ORDER
U.T. Shah, Sr. Vice President
1. In this appeal, the assessee is contesting disallowance of Rs. 48,675 out of Rs. 74,906 being the interest paid to M/s. Jeevan Ltd.
2. The assessee is an individual. The assessment year is 1984-85 and the relevant previous year ended on 31-3-1984.
3. During the relevant previous year, the assessee had borrowed Rs. 5 lakhs from M/s. Jeevan Ltd. for payment of wealth-tax. It may be mentioned that one of the source of income of the assessee is to earn interest on money advanced to various parties, namely, Shri Ramkrishna Bajaj (HUF), Shri Kamalnayan Bajaj (HUF), Shri Shishir Kumar Bajaj, etc. The interest earned by the assessee was Rs. 2,68,613. The assessee paid interest of Rs. 1,40,616 to the parties from whom he had borrowed funds. One of such party is M/s. Jeevan Ltd., to which interest of Rs. 74,096 was paid. Out of the interest earned, the assessee deducted the interest paid by him and offered for taxation net interest income of Rs. 1.27,997 under the head “other sources”. During the course of assessment proceedings, the ITO had enquired of the assessee as to how interest paid on the money borrowed for paying wealth-tax could be allowed in computing the interest income under the head “other sources”. The assessee explained to the ITO that if he had not taken loan from M/s. Jeevan Ltd., he would have been obliged to get back the loan advanced to other parties thereby he would have earned less income by way of interest. The ITO. however, in the assessment framed under Section 143(3) of the Act, disallowed Rs. 48,675 out of the assessee’s claim for deduction of Rs. 74,096 in the following manner :
1. Addition out of interest paid :
The assessee has declared interest income of Rs. 1,27,997 under the head ‘Other Sources’. Perusal of the record reveal that assessee has earned gross interest of Rs. 2,68,613 and he has paid interest to the extent of Rs. 1,40,616. The interest paid can be allowed as deduction provided interest has been paid for the purpose of earning interest. Perusal of the copy of account of the assessee with Central Bank of India H.O. shows that the assessee has borrowed Rs. 5,00,000 from Jeevan Ltd., on 23-7-1983 to pay wealth-tax. Wealth-tax date of payment is 25-7-1983. Interest has been paid on loan taken from Jeevan Ltd. Thus it is clear that assessee has not paid interest on this amount for earning the income under the head ‘Other sources’. The assessee’s representative was therefore asked to explain as to why interest paid on Rs. 5 lakhs may not be disallowed. The assessee’s representative has stated that there is a surplus of interest of Rs. 1,27,997 implying thereby the interest paid including interest paid to Jeevan Ltd. is less than the interest received. It has further been stated that if the said loan had not been taken, the assessee would have encashed loan given by him, thereby resulting in reduction of interest income.
Had the assessee done so, perhaps department could not have intervened because nobody can force an assessee to earn more but here the fact is that interest can be allowed under the head ‘Other Sources’ only to the extent, it has been paid for earning the income under Section 57 of the Income-tax Act. Since in the instant case, money has been borrowed to pay wealth-tax, it cannot be allowed as deduction. Therefore an amount of Rs. 48,675 worked @ 14% on Rs. 5 lakhs shall be disallowed.
In appeal, the CIT(A) upheld the action of the ITO. In doing so, he relied on the decision of the Hon’ble Supreme Court in the case of Smt. Padmavati Jaikrishna v. Addl. CIT 11987] 166 ITR 1761.
4. Being aggrieved by the order of the CIT(A), the assessee has come up in appeal before the Tribunal. The learned counsel for the assessee vehemently argued that the CIT(A) has not appreciated the decision of the Hon’ble Supreme Court in the case of Smt. Padmavati Jaikrtshna (supra) in proper perspective inasmuch as the CIT(A) has not given due weight to the following observations appearing at pages 179 & 180 of the report:
Mr. Ramachandran then maintained that even if there was an indirect link between the expenditure and the income earned, the claim would be admissible and relied upon the observations of Bose J. in Eastern Investment’s case [1957] 20 ITR 1 (SO. No attempt has been made by the assessee to point out before the taxing authorities or even before the High Court by placing the necessary facts to justify such a claim. On mere assumptions, such a point cannot be allowed to be raised here for consideration. In fact, unless the loan is incurred for meeting the liability connected with the sources itself, it would ordinarily be difficult to entertain the claims for deduction.
In this connection, he stated that it is the assessee’s case all throughout that there was an indirect link between the expenditure by way of interest incurred by him and the income earned by way of interest on the moneys advanced to other parties. Thereafter, he placed before us a copy of the order of the Tribunal in the case of Shri Ramkrishna Bajaj [IT Appeal No. 1982 (Bom.) of 1988 dated 4-12-1991] and pointed out that on a similar issue which came up before the. Tribunal in that case, the Tribunal was pleased to remit the matter back to the file of the CIT(A) “with directions to determine the claim of the assessee in terms of his letter dated 23-2-1987 and the law laid down by the Supreme Court in the case referred to supra and decide (he issue afresh”. He, therefore, urged that we should likewise sent the present case also to the CIT(A) with appropriate directions.
