Income Tax Appellate Tribunal - Delhi
Arun Shourie vs Income-Tax Officer on 21 August, 1987
Equivalent citations: [1988]26ITD533(DELHI)
ORDER
Anand Prakash, Accountant Member
1. The assessee is an individual. He derived income, inter alia, from salary and interest from bank, FDRs, deposits with companies, UTI, etc. The interest derived by the assessee from FDRs with the banks during the accounting' period, aggregated to Rs. 22,551 as against the said FDRs the assessee had borrowed funds and advanced them to his HUF from which no interest was charged by the assessee. On such borrowings from the bank Rs. 7,685 were paid by the assessee by way of interest. The assessee set off the said interest of Rs. 7,685 against the interest earned by the assessee from the said FDRs. The aforesaid claim of the assessee was rejected by the ITO as untenable. On appeal, the learned AAC confirmed the order of the ITO. It is against the aforesaid con current finding of the authorities below that the present appeal has been filed by the assessee.
2. On behalf of the assessee the learned counsel submitted that the assessee's claim was allowable Under Section 56(3) of the Income-tax Act, 1961 and that in respect of the assessment year 1980-81 the Tribunal had accepted similar claim of the assessee. A copy of the said order of the Tribunal being ITA No. 1966/Del/85 dated 30th December, 1986 has been placed on record. In particular, emphasis is laid on the observations of the Tribunal in paras 5 & 6 and it is urged that the matter being fully covered by the said judgment of the Tribunal the assessee's claim should be accepted for this year also.
3. On behalf of the Revenue the aforesaid submission of the assessee is stoutly opposed and it is pointed out that Under Section 57(iii) only such expenditure can be set off against the income earned as has been laid out for the purpose of earning the said income. The income earned from FDRs was interest and to earn this interest the assessee did not spend Rs. 7,685. That amount has been paid by the assessee by way of interest to the banks for raising loan to give it to the HUF as the assessee's contribution to the family for constructing the house. There is thus no other relationship whatsoever between the earning of the interest of the FDRs and the payment of the aforesaid interest on the borrowings made by the assessee from the business. There is a direct nexus between the loan borrowed by the assessee from the bank and the advancing of the said loans by him as his contribution to his family. The borrowings of the loan from the banks was thus for the purpose of making his contribution to the family and therefore, it could not be said that this interest, which was paid on the borrowings from the banks, was laid out wholly and exclusively for the purpose of earning the income from interest on FDRs with the genesis of which they have no relation whatsoever.
4. We have given very careful consideration to the facts of the present case and the rival submissions. It is well settled principle of law that Under Section 57(iii) only such expenditure can be allowed to be deducted as has been incurred to earn the income assessable under the head 'Other sources'. The purpose of the expenditure should be to earn the income, whether income itself has been earned or not is not material. Reference may be made to the judgment of the Hon'ble Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 in support of the above proposition. Their Lordships explained the scope of Section 57(iii) at page 522, inter alia, as follows :-
What Section 57(iii) requires is that the expenditure was to be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of Section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. ...
