JUDGMENT
S. Ananda Reddy, J.
At the instance of the revenue, the Income Tax Appellate Tribunal, referred the followinguestion, arising out of its order ITA Nos. 502 to 505 and 530 to 542 of 1986, dated 13-2-1989, for the assessment years 1980-81 to 1983-84, for the opinion of this court under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) :
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the interest payments on the loans taken for discharging wealth-tax liability is an allowable deduction under section 57(iii) from the interest income on the fixed deposits on whose security the loans were taken ?”
2. The assessee, trustees of H.E.H. the Nizams jewellery for Family Trust, Hyderabad, invested the corpus of the trust fund exceeding Rs. 2 crores as on 31-3-1980, in bank deposits. In respect of the assessment years 1969-70 to 1977-78, the assessee was re uired to pay wealth-tax to a tune of Rs. 41.29 lakhs, in addition to certain payments towards income-tax. For discharging the said liabilities, instead of li uidating either part or full of the fixed deposits, the assessee had resorted to raising a loan against such fixed deposits, in addition to a part on overdraft. The wealth-tax liability of Rs. 41.25 lakhs was discharged on 11-12-1979, and a sum of Rs. 16,62,587 was paid towards the income-tax liability on 22-12-1979. In the assessment proceedings for the assessment years inuestion, the assessee claimed deductions from the total income of the interest that was paid/payable in respect of the loans and overdrafts, incurred for the purpose of discharging the wealth-tax and income-tax liabilities. According to the assessee, only the net interest had to be considered for tax purpose. Alternatively, it was also contended that the interest that was incurred by the assessee in respect of the borrowals had to be allowed as deduction under section 57(iii) of the Act from the gross interest on the premise that the interest was paid for the purpose of earning the income on fixed deposits instead of prematurely withdrawing the same for the purpose of payment of tax. The Income Tax Officer, while framing the assessments, negatived the said contention.
3. The matter was carried in appeal to the first appellate authority. The first appellate authority, though did not agree with the contentions of the assessee that it is entitled for deduction under section 57(iii), however, accepted the plea that only the net amount of interest should be considered for taxation, i.e., after adjusting the interest payable towards the loans out the net interest received on the fixed deposits. The revenue carried the matter in appeal to the Income Tax Appellate Tribunal. The Tribunal agreed with the contentions of the assessee, but however, the deduction was allowed under section 57(iii) of the Act. Against the said order, the present reference is made at the instance of the revenue.
4. Learned standing counsel contended that certain amounts were borrowed for discharging the liabilities of wealth-tax and income-tax and those liabilities are the personal liabilities of the assessee and, therefore, the expenditure incurred for raising or borrowing such amounts for discharging the personal liabilities should not be allowed as deduction either under the general provisions or even under section 57(iii) of the Act. Learned standing counsel strongly contended that the fixed deposits, which were referred to by the assessee, basing on which loans were raised were made for the purpose of getting benefit under section 54E of the Act and, therefore, it was not open for the assessee to withdraw them prematurely. Even otherwise also, as held by the Supreme Court, the payment of income-tax and wealth-tax is a personal liability of the assessee and if any expenditure is incurred for discharging such liabilities, such expenditure would not be allowed as a deduction even under section 57(iii) of the Act.
5. Learned standing counsel relied upon the decisions of the Supreme Court in the case of T.S. Krishna v. CIT (1973) 87 ITR 429 (SC) and Smt. Padmavati Jaikrishna v. Addl. CIT (1987) 166 ITR 176 (SC).
6. Learned counsel for the assessee, on the other hand, contended that the borrowal was for the purpose of protecting the income-yielding asset and not merely to discharge the wealth-tax or income-tax liability. When once the amount borrowed was for the purpose of protecting the income-yielding asset, the assessee is entitled to deduction of the expenditure incurred for protecting such income-yielding asset under section 57(iii) of the Act. Learned counsel also strongly contended that there were two options for the assessee either to li uidate the fixed deposits prematurely thereby suffering a loss of interest or to raise a loan against the fixed deposits, may be incurring a little expenditure over and above the interest that was being paid by the institutions. But in the process, the assessee had earned more income and in fact, paid higher tax to the department also. Therefore, the borrowal should be construed to have been made for the purpose of protecting the income-yielding asset or the source of income and not merely a borrowal for discharging the personal liabilities. Learned counsel also contended that the Tribunal accepted the contention of the assessee and arrived at a finding that the borrowal was for the purpose of protecting the income-earning source. In the light of the said finding given by the Tribunal, which is the final fact-finding authority, it is not even open to this court to go beyond the said finding and, therefore, theuestion referred to this court is to be answered in the affirmative and against the revenue.
