1991 (6) TMI 62 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of interest under Section 57(iii) of the Income-tax Act, 1961.
2. Allowability of compound interest as a deductible expenditure.
3. Liability of interest on unpaid interest for tax purposes.

Detailed Analysis:

1. Deduction of Interest under Section 57(iii) of the Income-tax Act, 1961:
The primary issue revolves around whether the assessee can claim a deduction for interest paid on borrowed money used for purchasing shares under Section 57(iii) of the Income-tax Act, 1961. The assessee, acting as the karta of his Hindu undivided family, borrowed money from a firm and invested in shares, claiming the interest paid on this borrowed money as a deductible expense. The Income-tax Officer denied this deduction, arguing that the investments were made to control the affairs of the companies rather than to earn income. The Tribunal and the High Court upheld the Income-tax Officer's view, emphasizing that the interest paid on borrowed money must be directly connected to earning income to be deductible under Section 57(iii).

2. Allowability of Compound Interest as a Deductible Expenditure:
The assessee also claimed a deduction for compound interest, which was the interest on unpaid interest from the previous year. The Tribunal and the High Court both rejected this claim, stating that interest on unpaid interest does not qualify as an expenditure laid out wholly and exclusively for earning income. The High Court supported its decision by referencing the Supreme Court's ruling in Shew Kissen Bhatter v. CIT, where it was held that compound interest is not deductible as it is not considered interest on the principal borrowed amount but rather interest on unpaid interest, which does not meet the criteria for deduction under Section 57(iii).

3. Liability of Interest on Unpaid Interest for Tax Purposes:
The court also addressed whether the liability to pay interest on unpaid interest could be considered a deductible expense. The High Court concluded that once the principal interest liability has been allowed as a deduction in a previous year, any additional interest due to non-payment of the original interest does not qualify as a deductible expense. The court emphasized that allowing such deductions would enable taxpayers to defer interest payments and claim deductions on compound interest, which is not permissible under the tax laws. The court further noted that the assessee's liability for the original interest amount had already been accounted for in the previous year's tax assessment, and thus, any further interest on this amount could not be claimed as a deduction.

Conclusion:
The High Court ruled in favor of the Revenue, affirming that the assessee is not entitled to claim a deduction for compound interest or interest on unpaid interest under Section 57(iii) of the Income-tax Act, 1961. The court's decision was grounded in the principle that only interest directly connected to earning income is deductible, and compound interest does not meet this criterion. The court also rejected the assessee's request to certify the case for appeal to the Supreme Court, deeming it unfit for further appeal.