JASWANTRAI P MEHTA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is an individual and the assessment year with which we are concerned in this reference is 1974 -75, the year of account being S. Y. 2029, which ended on October 26, 1973. The assessee, as karta of his Hindu undivided family, is a partner in Messrs. C. Prabhudas and Co., a partnership firm. The assessee has an account with the firm of C. Prabhudas and Co. in his individual capacity also. He had borrowed money from C. Prabhudas and Co., and invested the borrowed money in purchase of shares. The assessee's major investments are in Polysteels (India) Limited and Polygas Limited. According to the Income -tax Officer, the investments are made in the said companies for controlling the affairs of the company rather than for earning income as envisaged under section 57(iii) of the Income -tax Act, 1961. In Polysteels (India) Limited, other members of the assessee's family, namely, his wife, brother, brother's wife, mother and other private limited companies in which the assessee and/or other members of his family have interest are holding shares. Opening balance in the assessee's individual account with Messrs. C. Prabhudas and Co. was Rs. 3,17,665. The assessee had paid interest of Rs. 40,193 on the outstanding amount in this account and claimed that interest to the extent of Rs. 39,801 should be allowed as deduction under section 57(iii) of the Income -tax Act, 1961 ('Act' for short), while computing the income chargeable under the head 'Income from other sources'. However, since, in the view of the Income -tax Officer, investment made out of the money borrowed from Messrs. C. Prabhudas and Co. were for controlling the affairs of the aforesaid companies, and not for earning the income as envisaged under section 57(iii) of the Act, the assessee was not entitled to claim deduction of the interest amount of Rs. 39,801 as claimed by him. He, therefore, rejected the claim of the assessee and proceeded to compute the total income for the assessment year 1974 -75. The total income computed came to Rs. 1,81,144 as against the returned total income of Rs. 1,18,920.

(2.) BEING aggrieved by the assessment made by the Income -tax Officer, the assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, following his decision in the appeals for the assessment years 1972 -73 and 1973 -74, allowed the assessee's claim for deduction of the interest of Rs. 40,193. It is not disputed that the Appellate Assistant Commissioner had committed a mistake in allowing the deduction of the entire interest of Rs. 40,193, since the assessee himself had restricted his claim to deduction of the interest to Rs. 39,801. We are told that the mistake committed by the Appellate Assistant Commissioner is corrected later.

(3.) THE question which arises for our consideration is as to whether the assessee is entitled to claim deduction of interest paid on interest payable in the preceding year or years. Section 57(iii), under which the assessee claims deduction, reads as follows :