Suhas Chandra Sen, J.:— The Tribunal has referred the following two questions of law under section 256(1) of the Income-tax Act, 1961, to this court:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that interest payment could not be disallowed for investment in shares as per provisions of section 36(1)(iii) of the Income-tax Act, 1.961, when such shares were not used as stock-in-trade but were acquired simply for the purpose of acquiring controlling interest in the companies concerned?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that investment in shares was the admitted business for the assessee when the activity in such investment was only to purchase shares for acquisition of controlling interest of companies and had not earned any income (except director's fees) by such vocation?”

2. The assessee is an individual. This reference relates to the income-tax assessment of the assessee for the two previous years relevant to the assessment years 1982–83 and 1983–84. In respect of these two years, the assessee filed his income-tax returns showing losses of Rs. 3,74,570 and Rs. 1,40,940, respectively. In his returns of total income, the assessee declared income assessable under the head “Profits and gains of business or profession”, “Capital gains” as well as under the head “Income from other sources”. In the previous year relevant to the assessment year 1982–83, the Assessing Officer in the course of the assessment proceedings found that the assessee had shown payment of interest of Rs. 4,70,457 on the moneys borrowed by him and had also received interest of Rs. 1,55,459 on advances made by him, thus claiming a business expenditure of Rs. 3,14,998 on account of interest payments. Similarly, in the previous year relevant to the assessment year 1983–84, the assessee received interest of Rs. 1,77,787 as against interest payments of Rs. 5,86,493. Thus the assessee claimed a business expenditure of Rs. 4,08,706 on account of interest payment made on moneys borrowed by the assessee. In the course of the assessment proceedings, it was submitted on behalf of the assessee before the Assessing Officer that the assessee had borrowed funds for business purposes like acquisition of shares for acquiring controlling interest in various companies, making loans and advances in the course of financing business as well as for dealing in shares, etc. The Assessing Officer found that the assessee was interested in about nine companies which were controlled by him and in some of these companies, he was also one of the directors. The Assessing Officer also found that the assessee had invested Rs. 10,79,228 in purchase of shares of different companies for acquiring controlling interest and another sum of Rs. 18,96,226 in the financing business. The Assessing Officer observed that the assessee made investment on capital account and as such the interest, if any, paid on borrowed moneys could not be treated as relating to his business activities and, therefore, the net interest paid on borrowed moneys was not deductible in computing the business income under section 28 of the said Act. The Income-tax Officer calculated interest at the rate of 18 per cent on Rs. 10,79,228 being the amount invested in purchase of shares of different companies in which the assessee acquired and held controlling interest and disallowed Rs. 1,94,261 (forming part of Rs. 3,25,646 at page 25 of the paper book) in computing his business income. Similarly, for the assessment year 1983–84, the Assessing Officer disallowed a sum of Rs. 1,94,246 out of interest paid on borrowed moneys.

3. It may be noted that the actual amount of addition in the said two years was Rs. 3,25,646. The Tribunal, however, has deleted the disallowance of interest pertaining to advances made to Kamla Tea Co. Ltd. in both these two years. The Revenue has not sought any reference on this account.

4. Therefore, the disallowance of the balance interest of Rs. 1,94,246 on moneys borrowed pertaining to investments made in acquisition of shares of different companies in which the assessee held controlling interest is the only question that remains for consideration by this court.

5. Before the Commissioner of Income-tax (Appeals), it was, inter alia, contended on behalf of the assessee that he was carrying on the business, profession and/or vocation of promoting, managing, financing and controlling different companies in some of which he was also a director. As such, the interest paid on moneys borrowed by him for purchase of shares and/or controlling interest in the various companies was nothing but a revenue expenditure incurred for the purpose of business and was, therefore, deductible in computing the business income under section 36(1)(iii) of the said Act.

6. The Commissioner of Income-tax (Appeals), however, held that in the course of its operation of promotion, management, control and financing of various companies, the assessee earned income by way of directors' fees only. The assessee did not derive any other income whatsoever. The Commissioner (Appeals), therefore, confirmed the disallowance made by the Assessing Officer.

7. On appeal by the assessee, the Tribunal found that the deduction for expenditure by way of net interest payments on borrowed moneys was claimed by the assessee under section 36(1)(iii) of the said Act. The Assessing Officer had also disallowed the claims in computing the business income. No addition was made under the head “Income from other sources”. The Tribunal observed that the disallowance of interest could not be made merely on the ground that the assessee acquired shares of different companies for acquiring controlling interest. The acquisition of shares for acquiring controlling interest may be a capital expenditure, but no disallowance could be made unless it was found that the borrowed moneys were not used for the purposes of the assessee's business. The Tribunal held that interest paid on borrowed moneys is admissible as a business deduction even when the borrowed money was utilised for acquiring capital assets.

8. The Tribunal noted that the case of the assessee was that the shares of different controlled companies were capital assets of the assessee's business. The Tribunal noted that the assessee was engaged in the business of rehabilitating and financing the controlled companies. Both financing and acquisition of shares were in the course of the assessee's activity of managing and rehabilitating controlled companies. Therefore, the investment in shares was clearly connected with the business operations of the assessee and interest paid on moneys borrowed for purchase of shares for acquiring controlling interest could not be disallowed in computing the business income of the assessee. The Tribunal, therefore, held that the assessee was entitled to deduction in respect of interest paid on borrowed moneys under section 36(1)(iii) of the Act. The Tribunal also noted that the various receipts including borrowings were credited to one common fund and the assessee was making disbursement of funds for different purposes out of such common fund. According to the Tribunal, it was not possible to co-relate any particular borrowing to any particular investments. For this reason also, the Tribunal felt that no disallowance could be made.

