K NANDAKUMAR Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) THE two petitioners in these original petitions have been assessed to tax under the IT Act, 1961. They were in receipt of the income from the two firms M/s Thirumani Publications (Trust) and M/s United Film Exhibitors. Both of them had also income by way of interest or fixed deposits and saving accounts in banks. The petitioners had taken loan from the Indian Bank for the purpose of contributing their portion of the share capital in the firm M/s United Film Exhibitors. Both the petitioners had filed returns claiming deduction of Rs. 6,000 under s. 80L of the Act in respect of their interest from deposits in the bank. The assessments were completed for the year 1983-84 by Ext. P2 orders without granting the benefit. On enquiry they knew that they were not granted the benefit for the reason that they had to pay interest to the bank on the loans on the fixed deposits and, therefore, there was no scope for granting the benefit under s. 80L. The petitioners filed revision petitions Ext. P4 before the CIT pointing out that the interest paid by them on the loans taken from the bank for contributing their share capital had to be deducted as admissible expenditure from the income from business and, therefore, they were entitled to the benefit of the deduction under s. 80L. They also pointed out that for the previous year 1982-83 in an appeal carried by them to the AAC, that authority had accepted their case that the amount taken as loan from the bank was for the purpose of contributing their share capital and therefore, the interest paid on that loan was liable to be deducted from their business income. The CIT did not, however, accept this contention and rejected the revision petition by the order Ext. P5. These original petitions are filed challenging Exts. P2 and P5 with the contention that the interest on the loan taken from the bank should be deducted as admissible from the expenditure from the income from business and they should be given the benefit of the deduction under s. 80L.

(2.) THE CIT had relied on s. 80AB which was introduced w.e.f. 1st April, 1981 to hold that the benefit under s. 80L could be allowed only out of the net amount remaining by way of interest after adjusting the interest paid to the bank on the loan from the fixed deposit and if so there was no amount which could be deducted under s. 80L. In other words, the view taken was that the interest paid on the loan from the bank was to be adjusted against the interest due from the bank and since that resulted in a negative figure no deduction under s. 80L could be allowed.

(3.) THE effect of s. 80AB is that for the purpose of computing the deduction under s. 80L the amount of income of that nature as computed in accordance with the provisions of the Act shall alone be deemed to be the amount of income of that nature. What the section means is that the net income by way of interest computed in the manner provided by the provision of the Act shall alone be taken into account for computing the benefit. But it must be noted that payment of interest under a loan transaction incurred for the purpose of deriving income from business is not an item which arises in the computation of interest income "in accordance with the provisions"of the Act. The said amount has to be paid irrespective of whether any interest income is otherwise received or not. Though the interest is payable to the same bank, the fact remains that the amount of income by way of interest is not calculated under the provisions of the Act with reference to such outgoings which fall under different heads. The assessee is entitled to deduction under s. 37 of all expenditure incurred for the purpose of deriving the business income, and it is under that head that the interest paid on the loan taken from the bank is deducted. The net amount of interest contemplated by s. 80AB should taken in the net amount arrived at after meeting the expenses deductible from that item under the provisions of the Act as explained above. That is not the case here. Therefore, s. 80AB has no application to the facts of these cases. The interest paid on the loan transaction has to be deducted from the business income, and not from the interest received from the bank on the fixed deposits. The assessees were, therefore, right in the submissions which they made before the CIT in the revision petitions which they filed. This aspect of the matter has been overlooked by the Commissioner in passing the order Ext. P5. Accordingly, I allow the original petitions and quash Exts. P2 and P5. The first respondent is directed to complete the assessments afresh after deducting the interest paid by each of the petitioners to the bank on the loans on their fixed deposits from out of the business income of the petitioners, and also to grant them the deduction under s. 80L. There will be no order as to costs.