7. Learned counsel also relied upon the following decisions in support of his contentions :
Aluminium Corporation of India Ltd. v. CIT (1972) 86 ITR 11 (SC), CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC); Sassoon J. Dovid and Co. P. Ltd. v. CM (1979) 118 ITR 261 (SC); Padmavati Jaikrishna (Smt) v. Addl. CIT (1987) 166 ITR 176 (SC); Sarabhai Sons (P) Ltd. v. CIT (1993) 201 ITR 464 (Guj) and CIT v. Gannon Dunkerley and Co. (P) Ltd. (2000) 243 ITR 646 (Mad).
8. Heard both sides and considered the material on record as well as the decisions cited and relied upon by the respective parties.
The simple issue in this referred case is whether the expenditure incurred by the assessee on the borrowals for discharging the wealth-tax and income-tax is to be allowed as a deduction under section 57(iii) of the Act.
For convenience the relevant provision is extracted hereunder :
“57. The income chargeable under the head Income from other sources shall be computed after making the following deductions, namely :
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly or exclusively for the purpose of making or earning such income.”
9. In order to get the benefit of the said provision, the expenditure must be laid out or expended wholly or exclusively for the purpose of making or earning income. Here the amount borrowed was expended for discharging the personal liability, which is not in dispute. But, however, the contention of the assessee was that the said borrowal was resorted to in order to protect the source of earning. According to the Tribunal, the fixed deposit and the loan taken against such fixed deposits represent one and the same transaction involving the earning of interest income and incurring of expenditure and in the process, the assessee has obtained more income and hence he is entitled to deduction under section 57(iii) of the Act. But such contention was negatived by the Apex Court in the case of Smt. Padmavati Jaikrishna v. Addl. CIT (1987) 166 ITR 176 (SC). In the said case, the assessee was an individual deriving income from other sources in the shape of interest, dividends, etc. For the assessment year 1966-67 out of the interest of Rs. 26,986 paid by her on the monies borrowed by her, the Income Tax Officer disallowed a sum of Rs. 10,279 on proportionate basis on the ground that to the extent the loan was taken by her to discharge her liabilities for income-tax and wealth-tax and to pay annuity deposit, the interest thereon was not allowable under section 57(iii) of the Act. The Tribunal recorded a factual finding that the expenditure had been incurred to meet her personal liability of payment of income-tax and wealth-tax and annuity deposit and confirmed the disallowance. On a reference, the High Court also confirmed the disallowance and on further appeal the Apex Court, affirming the decision of the High Court, held that the sum of Rs. 10,279 was not an admissible deduction under section 57(iii) of the Act. The High Court was right in holding that meeting the liability for income-tax and wealth-tax was a personal one and the dominant purpose for paying annuity deposit was not to earn income but to meet the statutory liability of making the deposit. The expenditure was not wholly and exclusively for the purpose of earning income. The facts of the case further show that the assessee instead of li uidating the investments, which were return-oriented, found it commercially expedient and viable to raise a loan instead of disturbing the investments, and, therefore, the claim became admissible in law. The Tribunal did not accept the said contention observing that the amounts were taken for meeting her personal obligation like payment of tax and deposit of annuity and these had nothing to do with the business.
10. In the case of T.S. Krishna (1973) 87 ITR 429 (SC), the facts are as under :
During the relevant accounting period 1962-63 the assessee paid wealth-tax of Rs. 21,963 in respect of the shares held by him and claimed to have this amount deducted from the dividend income and interest as an expenditure allowable under section 57(iii) of the Act. The Income Tax Officer rejected the claim on the ground that there was no direct or immediate connection between the payment of the wealth-tax and the earning of the dividend income. In the subse uent appeals, the order of the Income Tax Officer was confirmed. The High Court, on a reference rejecting the contention of the assessee, observed that the wealth-tax was paid by the assessee as the owner and on the value of the totality of his assets, which has nothing to do with his making or earning income from such assets and that the production of the income from the assets appeared to it to be wholly unconnected with the payment of wealth-tax. On further appeal, the Apex Court after referring to its various earlier judgments and also referring to the relevant provisions confirmed the view of the High Court.
