ORDER
D.S. Meenakshisundaram, Judicial Member
1. In this appeal by the revenue and the cross-objection by the assessee, the dispute is about a sum of Rs. 59,230, allowed by the AAC, as interest paid by the assessee on a borrowing and as admissible in computing the income of the assessee.
2. The assessee is a HUF known as K.M.D. Thackersey (HUF). The assessment year is 1976-77, for which the previous year ended on 31-3-1976. On a scrutiny of the computation of income filed by the assessee, with his return of income for this year, the ITO noticed that the assessee had claimed a deduction of Rs. 60,836, being deficit in interest as per ‘Vatav’ account. On an examination of the details filed for this year and the earlier year, the ITO found that this deficit in interest account was on account of interest referable to 1,358 shares of Crown Spg. & Mfg. Co. Ltd., which were acquired by the assessee with the borrowed funds of Rs. 4,97,000. The ITO also found that 1,350 shares out of these shares, of the value of Rs. 4,94,000, had been partitioned by the assessee by the end of March 1975. The ITO, therefore, concluded that the interest relating to the said 1,350 shares, which worked out to Rs. 59,820 (at 12 per cent of Rs. 4,94.000) could not be allowed as a deduction in this year. The ITO rejected the assessee’s claim for deduction of interest to this extent and allowed only the balance of Rs. 1,556 in computing the assessee’s total income.
3. The assessee appealed against this disallowance of Rs. 59,280, and contended that he was entitled to the deduction of the interest paid on the borrowings, once it was proved that the borrowings were invested for purposes of earning an income. He argued that it was not necessary to see whether the investments had actually yielded any income in any particular year. He, therefore, pleaded that the claim of the assessee to get deduction of the interest was not defeated only because the shares acquired out of the borrowed funds were not held by the assessee during the year of account. The assessee relied on the two decisions in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) and Kevalchand Nemchand Mehta v. CIT [1968] 67 ITR 804 (Bom.).
4. The AAC held that the two decisions, relied on by the assessee, were distinguishable on facts from the assessee’s case. He pointed out that the shares had left the hands of the assessee consequent on the partial partition of the assessee-HUF and that there were absolutely no prospects of earning any income from the said shares by the assessee-HUF. Hence, he held that the ratio of the Supreme Court decision was inapplicable to the assessee’s case. The AAC next pointed out that in the decision of the Bombay High Court, it was held that the income from the investments acquired out of the borrowed funds was still the income of the assessee in a law, in view of the deeming provisions of Section 16(3) of the Indian Income-tax Act, 1922 (‘the 1922 Act’) but in the case of the present assessee, the income, if any, from the shares allotted to the coparceners could never be considered as the income of the assessee-HUF and that the Bombay High Court decision, though somewhat identical on facts, was of no help to the assessee’s case.
5. In paragraph No. 7 of his order, the AAC examined whether the assessee’s claim could be considered for other reasons and held that the assessee was enabled to earn income from the already existing investments, by not immediately liquidating the debt by forced sales of the other investments and that in this view of the matter, it could be accepted that the interest paid by the assessee had ultimately helped the assessee in earning income for the assessee. The AAC was of the view that it could not, therefore, be said that there was no nexus whatever between the payment of interest and the earning of income from other investments. The AAC, therefore, held that the assessee was entitled to the deduction of interest paid on borrowing. In this view, the AAC did not consider the assessee’s alternative claim, set out in paragraph No. 8 of his order. The AAC, therefore, allowed the assessee’s appeal.
6. The revenue feels aggrieved by this order of the AAC and has come up in appeal to the Tribunal on the following two grounds :
1. On the facts and in the circumstances of the case and in law, the learned AAC erred in holding that the interest payable on the loan utilized for the purpose of acquiring certain shares is an admissible deduction in the computation of the assessee’s total income for this year, even though these shares are no longer held by the assessee now.
2. On the facts and in the circumstances of the case and in law, the learned AAC erred in deleting the additions of Rs. 59,280 made by the ITO on account of the interest claimed by the assessee as a deduction.
7. In his cross-objection, the assessee has raised the following ground :
The learned Appellate Assistant Commissioner erred in not deciding the question that the interest attributable to the borrowing made for the purposes of investment and which was disallowed being Rs. 59,280, as determined by the ITO, was excessive and ought to have in any case been much less.
