purpose of assessee's trade. In the second case, that is, Bank of New Zealand's case, the House of Lords adopted this view and held that expenditure in the course of trade which is unremunerative is nonetheless a proper deduction, if wholly and exclusively made for the purpose of trade, and that it does not require the presence of a receipt on the credit side to justify the deduction of an expense.
A third decision, again of the House of Lords, is the case of Usher's Wilthsh Brewery Limited v. Bruce ((1915) A C 433) which reaffirmed the view that It is not necessary to show that the expenditure was a profitable one or that In fact any profit was earned. In a subsequent case, British Insulated & Helsby Cables Limited v. Athereton (126 A C 205) the house of Lords went to the extent of laying down that it is enough to show that the money was expended not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily on the ground of commercial expediency, and In order indirectly to facilitate the carrying on of the business.
5. In construing section 12 (2), the Indian Supreme Court Itself adopted the views expressed in these English decisions when giving judgment in East Investments Ltd. v. Commissioner oaf Income-tax, West Pakistan ((1951) 20 I T R 1), and held that it is not necessary to show that the expenditure was profitable or that any profit eras earned, and that an expenditure is a permissible deduction even if it incurred on the ground of commercial expediency. The decisions of the High Court of Patna and Calcutta have not been accepted even in the other High Courts in India. In this connection, reference may be made to the cases of Ormerods (India) Private Ltd. v. Commissioner of Income- tax, Bombay City ((1959) 36 I T R 329), Chhail Behari Lal v. Commissioner of Income tax, U. P. & V. P.
((1960) 39 I T R 696), K. Appa Rao v. Commissioner of Income---tax, Madras ((1962) 46 I T R 511) and P. V. Mohamed Ghouse v. Commissioner of Income-tax Madras ((1963) 49 I T R 127).
6. It would appear that the two Indian decisions on which the Appellate Tribunal has relied have, in construing sub--section (2) of section 12, confined attention only to the words "making or earning such income, profits or gain" to the exclusion of the preceding words "for the purpose" and, as we have stated above, the word "purpose" in this subsection would mean the object for which the expenditure is incurred. If the scheme of the Income-tax Act is taken into consideration, then the necessary conclusion would be that if the object is to earn income, profits or gain, then the assessee can claim deduction of permissible allowances. Notwithstanding the difference in the language between section 12(2) and section 10(2) (xv) of the Indian Income-tax Act, 1922 (which latter provision corresponds to section 10(2) (xvi) of the Income-tax Act in force in Pakistan), the scheme of the two provisions is the same, that is, to permit deduction of expenditure incurred in connection with business, profession or vocation or with the object of making or earning income, profits or gain, even though the expenditure may not prove to be profitable. The difference of language is attributable to the fact that section 10 deals with a specific source of profits and gain, that is; business profession or vocation, whereas section 12 is general and deals, with all other sources of income, profits and gain which come under section 6(v) of the Income-tax Act. Hence, the necessity for using language in section 12(2) which is different from section 10(2)(xv) of the Indian Income-tax Act or section 10(2)(xvi) of the Income-tax Act in force in Pakistan.
7. Another aspect of the case is that in the instant case, the assessee had, in fact, received income from his investments in other shares. Even if we were to agree with the opinions of the Calcutta Court and of the Patna High Court, the asseseee before us would be entitled to the deduction of interest paid by him on investments ire the shares of Pakistan Welding Electrodes Ltd. The view cannot reasonably be taken that if an assessee makes investments in different shares, then each set of shares should be treated as a separate business or source of income or a separate entity.
The profits from investment in shares would be profit from one source. That is, investments in shares, even though the shares may be of different companies.
8. Accordingly arid for the reasons we have set forth above, our answer to the question referred by the Income-tax Appellate Tribunal to the High Court is in the negative.