9. We are of the view that the Tribunal has come to the correct decision in this matter. section 36(1)(iii) provides:

“36. Other deductions.—(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—….

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession.”

10. The only enquiry that is to be made is whether the payment of interest was in respect of capital borrowed for the purpose of the assessee's business or profession. There is no dispute that the capital was borrowed in the instant case and interest was paid on the borrowed capital. It is to be established that the amount was borrowed for the purpose of business or profession. The amount borrowed may be utilised for the purpose of acquisition of stock-in-trade or for the purpose of acquisition of capital assets. But so long as the money is utilised for business purposes the interest will have to be allowed as deduction. It is well-settled that business expenditure is not confined to expenses incurred on revenue account. Capital expenditure may not be allowed as a deduction under section 37 because the section specifically bars any deduction of expenditure of capital nature. But section 36 is differently worded. There is no bar in section 36(1)(iii) to allowance of interest paid in respect of capital borrowed which has been utilised for purchase of a capital asset. The position of law in this regard was explained by the Supreme Court in the cases of India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52, and State of Madras v. G.J Coelho, [1964] 53 ITR 186.

11. What is chargeable to income-tax under section 28 is profits and gains of business or profession. The word “profession” is defined in section 2(36) of the said Act to include vocation. The Assam High Court in Nabadwip Chandra Roy v. CIT, [1962] 44 ITR 591 (Assam) observed that the directorship is nothing but a vocation. The assessee was admittedly a director of several controlled companies. Even otherwise, the activity of controlling, managing, administering and financing companies is nothing but a business/professional/vocational activity.

12. In the case of Commissioner Of Income Tax, Madras v. Indian Bank Limited, Madras, [1965] 56 ITR 77, it was held by the Supreme Court as follows (at page 83):

“We cannot imply from this judgment that there is a general principle that if a part of the income of a business is tax-free, expenditure incurred for the purpose of earning this income is outside the purview of section 10.”

13. In that judgment, the Supreme Court placed reliance in the case of Hughes v. Bank of New Zealand, [1938] 6 ITR 636 : [1938] 21 TC 472, 523 (HL), and observed as under (at page 80):

“A similar question arose in England in Hughes v. Bank of New Zealand, [1938] 6 ITR 636 : [1938] 21 TC 472 and all the judges took the view that interest paid by the bank on capital borrowed in the course of its business and utilised in buying tax-free securities had to be deducted in arriving at the taxable profits of the business notwithstanding that the interest earned by the bank on the tax-free securities could not be taxed.”

14. Lord Thankerton put the reason shortly thus:

“It is perhaps enough to say that the Crown are unable to point to any statutory provision in support of their contention, whereas the respondents find full justification for their resistance in the provisions of rule 3 of the Rules applicable to Cases I and II of Schedule D….”

15. This rule is similar to section 10(2)(xv) of the Indian Income-tax Act, 1922. After setting out the rule and noticing its effect, he says:

“…. it seems to me to be incontrovertible that, in the present case, the investments in question were part of the business of the respondents' trade, and that the expense connected with them was wholly and exclusively laid out for the purposes of the trade. 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.”

16. Is there anything to suggest that section 36(1)(iii) prohibits allowance of unremunerative expenditure by way of interest even if the interest was paid in respect of capital borrowed for the purposes of the business or profession the provisions of section 36 merely say that in computing the income referred to in section 28, certain deductions will have to be allowed. There is no dispute that in this case computation of income under section 28 has taken place in the assessment order. There is nothing in section 36(1)(iii) which justifies disallowance of interest on capital borrowed for the purpose of business from the business income of the assessee assessed by the Assessing Officer.

17. The decision of this court in the case of CIT v. Model Manufacturing Co. (P.) Ltd., [1980] 122 ITR 767 does not help the Department. In that case, the provisions of section 36(1)(iii) of the Income-tax Act, 1961, were not examined at all. The only question raised was whether the interest paid on borrowed money and utilised for purchase of shares for acquiring the controlling interest of a company could be allowed as a deduction under section 57 of the said Act in computing income under the head “Income from other sources”. This question was decided by this court in favour of the assessee. This court, however, was not called upon to consider whether such interest was also admissible as a business deduction under section 36(1)(iii) of the said Act. This case is, therefore, clearly distinguishable and has no application in the facts and circumstances of this case.

18. The Revenue has not challenged as perverse the finding of the Tribunal that the assessee's business activity consisted of acquiring shares for managing, controlling and rehabilitating different companies listed by the Assessing Officer.

19. A businessman like the assessee in this case does not purchase shares of different companies for acquiring controlling interest therein only for earning dividends. Acquiring controlling interest in companies land managing, administering, financing and rehabilitating companies under control are for business and/or professional purpose. The Supreme Court in the case of P. Krishna Menon v. CIT, [1959] 35 ITR 48 held that in order that an activity might be called a vocation, it was not necessary to show that it was indulged in with a motive of making profits.

20. In view of the above and in view of the facts, as discussed above, we answer both the questions in the affirmative and in favour of the assessee. Each party to pay and bear its own costs.

Arun Kumar Dutta, J.:— I agree.