GOPALDAS DAHYABHAI LAVSI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this case, at the instance of the assessee, the following question has been referred to us for our opinion by the Tribunal :

(2.) WE are concerned in this case with the asst. yrs. 1965 66 and 1966 67, the relevant previous years being Samvat year 2020 and Samvat year 2021 respectively. The assessee is an individual and he was a partner at the relevant time in two firms, M/s Indian Textile Traders (hereinafter referred to as "the textile firm") and M/s Dahyabhai Vanmalidas Lavsi (hereinafter referred to as " the Lavsi firm"). The account of the assessee with the Lavsi firm showed a debit balance whereas the account of the assessee with the textile firm was to his credit at the end of each respective year. In each firm, the amount of interest payable by the partner to the firm or by the firm to the partner on the amount outstanding at the foot of the account was at the rate of six per cent. The assessee had a 20 per cent. share in the Lavsi firm and his wife was a partner in Lavsi firm with a 25 per cent. share. In the textile firm the assessee had a 50 per cent. share. At the end of Samvat year 2020, relevant to the asst. year 1965 66, the assessee paid an amount of Rs. 6,934 by way of interest to the Lavsi firm on the amount outstanding at the foot of the account. For Samvat year 2021, relevant to asst. year 1966 67, the assessee paid an amount of Rs. 7,338 by way of interest to the Lavsi firm. The assessee was paid interest at six per cent. by the textile firm in respect of the amount standing to his credit and those amounts of interest in each of the assessment years were included in the total income of the assessee for the purposes of taxation. The assessee claimed that he had allowed his amount to remain with the textile firm and had earned interest and he had withdrawn moneys from the Lavsi firm so that ultimately he could earn interest from the textile firm. The ITO noted that in the beginning of Samvat year 2020 there was a debit balance of Rs. 93,769 which rose to Rs. 1,31,310 by the end of the year. He also noted that the debit balance was due to withdrawals by the assessee for payment of income tax, insurance premium, meeting household expenses, etc. The ITO found that the debit balance in the past was also due to such payments and not for any investment yielding income. Relying upon the decision of the Bombay High Court in Bai Bhuriben Lallubhai vs. CIT (1956) 29 ITR 543 (Bom), the ITO disallowed the assessee's claim for the interest that he had paid to the Lavsi firm. In the appeal before the AAC, the same contentions were urged as were urged before the ITO. It was also urged before the AAC that the interest payments to the Lavsi firm were allowed in the past and it was also contended that as the assessee had offered for assessment interest received from the firm, interest paid to the Lavsi firm should be set off and only the balance should be assessed. The AAC rejected all the contentions of the assessee and confirmed the order of the ITO. The matter was taken in further appeal by the assessee to the Tribunal and the Tribunal passed a common order for both the years. The Tribunal found that out of the aggregate amount that the assessee had withdrawn from the Lavsi firm, an amount of Rs. 3,000 had been utilised by him for the purpose of investment in the textile firm. Barring this amount of Rs. 3,000, the rest of the money was borrowed for discharging what were found by the Tribunal to be purely personal liabilities. The Tribunal observed: "No doubt, the assessee's interest income would have gone down and in that case the assessee would have earned to that extent lower income but if the assessee chose to follow a different course whereby he earned more interest and at the same time he has to pay interest for borrowings for purposes which would not justify deduction of interest paid from the assessee's taxable income, it cannot be held that the taxable interest income should be deemed to have been reduced to the extent of the interest paid which is otherwise not allowable." So, the Tribunal allowed the appeals of the assessee so far as interest on Rs. 3,000 was concerned, that being the amount borrowed from the Lavsi firm for investment in the textile firm and the appeals as to the rest of the amounts of interest were dismissed. Thereafter, at the instance of the assessee, the question set out hereinabove has been referred to us for our opinion.

(3.) IN Bai Bhuriben Lallubhai vs. CIT (supra), the Bombay High Court has held that if an assessee has no option but to incur an expenditure in order to make the earning of an income possible, then undoubtedly the exercise of that option is compulsory and any expenditure incurred by reason of the exercise of that option would come within the ambit of S. 12(2) of the Indian IT Act. But where the option has no connection with the carrying on of the business or the earning of the income and the option depends upon personal considerations or upon motives of the assessee, that expenditure cannot possibly come within the ambit of S. 12(2). The assessee in that case claimed to deduct under S. 12(2) of the Indian IT Act from interest earned by her from fixed deposit the interest on money borrowed by her for the purpose of meeting household expenses, purchasing jewellery and meeting advance payment of tax. It was held that the purpose for which the assessee borrowed money had no connection, whether direct or indirect, with the income which she earned from the fixed deposit and that she was not entitled to the deduction claimed under s. 12(2). It might be that the assessee's motive was to save her fixed deposit and interest and to meet household expenses, etc., by means of a loan borrowed but that consideration was entirely irrelevant. Even as regards advance payment of tax the purpose of borrowing the money in order to pay advance tax was to discharge the statutory obligation upon the assessee; receipt of interest on that tax was purely incidental and, therefore, the assessee could not claim the deduction on that ground either. This decision of the Bombay High Court was followed by this High Court in CIT vs. Mrs.Indumati Ratanlal (1968) 70 ITR 353 (Guj). In that case the assessee's husband died leaving a will bequeathing half of his estate to his wife and the other half to his minor son. The estate consisted mainly of shares and securities. For the asst. year 1962 63, the assessee claimed that an amount of Rs. 15,397, being one half of the interest on money borrowed for payment of estate duty, was deductible under S. 57(iii) of the IT Act, 1961, from the dividends derived from the shares and securities. It was held by the Division Bench of this High Court that there is no difference between interest paid on money borrowed to pay income tax and interest on money borrowed to pay estate duty. While the former is not paid for the purpose of making or earning the income, the latter is not made for the purpose of making or earning the assets. Whether interest paid is allowable under S. 57(iii) of the Act or not, depends upon the facts of each case. If property is received by a person subject to a charge for payment of a liability and moneys are borrowed for clearing that liability, the interest paid on such borrowed moneys will be an allowable expenditure. If, therefore, at the date when the estate duty was paid by the assessee, the shares were charged with the liability for payment of estate duty, the interest paid on the money borrowed to pay estate duty would be allowable under S. 57(iii). If, however, the moneys had been borrowed by the assessee for the purpose of discharging what is purely a personal liability as an accountable person to pay the estate duty, the interest would not be allowable. In this case this High Court followed the decision of the Bombay High Court in Bhai Bhuriben Lallubhai vs. CIT (supra).