Smt. Padmavati Jaikrishna A v. Addl. Commissioner of Income Tax, Gujarat, Ahmedabad

SMT. PADMAVATI JAIKRISHNA A _v._ ADDL. COMMISSIONER OF INCOME .TAX. '"'f GUJARAT AHMEDABAD APRIL 22, 1987 B (R.S. PATHAK, C.J. RANGANATH MISRA AND K.N. SINGH, JJ.] -~ _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. c ## The assessee, assessed as an individual, derived income from -( "other sources" in the shape of interest, dividends etc, Jn the asse~· ment year 1966-67 she claimed deduction of Rs,U,986 being interest paid on loans taken by her, under s. 57(iii). ~Hhe Income Tax Act, 1961. The Income Tax Officer fe;>u~<l ~at out of the loans real investment was D Rs.1,250 only. He disalluw~ the claim of Rs.10,275 on proportionate basis. 1'h':: Aepel~~~~ As~istamt Commissioner relying upon the ratio of \he. ~cisioo ii\ _lttti Bhuriben Lallubhai_ v. _Commissioner of Income-tax,_ ~o.m#J,qy _North Cutch and Saurashtra,_ [1956 ITR (XXIX) 543] dismis· li"d the appeal of the assessee. t- E 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 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 •ll re$pect of such loans should have been admitted and (2) ,.J..) that the assessee instead of liquidating the investments which was F return-oriented, found it commercially expedient and viable to raise a loan Instead of disturbing the investments and, therefore, the claim ~ [became admissible. The '(ribunal rejecting the contentions and dismis-] sing 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. G 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 ipterest through such deposit was merely incidental and that the portion of the loan was not intended to meet expenditure wholly ~md exclusively for the purpose of earning the income and, therefore, did H not come under s. 57(iii) of the Act. 1167 A B ###### c _r_ D E F G 1168 SUPREME COUR'I; REPORTS [1987] 2 S.C.R. Dismissing the appeal of the assessee the Court, HELD:l. Unless the claim comes within the purview of s. 57(iii) _Y_ of the Income Tax Act, 1961 it· would not be admissible as a deduction. [1170C] 2. The ~est t~ apply is that the expenditure should be wholly and exclusively for the purpose of earning the income. [ 1172C] ' ' ## _Eastern 'Investments Ltd._ v. _Commissioner of Income-tax, West_ ~ _Bengal,_ [1951) ITR 20 1 and _Commissioner of Income-tax, West Bengal_ ~ v. _Rajendra'Prasad Moody._ [1978) 115 ITR 519, followed. 3. In order that t,he claim for deduction could~ sustained, it was for the assessee to satisfy the Income Tax Officer that the loan, interest }fo 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-GJ 4. The Income Tax Authorities as also the High Court have cl~arly 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 ofs. 57(iii) of the Act. [1171H-1172A, D] _-f_ ... L.:. 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 depos~t is concerned, the Tribunal and the High Court have come to the right conclusion that the _y_ 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. [1172Fl ' · _+--_ ·CIVIL APPELLATE JURISDICTION: Civil Appeal No. _65_ of 1975. From the Judgment and Order dated 3.12.1973 of the Gujarat H High Court in I.T.R. No. 35of1972. A B c D E F G H 1170 SUPREME COURT REPORTS (1987] 2 S.C.R. 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 expendi· ture wholly and exclusively for the purpose of earning the income and therefore did cot 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 deduction. That section as far as relevant provides: "The income chargeable under tbe head 'income froJll other sources' shall be computed after making tbe follow· ing deductions, namely: (i) ... (ii) ... (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended _wholly and exclu-_ _sively_ for the purpose of making or earning such income; Provided ............................................ Explanation: ............................... ·'· .... '' 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 !hat the provision 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 _}-_ -4 ## }. #### _+_ - _JJJi--_ ..., _+-_ PADMAVATJ _v._ ADDL. C.I.T. (MISRA, J.) 1171 the carrying on of the business of the company and was A 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 B 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, 519 this Court observed: c # ### + "The expenditure to be deductible under section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such inqim~ ,, In the said decision this Court clearly indicated 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 "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 D 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 G H "dividends". bividend on shares is thus income charge- E able 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), w!iich reads as follows: .............. " F 1172 SUPREME COURT REPORTS (1987] 2 S.C.R. A 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 ihe right c - conclusion that the dominant purpose'was. not to earn income"by way. of interest but to meet the statutory liability of making the deposit. The test to apply is that the expenditure. should be wholly and exclu A sively for the purpose of earning the income. The fact finding autho-· rities have come to the conclusion that no part of the expenditure came '. ###### D within the purview.of section 57(iii~ of the Ac,t: · / ' -· . ' . •': - ' _:';,_ _-,:_ . \ . · .. _' . '. . . ' ###### ., ' _f_ .·.·~ E 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. 0,1 mere assumptions such a point cannot .be allowed to _be raised here for consideration. In fact unless.the loan is incuned 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 arid the order _ot_ the High court has to be 'affirmed .. We accordingly dismiss the"appeal but leave the parties to bear their respective costs:, - :. - · · ·· .,. . A:P.J. "-.. Appealdismissed. .,;' ' . •' .. _,_,·-:_ ·._ ··-.,. :_-· .- ..,.•_·, ;··. .., __ - .., ;··. .., __ _j_ ·'"' _··:·_ < •• .,,_ ... ' .··- ... -,,-,