PETITIONER:
SMT. PADMAVATI JAIKRISHNA
Vs.
RESPONDENT:
ADDL. COMMISSIONER OF INCOME 'FAX,GUJARAT AHMEDABAD
DATE OF JUDGMENT22/04/1987
BENCH:
MISRA RANGNATH
BENCH:
MISRA RANGNATH
PATHAK, R.S. (CJ)
SINGH, K.N. (J)
CITATION:
1987 AIR 1723 1987 SCR (2)1167
1987 SCC (3) 448 JT 1987 (2) 230
1987 SCALE (1)958
CITATOR INFO :
F 1989 SC1092 (6)
ACT:
Income Tax Act, 1961--Section 57(iii)--Deduction--Claim
for Expenditure incurred should be wholly and exclusively
for purpose of earning income-Assessee to satisfy Income Tax
Officer.
HEADNOTE:
The assessee, assessed as an individual, derived income
from "other sources" in the shape of interest, dividends
etc. In the assessment year 1966-67 she claimed deduction of
Rs.26,986 being interest paid on loans taken by her, under
s. 57(iii) of the Income Tax Act, 1961. The income Tax
Officer found that out of the loans real investment was
Rs.1,250 only. He disallowed the claim of Rs.10,275 on
proportionate basis. The Appellate Assistant Commissioner
relying upon the ratio of the decision in Bai Bhuriben
Lallubhai v. Commissioner of Income-tax, Bombay North Cutch
and Saurashtra, [1956 ITR (XXIX) 543] dismissed the appeal
of the assessee.
Before the Tribunal the assessee contended: (1) that
expenditure under the head of payment of income tax and
wealth tax and annuity deposits should have been taken as
revenue expenditure and the claim of interest in respect of
such loans should have been admitted and (2) that the asses-
see instead of liquidating the investments which was
return-oriented, found it commercially expedient and viable
to raise a loan instead of disturbing the investments and,
therefore, the claim became admissible. The Tribunal reject-
ing the contentions and dismissing the appeal observed that
the loans were taken for meeting her personal obligation
like payment of taxes and deposit of annuity and these had
nothing to do with the business.
On reference, the High Court held that at the relevant
time it was obligatory for the assessee to make the annuity
deposit and the earning of interest through such deposit was
merely incidental and that the portion of the loan was not
intended to meet expenditure wholly and exclusively for the
purpose of earning the income and. therefore. did not come
under s. 57(iii) of the Act.
1168
Dismissing the appeal of the assessee the Court.
HELD: 1. Unless the claim comes within the purview of s.
57(iii) of the Income Tax Act. 1961 it would not be admissi-
ble as a deduction. [1170C]
2. The test to apply is that the expenditure should be
wholly and exclusively for the purpose of earning the in-
come. [1172C]
Eastern Investments Ltd. v. Commissioner of income-tax,
West Bengal, [1951] ITR 201 and Commissioner of Income-tax,
West Bengal v. RaJendra Prasad Moody. [1978] 115 ITR 519,
followed.
3. In order that the claim for deduction could be sus-
tained, it was for the assessee to satisfy the Income Tax
Officer that the loan, interest in respect of which is
claimed as deduction, was laid out or expended wholly and
exclusively for earning the income from out of which the
deduction was claimed. [1170F-G]
4. The Income Tax Authorities as also the High Court
have clearly recorded a factual finding of facts that the
expenditure in this case was to meet the personal liability
of payment of income-tax and wealth-tax and annuity and that
no part of the expenditure came within the purview ors.
57(ii) of the Act. [1171H-1172A, D]
5. This Court is inclined to agree with the High Court
that so far as meeting the liability of income-tax and
wealth-tax is concerned, it was indeed a personal one and
payment thereof cannot at all be said to be expenditure laid
out or expended wholly and exclusively for the purpose of
earning income. So far as annuity deposit is concerned. the
Tribunal and the High Court have come to the right conclu-
sion that the dominant purpose was not to earn income by way
of interest but to meet the statutory liability of making
the deposit. [1172B-C]
6. 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. [1172F]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 65 of
1975.
From the Judgment and Order dated 3.12. 1973 of the
Gujarat High Court in I.T.R. No. 35 of 1972.
1169
T.A. Ramachandran, Mrs. J. Ramachandran and S.C. Ratelh
for the Appellant.
V.S. Desai and Ms. A. Subhashini for the Respondent.
The Judgment of the Court was delivered by
RANGANATH MISRA, J. This appeal by certificate is di-
rected against the judgment of the High Court of Gujarat.
Assessee is assessed as an individual and she derived
income from “other sources” being in the shape of interest,
dividends etc. The relevant year of assessment is 1966-67.
During this year assessee claimed deduction of Rs.26986
being interest paid to Barivallabndas Kalidas Estate on
loans taken by her. The Income-tax Officer found that out of
the loans real investment was of a sum of Rs. 1250 only. He
disallowed the claim to the extent of Rs. 10,275 on propor-
tionate basis. According to him this claim could not be
admitted under section 57(iii) of the Income-tax Act of
1961.
Assessee’s first appeal to the Appellate Assistant
Commissioner was rejected. The Appellate Authority relied
upon the ratio of the decision of the Bombay High Court in
Bai Bhuriben Ballubhai v. Commissioner of Income-tax, Bombay
North Cutch and Saurashtra. [1956] ITR (XXIX) 543 and dis-
missed the appeal.
