Law: Income Tax Act, 1922

Section: 12(2)

Income-tax Act (XI of 1922)---S. 12(2)--Assessee is not entitled to claim interest on loan taken by him From bank and paid to company of which he was Managing Director, in settlement of his interest free loan, which he had taken from the company and utilized for investment of shares--Nexus between the transaction of loan and purchase of shares has to be there. While assessing the income from other sources the income profits and gains are computed after making allowance for the amount of interest paid in respect of money borrowed for the purposes of acquisition of the part of the shares capital of the company. Section 12(2) of the Income-tax Act grants this relief to the assessee to the extent of interest paid by him on the amount borrowed by him and invested in purchasing the share capital of a company. Therefore interest will be an admissible allowance which has been paid in respect of loan borrowed for the purpose of acquisition of shares. This also implies that the shares have not been purchased before taking the loan. The borrowing should precede the acquisition of shares. Therefore the question which falls for consideration is whether the amount has been borrowed by the assessee from which he has purchased the share. In the present case the assessee has adopted a different procedure. He had borrowed interest free loan from the company, purchased the shares and after some time he borrowed loan from the bank and paid it to the company which had a large debit balance against him. As the amount borrowed from the bank was equal to the sum the assessee had invested in the purchase of shares, he claims that this amount has been invested in purchase of shares and he is entitled to the allowance in respect of interest paid by him. The assessee was maintaining a debit account. Therefore, the loan borrowed from the bank was for the purpose of paying the debt the assessee had obtained from the company irrespective of the fact whether part of the debt was invested in purchasing the share and part of the debt was for his own personal expenses. It is difficult to conclude that the assessee had borrowed money from the bank for the purposes of acquiring share of a company.…

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