1955 (4) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of interest paid on borrowings under Section 12(2) of the Indian Income-tax Act.
2. Connection between expenditure incurred and the earning of income.

Issue-Wise Detailed Analysis:

1. Deductibility of Interest Paid on Borrowings under Section 12(2) of the Indian Income-tax Act:
The primary issue in this case is whether the amounts of Rs. 1,648 and Rs. 2,530 paid as interest on borrowings can be deducted under Section 12(2) of the Indian Income-tax Act. The assessee borrowed money for household expenses, purchasing jewelry, and paying advance tax. She claimed these interest payments as deductions from her income earned from fixed deposits. The Tribunal rejected her claim, and the High Court was asked to decide if these interest payments were incurred solely for the purpose of making or earning income.

2. Connection between Expenditure Incurred and the Earning of Income:
The Court examined Section 12(2), which allows deductions for expenditures incurred solely for the purpose of making or earning income. The Court emphasized that the purpose of the expenditure must be directly or indirectly connected to earning the income. In this case, the interest paid on borrowings had no connection, direct or indirect, with the income earned from fixed deposits. The Court noted that the expenditure was for personal purposes (household expenses, jewelry, advance tax) and not for earning income from the fixed deposit.

The Court further elaborated that the assessee's motive to preserve her fixed deposit by borrowing money instead of withdrawing from the deposit was irrelevant. The actual purpose of borrowing was to meet personal expenses, not to earn or maintain income from the fixed deposit.

Conclusion:
The Court concluded that the interest paid on borrowings for personal expenses, including advance tax, did not qualify for deduction under Section 12(2) as it was not incurred solely for the purpose of making or earning income. The Tribunal's decision was upheld, and the reference was answered in the negative. The assessee was ordered to pay costs.