5. Even on the merits of the case, the learned counsel for the assessee submitted that in view of the decision of the Hon’ble Bombay High Court in the case of CIT v. H.H. Maharani Shri Vijaykuverba Saheb of Morvi [ 1975] 100 ITR 67 the assessee would be entitled to claim deduction of the entire interest paid to M/s. Jeevan Ltd. He also pointed out that in the said decision the Hon’ble High Court has also considered their decision in the case of Bai Bhuriben Lallubhai v. CIT [1956] 29 ITR 543 (Bom.). He also made a reference to the decision of the Hon’ble Gujarat High Court in the case of C.J. Patel & Co. v. CIT [1986] 158 ITR 486 to urge that there was no justification on the part of the Income-tax authorities to disallow a portion of the interest paid to M/s. Jeevan Ltd. on Rs. 5 lakhs borrowed by the assessee. Relying on the decision of the Hon’ble Supreme Court in the case of Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 he further submitted that even in a case of an indirect link between the expenditure incurred and the income earned, the assessee would be entitled to deduction of the interest paid on borrowed funds. According to the learned counsel for the assessee, after the decision of the Hon’ble Bombay High Court in the case of H.H. Maharani Shri Vijaykuverba Saheb of Morvi (supra), the decision in the case of Bai Bhwiben Lallubhai (supra) has lost its force, the learned counsel for the assessee also took us through the paper book containing the statement of income filed along with the return of income as well as the accounting treatment given in the accounts maintained by the assessee. He. therefore, urged that either we should delete the disallowance of Rs. 48,675 made by the Income-tax authorities or remit the matter to the file of the CIT(A) for a fresh decision as was done in the case of Shri Ramkrishna Bajaj.
6. The learned Representative for the department, on the other hand, submitted that since the assessee’s case is fully covered by the aforesaid decision of the Hon’ble Supreme Court in the case of Smt. Padmavati Jaikrishna (supra] and since in deciding the appeal in favour of the revenue, the CIT(A) has followed the said decision, it is not necessary to send the matter as urged by the assessee or accepted by the Tribunal in the case of Shri Ramkrishna Bajaj.
7. We have carefully considered the rival submissions of the parties and we do not find any merit in the stand taken on behalf of the assessee. It is pertinent to note that in the case of Smt. Padmavati Jaikrishna (supra), the Hon’ble Supreme Court has held that the interest paid on money borrowed for the purpose of meeting the liability of income-tax/wealth-tax was a personal liability and was not to earn income by way of interest. Further, we are of the view that it is not necessary to remit the matter to the file of the CIT(A) as was done in the case of Shri Ramkrishna Bajaj as it would be noticed from the decision of the Hon’ble Bombay High Court in the case of Bai Bhwiben Lallubhai (supra) that the Hon’ble High Court has, in fact, considered the decision of the Hon’ble Supreme Court in the case of Eastern Investments Ltd. (supra). In the case also, the assessee had borrowed money for meeting household expenses, to pay advance tax, etc., and had taken a similar stand that if she had not borrowed the money, she would have been obliged to liquidate some of her income earning deposits and thereby her income by way of interest would have been reduced resulting in loss of revenue to the exchequer. For our purpose, it would be suffice if the “Held” portion is reproduced here :
Held, that the purpose for which the assessee borrowed money had no connection, whether direct or indirect, with the income which she earned from the fixed deposit and that she was not entitled to the deduction claimed under Section 12(2). It might be that the assessee’s motive was to save her fixed deposit and interest and to meet household expenses etc., by means of a loan borrowed but that consideration was entirely irrelevant. Even as regards advance payment of tax the purpose of borrowing the money in order to pay advance tax was to discharge the statutory obligation upon the assessee ; receipt of interest on that tax was purely incidental; and therefore the assessee could not claim the deduction on that ground either.
In our considered opinion, the decision in the case of H.H. Maharani Shri Vijaykuverba Saheb of Morvi (supra) is clearly distinguishable on the basis of the facts and circumstances obtaining in that case and with which we are concerned in the present appeal. Both the Hon’ble Supreme Court and the Hon’ble Bombay High Court have clearly held that no deduction can be allowed under Section 57 from income earned on deposits or other assets, in respect of interest paid on money borrowed to pay personal expenses or income-tax/wealth-tax even though without such borrowing the assessee would have to withdraw the deposits or dispose of other assets in order to pay expenses or taxes. However, the decision in the case of H.H. Maharani Shri Vijaykuverba Saheb of Morvi (supra) is quite different as in that case the assessee trustee came into possession of certain assets which were subject to a liability (estate duty) attached to such assets. It is on these facts that the Hon’ble High Court held that if a trustee or heir who acquires the assets of the deceased subject to the liability for estate duty, borrows money to pay the estate duty, which he otherwise could not have paid without disposing of the assets, the interest on money borrowed was deductible from the income earned from such assets. The Hon’ble High Court noticed that the case before them illustrates a situation of an indirect connection between the expenditure and the earning of the income from the assets. However, since in the instant case there is a direct link between the money borrowed from M/s. Jeevan Ltd. and the payment of wealth-tax, which is not in dispute, there is no need to finding out indirect link between the expenditure incurred and the income earned under the head “other sources”.
8. In view of the aforesaid discussion, and respectfully following the ratio laid down in the cases of Smt. Padmavati Jaikrishna and Bai Bhuriben Lallubhai (supra), we have no hesitation in upholding the disallowance of Rs. 48.675 made by the Income-tax authorities.
9. In the result, the appeal is dismissed.