For applying the aforesaid test to the facts of the present case, we must therefore, ascertain as to what is the purpose of the expenditure incurred by the assessee and what is the nature of the income against which the said deduction is being claimed. The purpose of the expenditure incurred by the assessee was to obtain loan from the bank to meet his personal obligation to his family to provide funds to it to construct the house. This purpose had no correlation whatsoever with the making of the FDRs with the bank and earning interest therefrom. The income which is being earned by the assessee and which is being sought to be taxed Under Section 56 is the income from interest on FDRs. The expenditure which is incurred to earn this income shall be set off against it Under Section 57(iii). The expenditure which the assessee has incurred by way of paying interest to the banks, does not however, have as its object, the earning of the income from interest on FDRs. It is provision of the funds to the family as a member of the family. There is thus no correlation whatsoever between the purpose of the expenditure and the income from interest earned on FDRs and that this be so, there is no question of any deduction Under Section 57(iii) of Rs. 7,685 against the said income from FDRs. There is a catena of case law which says that interest paid on moneys borrowed for personal expenses or for payment of advance tax or for payment of annuity deposit or for payment of wealth-tax or for payment of estate duty is not to be allowed as a business expenditure Under Section 57(iii). Reference may be made to the following cases in this regard :
1. Bai Bhuriben Lallubhai v. CIT [1956] 29 ITR 543 (Bom.) ;
2. CIT v. M.P. Jatia 1972 Tax LR 1016 (All.) ;
3. Mrs. Arundhati Balakrishna v. CIT [1976] 102 ITR 356 (Guj.) ;
4. Balmer Lawrie & Co. Ltd. v. CIT [1960] 39 ITR 751 (Cal.) ;
5. Gopaldas Dahyabhai Lavsi v. CIT [1977] 108 ITR 531 (Guj.) ;
6. Roopchand Chabildass & Sons v. CIT [1967] 63 ITR 166 (Mad.) ;
7. Mannalal Ratanlal v. CIT [1965] 58 ITR 84 (Cal.) ;
8. MM. Thapar v. CIT [1978] 114 ITR 331 (Cal.);
9. Smt. Padmavati Jaykrishna v. CIT [1975] 101 ITR 153 (Guj.) ;
10. T.S. Krishna v. CIT [1973] 87 ITR 429 (SC) ;
11. Basant Kumar Aditya Vikram Birla v. CIT [1968] 70 ITR 657 (Cal.) ; and
12. CITv. Mrs. Indumati Ratcmlal [1968] 70 ITR 353 (Guj.).
5. One of the pleas taken in some of the cases mentioned above was that, but for the borrowing the assessee would have liquidated the fixed deposit carrying interest and, therefore, the interest on borrowings should be allowed by way of deduction against the interest from FDRs. It was held that the nexus between the borrowing and fixed deposits is too remote and as such, there could be no justification to make the deductions. These observations apply pro tanto to the facts of the present case.
6. The learned counsel for the assessee had tried to distinguish the aforesaid case law by pointing out that in the said case it was the individual/personal liability of the assessee that was being sought to be liquidated by borrowing the funds from the banks whereas in the assessee's case it was not the individual liability but is liability towards the HUP that was being sought to be met and so the above case law would not apply to the assessee's case. We see no merit in the above submission of the learned counsel for the assessee. The distinction is entirely superficial. What has to be seen is the purpose of expenditure as emphasised by the Hon'ble Supreme Court and if this purpose is not related with the earning of the income which is assessable Under Section 56, the expenditure is not to be allowed. It is not material what the purpose of expenditure was, whether it was to discharge the individual liability or whether it was to provide funds to the HUF. In either case it was not to earn the income which was assessable Under Section 56, and so it is not deductible Under Section 57(m).
7. Apparently the aforesaid catena of case law and the aforesaid judgment of the Supreme Court were not brought to the attention of our learned brothers when they decided the appeal relied upon by the assessee. When so many authorities including those of the Hon'ble Supreme Court be available for our guidance, it would be entirely against law for us to ignore the guidance provided by the Hon'ble Supreme Court and the High Courts. We would not be legally justified to do so and as such we hold that the assessee's claim for deduction of interest on borrowings from the bank against the income from FDRs is not justified. The assessee's request for referring the matter to a special Bench in case the view point of earlier Bench was not acceptable to us would have relevance if the aforesaid mentioned catena of the case law was not available for guidance. When the authority of the Hon'ble Supreme Court is available to us, no reference to another forum is in our opinion necessary. Accordingly, we reject the assessee's request in this respect.
8. The assessee's learned counsel had requested for adjournment of the case after he had advanced his arguments and placed the aforesaid order of the Tribunal on record, because he found that he was not in a position to meet the said case law. The case was taken up out of turn at his specific request making the other advocates whose cases were listed prior to his case wait. The learned counsel made his submissions in full and when he found that he was not in a position to answer the authority of Bai Bhuriben Lallubhai's case (supra) which was pointed out to him he sought adjournment. It was not considered proper to grant adjournment at this stage when the appeal had been argued by the counsel in the circumstances indicated above.
9. In the result we dismiss the present appeal filed by the assessee.