COMMISSIONER OF INCOME TAX Vs. D M GHIA

JUDGEMENT

(1.) BY this reference under S. 256(1) of the IT Act, 1961, the Tribunal has referred the following question of law to this Court for opinion at the instance of Revenue :

(2.) THE assessee is an individual. He was a partner of the firm M/s M.C. Ghia and Co. His personal account in the firm had been treated somewhat like a current account. His income was credited in that account. Similarly his drawing, payment of taxes, etc. were debited in that account. The partnership deed did not stipulate that partners would be debited with interest. Nevertheless, interest was charged on the debit balances. The interest debited in the account of the assessee was Rs. 1,47,257 for the asst. year 1976 -77 Rs. 1,04,552 for the asst. year 1977 -78 and Rs. 1,16,686 for the asst. year 1978 -79. There was brought forward debit balance in the above account every year. Part of the brought forward debit balance was stated to be the withdrawals made on account of the payment of personal income -tax of the assessee. The assessee claimed deduction of interest attributable to the amount of tax paid by him in the past from the money withdrawn by him as a partner of the firm and debited in the above account. For the asst. year 1976 -77, the ITO allowed a sum of Rs. 2,085 calculated at the rate of 9 per cent on the borrowings made by the assessee for the payment of taxes after 1st April, 1976. For the asst. year 1977 -78, he found that nothing was withdrawn from the firm for payment of taxes. Nothing was, therefore, allowed as deduction under S. 80V of the IT Act, 1961 ("Act"). For the asst. year 1978 -79, he found the position to be the same as in 1977 -78. There were no specific withdrawals for payment of taxes and the drawings of the year were less than the debits. The assessee appealed to the CIT(A) examined the accounts of the assessee and found that the amount in question was a sort of current account and it could not be said that debit balances therein were borrowings made by the assessee from the firm for the payment of taxes. The CIT(A) also noticed that the assessee was having substantial income in all these years and there was nothing to show that the tax payments were made from the withdrawals. He also agreed with the ITO that the allowance under S. 80V of the Act would be limited only to such interest on the borrowing made for payment of taxes after 1st April, 1976, when this relevant section came into operation. The assessee appealed to the Income -tax Appellate Tribunal ("Tribunal"). The Tribunal did not agree with the opinion of the CIT(A) that the interest on borrowings made for payment of taxes after coming into force of S. 80V of the Act only was allowable as a deduction under that section. In other words, according to the Tribunal, S. 80V of the Act was applicable even to interest paid on borrowings made prior to the coming into force of s. 80V of the Act for payment of taxes under the Act. The Tribunal also held that the amount withdrawn by the assessee from the firm amounted to borrowing and interest thereon was allowable as a deduction under S. 80V of the Act. The Tribunal, however, held that as 50 per cent of the interest paid by the assessee to the firm was received back by him by way of share in the profits in the firm. The assessee was entitled to deduction under S. 80V of the Act only of 50 per cent of the interest paid on the amount withdrawn by him. Hence this reference.

(3.) WE have considered the rival submissions. Sec. 80V was inserted in the Act by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st April, 1976, and was deleted by the Finance Act, 1985, w.e.f. 1st April, 1986. This section provides for deduction of interest paid on monies borrowed by the assessee for payment of any taxes due from him under the Act. The object of the section is to encourage the assessees to pay the tax due from them promptly even by borrowing. Sec. 80V, as it stood at the material time, reads :