11. The facts of the present case are almost identical to the referred cases. The amounts borrowed for discharging the wealth-tax and income-tax liability, which is personal in nature, has nothing to do with the earning of income from the fixed deposits. An almost identical contention advanced in the present case was negatived by the Apex Court in the earlier referred decisions. Therefore, there is no merit in the contention of the assessee that the assessee had resorted to borrowals to protect the source of earning. Here the source of earning is totally different and no part of the borrowed funds had gone into the source or to discharge any liability with reference to the source. On the other hand, the borrowed funds had gone to discharge the personal liability of the assessee. These two transactions cannot be considered as inter-connected or inter-related. When the expenditure is laid out or expended wholly and exclusively for the purpose of earning income, then only the said expenditure is allowable as deduction under section 57(iii) of the Act and not otherwise.
12. Apart from the above, a reference to section 58(1)(a) also shows that any personal expenses of the assessee shall not be allowed as a deduction notwithstanding anything contained in section 57 of the Act. As held by the Apex Court the wealth-tax and income-tax liabilities are said to be the personal liability of the assessee and, therefore, the expenditure claimed by the assessee in the present case is a personal expenditure. Even by virtue of section 58(1)(a) of the Act such expenditure shall not be allowed as a deduction.
13. Learned counsel for the assessee relied upon a number of judgments of the High Courts as well as the Supreme Court, which are briefly discussed hereunder :
14. The first decision is in the case of Aluminium Corporation of India Ltd. (1972) 86 ITR 11 (SC). In this case, the assessee-company claimed the payments made to the sole selling agent as a deduction as business expenditure. As per the terms of the agreement, the agent is entitled to commission on the sales of all its products whether made through the agent or directly to the customers. The agent was responsible for payment of the price due and due fulfillment of all contracts made by the assessee and all losses and damages arising from breach of contract by the customers. Though the commission was allowed in the earlier years, for the assessment year inuestion, the commission paid to the agent was disallowed on the ground that all the sales were directly effected by the assessee-company. On appeal, the Appellate Tribunal upheld the claim of the assessee, holding that the selling agent was entitled to the commission on the sales of all its products whether made through the agent or directly to the customers. On a reference, the High Court answered theuestion in the negative and against the assessee. On further appeal, the Apex Court had reversed the decision of the High Court and upheld the finding of the Tribunal holding that the Tribunal after taking into consideration the various terms of the agreements as well as the significance of the deduction given in the earlier assessment years had come to the conclusion that the commission paid was expended wholly and exclusively for the purpose of the assessees business. The Tribunal had given good reasons in support of its conclusion. The primary facts found by the Tribunal and the factual inferences therefrom were not open to review by the High Court.
15. The next decision is in the case of Rajendra Prasad Moody (1978) 115 ITR 519 (SC). In this case, the Apex Court considered the allowability of expenditure incurred by the assessee for making investment in shares. The dispute was when no dividend was received whether interest expenditure incurred on such investments is allowable as deduction and the Apex Court held that interest on monies borrowed for investment in shares, which had not yielded any dividend was admissible as a deduction under section 57(iii) of the Act in computing its income from dividend under the head “Income from other sources”, as according to the Apex Court the said investment was made with the intention of making or earning income.