In further appeal before the Tribunal the claim of the
assessee was reiterated by contending that expenditure under
the head of payment of income-tax and wealth-tax and annuity
deposits should have been taken as revenue expenditure and
the claim of interest in respect of such loans should have
been admitted. It was further contended that the assessee
instead of liquidating 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 this contention and observed that the loans
were taken for meeting her personal obligation like payment
of taxes and deposit of annuity and these had nothing to do
with the business. The Tribunal also relied upon the ratio
of Bombay High Court decision referred to above. As the
Tribunal dismissed the appeal assessee asked for the case to
be stated to the High Court and the following question was
referred for its opinion:
“Whether on the facts and in the circumstances
of the case,
1170
payment of interest to the extent of Rs. 10.27
was not an admissible deduction under section
57(iii) of the Incometax Act?”
The High Court referred to various authorities and decided
against the assessee by concluding that at the relevant time
it was obligatory for the assessee to make the annuity
deposit and the earning of interest through such deposit was
merely incidental. The High Court further found that the
portion of the loan was not intended to meet expenditure
wholly and exclusively for the purpose of earning the income
and therefore did not come under section 57(iii) of the Act.
It is not disputed by Mr. Ramchandran for the assessee
that unless the claim comes within the purview of section
57(iii) of the Act it would not be admissible as a deduc-
tion. That section as far as relevant provides:
“The-income chargeable under the head ‘income
from other sources’ shall be computed after
making the following deductions, namely:-
(i)……
(ii) …
(iii) any other expenditure (not being in the
nature of capital expenditure) laid out or
expended wholly and exclusively for the pur-
pose of making or earning such income;-
P
r
ovided ………………………… …….
E
x
p
l
a
n
a
t
ion: ………………………………. .
In order that the claim for the deduction could be
sustained, it was for the assessee to satisfy the Income-tax
Officer that the loan interest in respect of which is
claimed as deduction was laid out or expended wholly and
exclusively for earning the income from out of which the
deduction was claimed. There is no dispute that the provi-
sion of section 57 of the Act corresponds to section 12(2)
of the Act of 1922. Dealing with a claim under section 12(2)
of the 1922 Act this Court in Eastern Investments Ltd. v.
Commissioner of Income-tax, West Bengal, [ 1951] ITR 20 1
summarised the position of law thus:-
“On a full review of the facts it is clear
that this transaction was voluntarily entered
into in order indirectly to facilitate
1171
the carrying on of the business of the company
and was made on the ground of commercial
expediency. It therefore falls within the
purview of Section 12(2) of the Income-tax
Act. 1922, before its amendment ……… ”
“This being an investment company, if
it borrowed money and utilised the same for
its investments on which it earned income. the
interest paid by it on the loans will clearly
be a permissible deduction under section 12(2)
of the Income-tax Act.”
In Commissioner of Income-tax, West Bengal v. Rajendra
Prasad Moody, [1978] ITR 115.5 19 this Court observed:
“The determination of the question before
us turns on the true interpretation of section
57(iii) and it would, therefore. be convenient
to refer to that section, but before we do so,
we may point out that section 57(iii) occurs
in a fasciculus of sections under the heading
“F–Income from other sources”. Section 56,
which is the first in this group of sections,
enacts in sub-section (1) that specified in
section 14, Items A to B, shall be chargeable
to tax under the head “Income from other
sources” and sub-section (2) includes in such
income various items, one of which is “divi-
dends”. Dividend on shares is thus income
chargeable under the head “Income from other
sources”. Section 57 provides for certain
deductions to be made in computing the income
chargeable under the head “Income from other
sources” and one of such deductions is that
set out in clause (iii). which reads as fol-
lows: ………….. ”
“The expenditure to be deductible
under section 57(iii) must be laid out or
expended wholly and excluSively for the pur-
pose of making or earning such income
In the said decision this Court clearly indi-
cated that:
“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.”
The taxing authorities as also the High Court have clearly
recorded a
1172
factual finding facts that the expenditure in this case was
to meet the personal liability of payment of income-tax and
wealth-tax and annuity. From the order of the Tribunal as
also the judgment of the High Court it appears that the
assessee had taken the stand that even if the claim relating
to income-tax and wealth-tax was not admissible. that part
of the claim relatable to annuity deposit should have been
admitted as it fetched interest. We are inclined to agree
with the High Court that so far as meeting the liability of
income-tax and wealth-tax is concerned it was indeed a
personal one and payment thereof cannot at all be said to be
expenditure laid out or expended wholly and exclusively for
the purpose of earning income. So far as annuity deposit is
concerned the Tribunal and the High Court have come to the
right conclusion that the dominant purpose was not to earn
income by way of interest but to meet the statutory liabili-
ty of making the deposit. The test to apply is that the
expenditure should be wholly and exclusively for the purpose
of earning the income. The fact finding authorities have
come to the conclusion that no part of the expenditure came
within the purview of section 57(iii,) of the Act.
Mr. Ramchandran 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 Investments Case. 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.
This appeal has to fail and the order of the High Court
has to be affirmed. We accordingly dismiss the appeal but
leave the parties to bear their respective costs.
A.P.J. Appeal
dismissed.
1173