8. We have heard the learned Counsels on both sides and carefully considered their arguments in the light of the materials placed before us and the authorities cited by them.
9. Shri Roy Alphonso submitted that for a deduction to be allowed under Section 57(iii) of the Income-tax Act, 1961 (‘the Act’), there must be a source or rather a specific source of income, since the section uses the words ‘such income’. He argued that the expenditure should correlate specifically to the particular item of income chargeable under Section 56 of the Act and not generally to the income assessable under the head ‘Income from other sources’, to which income it could be correlated. The point made out by the learned departmental representative was that a particular income would be derived from a particular source in contradistinction to Section 37(1) of the Act, which allows expenditure laid out wholly and exclusively for the purposes of business. In this connection, the learned departmental representative referred to the decision of the Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140. Shri Alphonso next argued that the source, from which the income was derived, should also remain with the assessee in order to enable the assessee to get the deduction of the expenditure claimed by him. He pointed out that in the present case, 1350 shares of the Crown Spg. & Mfg. Co. Ltd. had gone out of the hands of the assessee-HUF consequent to the partial partition, that these shares no longer belonged to the assessee family and that the income from these 1350 shares were not assessable in the hands of the assessee-family, but in the hands of the divided coparceners, to whom they have been allotted in the partial partition. Shri Alphonso submitted that the facts of the present case were similar to the facts in the case of Seth Shiv Prasad v. CIT [1972] 84 ITR 15 (All.) and that the ratio of the said decision would be directly applicable to the facts of the present case. He, therefore, submitted that the reasoning of the AAC in paragraph No. 7 of his order to allow the assessee’s claim for deduction of this interest was erroneous and that the department should succeed in its appeal.
10. Shri Dilip Chokshi relied on the language of Section 57(iii) and pointed out that emphasis in the said provision was on the words ‘laid out’ or ‘expended’, that these two words do not connote the same idea, that the word ‘expended’ means taking over an obligation by way of mortgage or pledge and the word ‘purpose’ means what was paid to be obtained. In support of his arguments, Shri Chokshi relied on the decision of the Gujarat High Court in the case of Smt. Padmavati Jaykrishna v. CIT [1975] 101 ITR 153 at pages 360 and 164 and contended that we should consider the immediate purpose of the loan only and not whether the asset continued with the family or not. He argued that in the present case, the dominant purpose of the borrowing was to invest in shares at the time of making the borrowing, which would entitle the assessee to allowance of interest under Section 57(iii). He further argued that there was a distinction between accruing of expenditure and incurring of expenditure and submitted that the assessee incurs the liability to pay interest on borrowing as soon as the borrowing is effected. He submitted that the continuance of the asset in the subsequent years, i.e., after the year of borrowing was necessary and that the asset did continue with the assessee-HUF in a depleted form, i.e., in the form of 8 shares. Shri Chokshi, therefore, submitted that the source of income, viz., the shares, still continued to exist even after partial partition and that, therefore, the assessee would be entitled to deduction of interest claimed by him. The argument of the learned Counsel is that dividends from the shares of Crown Spg. & Mfg. Co. Ltd. and other shares, constitute one source of income under the head ‘Income from other sources’ and that, therefore, the assessee’s claim for deduction of interest on borrowing under Section 57(iii) was rightly allowed by the AAC. He further pointed out that the shares partitioned in the partial partition were out of the shares of the value of Rs. 10.24 lakhs and that the remaining shares continued with the assessee family, which was a source of income under the head ‘Income from other sources’ and that, consequently, the assessee would be entitled to deduction under Section 57(iii). Shri Chokshi submitted that the decision of the Allahabad High Court in Seth Shiv Prasad’s case (supra), relied on by the revenue, was distinguishable on facts, as would be seen from the discussion at p. 19 (Second paragraph). Shri Chokshi relied on the decision of the Bombay High Court in Mills Store Co. v. CIT [1971] 80 ITR 225 for the purpose of determining the amount disallowable, which is the point agitated by the assessee in his cross-objection.
