MATUBHAI C PATEL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this reference, the Tribunal, Ahmedabad Bench 'B' has referred for our opinion a question of law under S. 256(1) of the IT Act, 1961, at the instance of the assessee. The said question runs as under :

(2.) IN order to appreciate the background of the controversy between the parties which has given rise to the aforesaid reference, it is necessary to have a look at certain relevant facts : The assessee's father expired somewhere in July, 1965. On his death, the assessee inherited assets worth Rs. 12,38,000 and liabilities worth Rs. 2,47,000 in respect of the borrowing from the Bank of India by the assessee's father. The bank liabilities represented overdraft taken by the assessee's father for the purpose of paying his tax liabilities. The assessee's father in his lifetime had paid interest on the overdrafts for four years. Out of the assets which included shares and buildings, the shares had been pledged by the father of the assessee with the Bank of India as security for the overdrafts for the relevant asst. yrs. 1966 67, 1967 68, 1968 69 and 1969 70. The ITO did not allow the claim of the assessee to deduction of interest payment to the Bank of India from the income from assets inherited by him on the death of his father. The assessee's case before the ITO was that when the Revenue was assessing the dividends from such shares which he had inherited from his father and when it was also assessing the rental income of the assessee from the property inherited by him, as a necessary corollary the assessee should be allowed a deduction of interest payment made by him on such liabilities. The ITO took the view that the assessee was not able to prove that the interest payment was for the purpose of investment, income from which was chargeable to tax.

(3.) THE AAC's orders were challenged before the Tribunal where the assessee contended that what the assessee inherited were encumbered properties and, therefore, there could be no justification for disallowing the interest payment on the liabilities inherited as a deduction from the assessable income because what was assessable must be the real and not the fictional income. It was also submitted that what was true of the wealth or the estate must also be true of the income and it cannot even be suggested by the Revenue that the liabilities inherited by the assessee were not deductible from the wealth or the estate.