ZUBEDABAI SMT Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the assessee, the following question has been referred by the Tribunal for opinion of this Court :

(2.) SMT . Zubedabai, wife of Haji Umer Gani, the assessee, was a partner in the firm of Haji Umer Gani & Co. up to the end of March, 1962. After she ceased to be a partner, she withdrew various sums from her accounts in the books of the firm, for which the firm charged interest from her at the rate of 9 per cent per annum. She made deposit with one P. S. S. Chettiar out of the moneys withdrawn by her, from which she received interest at 12 per cent per annum. Her income from such interest in the accounting years ending with March, 1964, March, 1965 and March 1966, which are the previous years for the three assessment years under consideration, namely, 1964 65 to 1966 67, was respectively to the tune of Rs. 13,718, Rs. 14,200 and Rs. 9,373. The assessee claimed that the borrowings from the firm were for payment of advance tax and meeting other personal expenses, and as a result she was entitled to deduction of the amount of interest paid by her to the firm in determining her income from interest on deposits. It is obvious that the income was declared under the head "Other sources" under S. 56 of the IT Act, 1961, and deduction was claimed under S. 57(iii). The ITO disallowed the claim of deduction. The assessee filed appeals to the AAC, who allowed the deduction and consequently appeals were filed. The Department challenged these orders before the Tribunal. All these appeals were disposed of by a common order of the Tribunal dt. 28th Feb., 1972. The Tribunal came to the conclusion that the expenditure was not "laid out or expended wholly and exclusively for the purpose of making or earning such income" as mentioned in S. 57(iii). The question referred arises out of this order of the Tribunal.

(3.) IT is true that this nexus need not be always direct. All the same it has to be established that the assessee had no option except to incur the expenditure in order to preserve the income earning apparatus or, in other words, to make earning of that income possible. What is contended on behalf of the assessee by Shri Thakkar, the learned counsel, is that commercial expediency demanded that borrowings from the firm should be made to keep those deposits intact, for, otherwise, the deposits would have been required to be liquidated for payment of taxes and, therefore, at least to that extend deduction should have been allowed. It seems to us that this line of reasoning is not sound. If the argument is carried to its logical conclusion, the result would be ridiculous. Interest paid on any borrowings for discharging any statutory or commercial liability would be deductible, for it would always be possible to say that if those borrowings had not taken place, the income earning apparatus, including deposits such as these, would have to be liquidated, and that consequently would have resulted in loss of income. But in the scheme of S. 57(iii) this is not permissible. May be that the motive behind the borrowings was what was suggested. But for establishing a nexus, not the motive but the purpose is relevant. It is obvious that the interest on deposits would have been continued even if the advance tax was not paid. The two, namely, the expenditure and the income, are thus unconnected.