11. Shri Alphonso, in his reply, submitted that the decision in the case of Mills Store Co. (supra) was a case arising under Section 10(2)(iii) of the 1922 Act, corresponding to Section 36(1)(iii) of the 1961 Act, relating to the allowance of interest on borrowings for the purpose of business and, therefore, the said decision would be inapplicable to the facts of the present case. He further pointed out that for computing the disallowance, the ITO had taken note of the 8 shares of Crown Spg. & Mfg. Co. Ltd., which were acquired by the assessee out of the borrowing made by him, which continued to remain with the assessee-family and, after excluding the value of Rs. 3,000 relating to these 8 shares, the ITO had calculated the interest on the balance of the borrowing amounting to Rs. 4,94,000 and that, therefore, the assessee was not entitled to any further deduction. He submitted that the disallowance made by the ITO was correct and that the same should be restored and the cross-objection deserved to be rejected.
12. In our view, the decision of the Allahabad High Court in the case of Seth Shiv Prasad (supra) is directly applicable to the facts of the present case. In the said case, the assessee, a HUF, already holding a large number of shares of a company, purchased a block of 19,250 shares of the company from ‘D’. A part of the purchase consideration was paid and the unpaid balance was treated as money due to ‘D’ and interest was paid on this amount. There were partial partitions in the assessee-family in 1953 and 1959. As a result, the entire block of 19,250 shares ceased to form part of the assets of the assessee. For the assessment years 1960-61 and 1961-62, the assessee claimed deduction of the interest amount as also the legal expenses incurred in defending the right to the block of shares. The Allahabad High Court held that the block of 19,250 shares was treated by the assessee as a distinct group and formed a single source of income of the assessee, that as these shares were not held by the assessee during the relevant previous years, the interest was not expenditure incurred for earning dividend from it, that it was not deductible and that the legal expenses in defending the right to the shares were not also deductible. Their Lordships held that under Section 12(2) of the 1922 Act, corresponding to Section 57(iii) of the 1961 Act, the allowance is in respect of the expenditure incurred for the purpose of making or earning income and, hence, it must be incurred while there is a possibility of income being earned and that necessarily postulates the existence of the source of such income at the time when the expenditure is incurred. Their Lordships also held that a source of income may be described as the spring or fount from which a clearly defined channel of income flows, that it is that by which its nature and incidents constitute a distinct and separate origin of income capable of consideration as such in isolation from other sources of income and which, by the manner of dealing adopted by the assessee, can be treated so. Their Lordships further held that the assessee may treat the shares of the same company as constituting a number of separate and distinct holdings and, hence, distinct sources of income and that shares may be divided into groups defined by reference to the circumstances in which they were acquired or to the purpose for which they were acquired or to the class or category to which they belong. We are unable to agree with the learned Counsel for the assessee that this decision of the Allahabad High Court is distinguishable on facts from the present case.
13. In Bai Bhuriben Lallubhai v. CIT [1956] 29 ITR 543, the Bombay High Court held, on the facts of the said case, 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 deduction claimed under Section 12(2) of the 1922 Act and that 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. Their Lordships further held that 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, that receipt of interest on that tax was purely incidental and that, therefore, the assessee could not claim the deduction on that account either. Their Lordships further held that if an assessee has no option except to incur an expenditure in order to make the earning of an income possible, then undoubtedly the exercise of that option is compulsory and any expenditure incurred by reason of the exercise of such option would come within the ambit of Section 12(2). Their Lordships also held that whether the option has no connection with the carrying on of the business or the earning of the income and the option depends upon personal considerations or upon motives of the assessee, that expenditure cannot possibly come within the ambit of Section 12(2). In that case, the assessee had claimed to deduct under Section 12(2) the interest earned by her from fixed deposit, the interest on money borrowed by her for the purpose of meeting the household expenses, purchase of jewellery and meeting advance payment of tax. In our view, the ratio of this decision is also to be followed in the present case.
