1961 (12) TMI 88 - HC - Income Tax

Summary

Issues Involved:
1. Whether the petitioner is entitled to the allowance claimed for the assessment years 1953-54, 1954-55, and 1955-56.
2. Whether the interest paid to Mysore Bank on the borrowed amount is a permissible deduction.
3. Whether the waiver of interest by the assessee affects the claim for deduction.
4. Whether the sum of Rs. 4,948 treated as income in the assessment year 1952-53 can be claimed as a loss in the assessment year 1955-56.

Detailed Analysis:

1. Entitlement to Allowance for Assessment Years 1953-54, 1954-55, and 1955-56:
The primary issue is whether the petitioner is entitled to the allowance claimed for the assessment years 1953-54, 1954-55, and 1955-56. The assessee, an individual deriving income from investments, borrowed Rs. 1,25,000 from Mysore Bank and advanced it to Bharat Development Corporation at a higher interest rate. However, no interest was actually received from the corporation, and the assessee waived the interest due up to December 31, 1956. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal all rejected the assessee's claim for deduction of the interest paid to Mysore Bank, stating that the transaction was not a business transaction and the waiver was voluntary.

2. Permissibility of Interest Deduction:
The assessee argued that the borrowing from Mysore Bank was for the purpose of earning income by advancing it to the corporation at a higher rate, thus making the interest paid a deductible expense. However, the authorities held that the loan was not a business transaction and the amounts in question were not expenses incurred to earn income. The court examined sections 10(2)(iii) and (xv) and section 12(2) of the Income-tax Act, concluding that the money-lending was neither the profession nor the vocation of the assessee. The transaction did not constitute a "business" as defined under section 2(4) of the Act, which requires a continuous exercise of an activity. Therefore, the interest paid on the borrowed capital was not a permissible deduction under section 10(2)(iii) or (xv).

3. Effect of Waiver of Interest:
The assessee contended that the waiver of interest should not affect the claim for deduction, citing the case of Commissioner of Income-tax v. Chandulal Keshavlal & Co. However, the court noted that section 10 applies only if there is a business carried on by the assessee. Since the transaction was not a business transaction, section 10(2)(xv) was not applicable. The court further stated that the waiver was not for reasons of commercial expediency likely to benefit the assessee's business, but rather to accommodate the corporation in which her relatives were interested.

4. Claim of Rs. 4,948 as a Loss in Assessment Year 1955-56:
The assessee claimed Rs. 4,948, treated as income in the assessment year 1952-53, as a loss in the assessment year 1955-56. The Income-tax Officer refused this claim, stating that the loss was due to the assessee's voluntary waiver of interest. The Tribunal upheld this decision, concluding that the amount could not be considered a bad debt. The court agreed with the Tribunal's finding, stating that the waiver was gratuitous and not for earning income or profit.

Conclusion:
The court answered the referred question in the negative, concluding that the petitioner is not entitled to the allowance claimed for the assessment years 1953-54, 1954-55, and 1955-56. The interest paid to Mysore Bank was not a permissible deduction as the transaction was not a business transaction. The waiver of interest was voluntary and not for commercial expediency. The sum of Rs. 4,948 treated as income in the assessment year 1952-53 could not be claimed as a loss in the assessment year 1955-56. The assessee was ordered to pay the costs of the department.