16. The next decision is in the case of Sassoon J. David and Co. (P) Ltd. (1979) 118 ITR 261 (SC). Here, the assessee was an investment company and its shares were held by the Davids. The company proposed to terminate the services of 22 employees, the managing director and a director and to pay compensation. The shareholders accepted the proposals for such termination. Under an agreement, the Davids agreed to sell to the Tatas all the shares in the company for Rs. 155 lakhs, the sum voted for payment of compensation to the employees being deductible therefrom. The agreement also provided that the Davids should arrange to terminate the services of all employees with effect from 31-3-1956, and arrange to have all the directors resign their offices, so that the Tatas should be entitled to appoint their own directors or employees. After the take over, the appellant-assessee re-employed 9 out of 22 employees. There was a substantial reduction in the wage bill as a conse uence of the retrenchment. The appellant paid Rs. 1,64,899 during the calendar year 1956 relevant to the assessment year 1957-58, which amount, inter alia, included Rs. 16,188 paid to the managing director in lieu of six months notice, Rs. 21,200 paid towards compensation for termination of pension allowance and Rs. 16,885, the first of five annual payments as compensation to the director. The appellant claimed deduction of the sum of Rs. 1,64,899 as business expenditure under section 10(2)(xv) of the Indian Income Tax Act, 1922. The Appellate Tribunal held that the expenditure had been incurred by the appellant not for the purpose of the business but purely as a result of the bargain between the Davids and the Tatas and that even assuming the payments were beneficial to the appellant, no deduction could be allowed since they had been made to benefit third parties. On a reference, the High Court held that only the two amounts of Rs. 21,200 and Rs. 16,188 were allowable as deductions and that the balance paid to the employees and a director was not allowable as a deduction since the expenditure had not been incurred by the company for commercial reasons. On appeal, the Apex Court held on the facts, that, even assuming that the motive behind the. payment of the compensation was that the terms of the agreement between Davids and Tatas for the sale of the shares be satisfied, as long as the amount of Rs. 1,27,511 was laid out wholly and exclusively for the purpose of the business of the appellant there was, no reason for denying the benefit of section 10(2)(xv). The appellant-company continued to function even after its control passed on to the Tatas and the expenditure inuestion was laid out for the purpose of the companys own trade and not for the trade of the Tatas, who were only its shareholders. As a result of the expenditure, the appellant-company was in fact, benefited by reduction in its wage bill. It could not be said that the Tatas were in any way benefited financially because of the reduction in the consideration payable by them for the shares. The sum of Rs. 1,27,511 was expended by the appellant on the ground of commercial expediency and in order indirectly to facilitate the carrying on of its business and was, therefore, allowable as a deduction.
17. The next decision is in the case of Sarabhai Sons (P) Ltd. (1993) 201 ITR 464 (Guj). In this case, the Gujarat High Court considered whether the deduction claimed under section 57(iii) of the Act was allowable in respect of the interest paid to the shareholders on the outstanding amount of purchase price. The assessee along with two other groups was holding shares in Swastik Oil Mills Ltd. It was also its managing agent. In order to get control over the company, the assessee ac uired certain shares and in the process paid interest to the shareholders on the outstanding amount of purchase price. When the assessee claimed deduction under section 57(iii) of the Act, the Gujarat High Court held that in order to claim deduction of expenditure under the provisions of section 57(iii) of the Act, the connection between the expenditure incurred and the income earned need not be direct. Even if the connection is indirect or incidental, that can be regarded as sufficient for the purpose of section 57(iii). It was also held that for attracting section 57(iii), it is not necessary that any income in fact, should have been earned as a result of the expenditure. However, the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for a mixed purpose. The distinction between purpose and motive must always be borne in mind, for what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee for incurring the expenditure. Saying so, the Gujarat High Court negatived the claim of the assessee, as the expenditure was incurred not with the main intention of earning income but with the intention of getting control over the company.
18. The next decision is in the case of Gannon Dunkerley and Co. (P) Ltd. (2000) 243 ITR 646 (Mad). In this case, the assessee-company was in li uidation, which was represented by the official li uidator. The company, which had been engaged in construction business at various places involving huge and substantial investments, filed its return of income for the assessment years 1978-79 to 1980-81 admitting nil income, as there was excess expenditure over the income. The Income Tax Officer determine the total income showing a positive figure by disallowing certain expenditure towards establishment charges, rent, rates, taxes, travelling, etc., on the ground that they were not admissible as deduction against the interest receipt on fixed deposits. The Commissioner (Appeals), on going into each item of expenditure, found that they were incurred in order to protect the assets of the company as well as by the official li uidator to discharge the statutory duties and therefore the expenditure should be allowed as deduction under section 57(iii) of the Act. which was upheld by the Tribunal. On a reference, the Madras High Court held that the expenditure was incurred in the performance of the duties by the Official Li uidator and the nature of the expenditure clearly showed that it was incurred to protect and preserve the assets. It was also held that without incurring such expenditure, it would not have been possible to earn income by way of interest. Therefore, it upheld the view of the Tribunal that the expenditure incurred was allowable as deduction under section 57(iii) of the Act.
19. A perusal of the above judgments clearly shows that they are not supporting the contention of the assessee. In all those cases, the expenditure was held allowable only if laid out wholly and exclusively for earning income. In fact, the Gujarat High Court held that the motive or personal considerations are not relevant but only the immediate purpose is relevant. The facts of the present case clearly show that the immediate purpose of the borrowals was to discharge the tax liability and the amounts were also incurred to discharge such liability. Therefore, the expenditure incurred on such borrowals was not allowable as deduction under section 57(iii) of the Act.
20. Under the above circumstances, we answer theuestion in the negative, in favour of the revenue and against the assessee.