14. In Madhav Prasad Jatia v. CIT [1979] 118 ITR 200, their Lordships of the Supreme Court held that the expression ‘for the purpose of business’ occurring in Section 10(2)(iii) as also in Section 10(2)(xv) of the 1922 Act was wider in scope than the expression ‘for the purpose of earning income, profits or gains’ occurring in Section 12(2) and, therefore, the scope for allowing a deduction under Section 10(2)(iii) or Section 10(2)(xv) was much wider than the one available under Section 12(2). In the said case, the Supreme Court affirmed the decision of the Allahabad High Court, disallowing the assessee’s claim for deduction of interest on the borrowing of Rs. 5.5 lakhs made by the assessee for the purpose of making a donation to an educational institution. The assessee’s claim that she had preferred to draw on the overdraft account for the purpose of paying to the college in order to save her income earning assets, viz., the shares, which she otherwise would have had to sell, was not accepted by the Court.
15. The decision of the Gujarat High Court in Smt. Padmavati Jaykrishna’s case (supra), relied on by the assessee’s learned Counsel, also supports the case of the revenue and not that of the assessee. In this case, their Lordships of the Gujarat High Court have held that, in order to earn a deduction from ‘Income from other sources’ contemplated by Section 57(iii), the assessee has to prove two things, viz., (i) that the expenses in question were incurred for the purpose of earning the income sought to be taxed and (ii) that such expenditure was incurred ‘wholly and exclusively’ for the said purpose. Pointing out the distinction between the provisions of Section 37 and Section 57(iii), their Lordships held that the purpose contemplated by Section 57(iii) is more specific in character inasmuch as it points to a precise and specific object of making or earning income and that the motive, with which the expenditure is incurred, is irrelevant in this section. Their Lordships also pointed out that the other requirement of Section 57(iii) is that the expenditure should be incurred ‘wholly and exclusively’ for the purpose of earning income and that if the purpose of earning income is coupled with some other extraneous purpose, it will not be possible to say that the deduction under Section 57(iii) is earned by the assessee. In that case also, the assessee claimed to deduct interest on amounts borrowed for payment of income-tax, wealth-tax and annuity deposit under Section 57(iii) on the ground that if she had not borrowed the money, she would have had to liquidate her shareholdings and, thus, would have lost one of her sources of income and in any case the annuity deposit would earn interest. These contentions were rejected and it was held that the interest on the borrowed amount was not deductible under Section 57(iii). Their Lordships followed the decisions of the Supreme Court in the cases of Malayalam Plantations Ltd. (supra), T.S. Krishna v. CIT [1973] 87 ITR 429 and two other decisions of the Gujarat High Court in CIT v. Kasturbhai Lalbhai [1968] 70 ITR 267 and CIT v. Mrs. Indumati Ratanlal [1968] 70 ITR 353. This decision, in our view, rather supports the stand of the revenue and not that of the assessee in the present case.
16. The decision of the Bombay High Court in Mills Store Co.’s case (supra), cited by the assessee’s learned Counsel, was a case under Section 10(2)(iii) and is, therefore, of no relevance for the point in dispute in the present appeal and the cross-objection. It is, therefore, not necessary to refer to this decision in detail.
17. When we examine the facts of the present case in the light of the ratio of the four decisions discussed above, we find that 1,350 shares out of 1358 shares of Crown Spg. & Mfg. Co. Ltd. which were acquired by the assessee-HUF, out of the borrowing of Rs. 4,97,000, have been taken out of the joint family common stock and divided by metes and bounds by allotment of specific shares to the three coparceners in the partial partition effected on 17-3-1975. Only 8 shares are left with the assessee-HUF and the remaining 1350 shares have been specifically allotted with their distinctive numbers to the three coparceners. This is clear from the indenture of partial partition dated 17-3-1975, the balance sheet of the assessee-HUF as on 31-3-1975 and the order of the ITO accepting the partial partition as on 17-3-1975 and holding that these 1350 shares and other assets divided among the three coparceners ceased to be held by the assessee-HUF and that from that date onwards, the partitioned assets would be considered in the hands of the respective members/groups to whom they have been allotted. There is no dispute before us that in this partial partition, the liability for the borrowing for the acquisition of the 1350 shares was not also divided and allotted to the three members in the proportion of the shares