1993 (3) TMI 75 - HC - Income Tax

Summary

Issues Involved: Assessment of tax under the Income-tax Act, 1961, specifically regarding deduction under section 80L for interest paid on loans taken from the bank for contributing share capital in firms.

Assessment of Tax under Income-tax Act, 1961:
The petitioners were assessed to tax under the Income-tax Act, 1961, for income received from two firms and interest on fixed deposits and savings accounts. They claimed deduction under section 80L for interest from bank deposits but were denied due to interest paid on loans taken from the bank. The Commissioner of Income-tax relied on section 80AB to disallow the deduction, stating that interest paid on the loan should be adjusted against interest due from the bank, resulting in no deduction under section 80L.

Admissibility of Expenditure and Legal Precedents:
Interest paid on loans borrowed for contributing share capital is deductible under section 37 of the Act as an admissible expenditure. Previous appellate orders supported the petitioners' case that the loans were taken for this purpose. The contention that there was no evidence for this purpose was dismissed based on past findings. The Supreme Court decision in Jeewanlal (1929) Ltd. v. CIT [1969] 74 ITR 753 further supported the admissibility of such expenditure.

Interpretation of Section 80AB and Deductibility of Interest:
Section 80AB governs the computation of deduction under section 80L, stating that only the net income of interest as per Act provisions should be considered. However, interest paid on loans for business income is not part of interest income calculation under the Act. Such expenses fall under section 37 for deduction. Therefore, section 80AB does not apply in cases where interest paid on loans is deducted from business income, not interest received from the bank on fixed deposits.

Judgment and Direction:
The High Court allowed the original petitions, quashing previous orders, and directed fresh assessments. The first respondent was instructed to deduct interest paid by the petitioners to the bank on loans from their business income and grant them the deduction under section 80L. No costs were awarded in this matter.