allotted to each of them, but was retained by the assessee-HUF as its liability as could be seen from the balance sheet as at 31-3-1975. There is also no dispute that the borrowing relating to the acquisition of 1350 shares amounted to Rs. 4,94,000. It is the interest paid by the assessee in respect of this amount of Rs. 4,94,000, which the ITO had worked out at 12 per cent and disallowed Rs. 59,820 in the assessment order. The materials referred to above clearly establish that 1358 shares of the Crown Spg. & Mfg. Co. Ltd. acquired out of the borrowing along with 20 shares acquired earlier, were treated as separate and distinct holdings by the assessee-family and also divided among the three coparceners, leaving only 28 shares with the assessee-HUF. Out of these 28 shares, only 8 shares were acquired out of the borrowing, since the 20 shares seem to have been acquired much earlier. It is not the case of the assessee before us that these 20 shares were acquired out of any borrowing. These facts, therefore, lead to the conclusion that the source of income, namely, 1350 crown shares have gone out of the hands of the assessee-HUF as a result of the partial partition and that there is absolutely no chance of any dividend income from these 1350 shares being earned by the assessee-HUF, as such dividend income will belong to the three coparceners to whom they have been allotted. No doubt, the dividends from the 8 shares still remaining with the assessee-HUF, will be assessable in the hands of the assessee-HUF. For that reason, can it be said that the interest on the entire borrowing of Rs. 4,97,000 should be allowed against such dividend income from the 8 shares ? To our mind, the assessee is entitled to the deduction of interest relatable to the borrowing invested in the 8 shares and not to the entire amount of interest on the borrowing of Rs. 4,97,000 invested in acquiring the 1358 shares. The interest relating to the borrowing of Rs. 4,94,000 invested in the 1350 Crown shares, which have gone out of the common HUF hotchpot in the partial partition is not an allowable deduction in the hands of the assessee-HUF, as such interest was neither laid out nor expended by the assessee-family in the year ended 31-3-1976, for the purpose of making or earning any income, much less any dividend income from the 1350 Crown shares.
18. The argument of the learned Counsel that such interest would be allowed under Section 57(iii), as the assessee-HUF was holding shares of other companies which yielded dividend income under the head ‘Income from other sources’ and that all these shares should be considered as a single source of income for this purpose, cannot be accepted for the simple reason that it is an indisputable fact that none of these shares has been acquired out of the borrowing of Rs. 4,94,000. Therefore, the interest relating to this amount of Rs. 4,94,000 can by no stretch of argument or imagination be held to have been laid out or expended for the purpose of making or earning the dividend income from the other companies’ shares held by the assessee-HUF. The reasoning and conclusion of the AAC in paragraph No. 7 of his appellate order to allow the assessee’s claim are, therefore, clearly contrary to law as laid down by the Supreme Court, Allahabad, Bombay and Gujarat High Courts, referred to above.
19. This takes us to the consideration of the assessee’s alternative submission in his cross-objection, that the amount disallowed by the ITO is excessive. On an examination of the particulars of interest payments in the statements of accounts filed along with the return of income, we find that there is some force in the submission of Shri Chokshi. We find that the borrowing for the purpose of purchase of 1,358 Crown shares was made by the assessee-HUF on 31-1-1975 from Laxmi Sprinklers Deposit Account No. 1. This is a separate account distinct from another ‘Deposit account’ in the name of the same ‘Laxmi Sprinklers’. The interest credited to deposit account No. 1 for this year was Rs. 50,738 only as the assessee-HUF had repaid Rs. 1 lakh in this loan account. Therefore, the ITO was not justified in disallowing Rs. 59,280, ignoring the actual amount of interest paid by the assessee in this deposit account No. 1. Even out of this Rs. 50,738, the amount to be disallowed is Rs. 49,378 only, if Rs. 360 representing interest at 12 per cent per annum on Rs. 3,000 invested in the 8 Crown shares retained by the assessee-HUF is excluded. Thus, out of the deficit of Rs. 60,836 on account of interest in Vatav account claimed by the assessee-HUF, Rs. 11,458 is allowable instead of Rs. 1,556 allowed by the ITO (Rs. 60,836 minus Rs. 49,378). The ITO is directed to allow the said deficit of Rs. 11,458 as against Rs. 1,556 allowed by him and allow consequential relief due to the assessee.
20. In the result, the revenue’s appeal and the assessee’s cross-objection are partly allowed.
