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Issues Involved:
1. Entitlement to deduction of interest payments on inherited liabilities. 2. Applicability of Section 57(iii) of the Income Tax Act, 1961. Detailed Analysis: 1. Entitlement to Deduction of Interest Payments on Inherited Liabilities The core issue in this case was whether the assessee was entitled to deduct interest payments made on liabilities inherited from his father from his assessable income. The assessee's father had borrowed Rs. 2,47,000 from the Bank of India, secured by pledging shares, to pay his tax liabilities. Upon his father's death, the assessee inherited both the assets and the liabilities. The assessee argued that since the revenue was assessing the dividends from the inherited shares and the rental income from inherited properties, it should logically allow the deduction of interest payments made on the inherited liabilities. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) denied the deduction, stating that the interest payments were not for the purpose of investment or income generation. The Tribunal upheld this view, relying on the decisions in CIT v. Mrs. Indumati Ratanlal and Padmavati Jaykrishna v. CIT. The High Court, however, disagreed with the Tribunal's decision. It referenced the case of Udayan Chinubhai v. CIT, where it was held that income taxable under the Income Tax Act is the "real income" of the assessee. The court noted that the assessee's real income should not include amounts diverted to meet the claims of secured creditors, as these amounts never reached the assessee as his income. The court concluded that the interest payments made to the Bank of India were diverted before the income reached the assessee, thus not forming part of his real income. 2. Applicability of Section 57(iii) of the Income Tax Act, 1961 The alternative argument presented by the assessee was that even if the interest payments were considered part of his income, they should be deductible under Section 57(iii) of the Income Tax Act, 1961. This section allows for the deduction of expenses incurred wholly and exclusively for the purpose of earning income from other sources. The court, having already decided in favor of the assessee on the primary issue, deemed it unnecessary to delve deeply into this alternative argument. However, it noted that there was substantial merit in the assessee's claim that the interest payments were made to prevent the pledged shares from being disposed of by the bank, thereby maintaining the source of income. Conclusion The High Court concluded that the assessee was entitled to deduct the interest payments made to the Bank of India from his assessable income. The amounts paid as interest were considered to be diverted by an overriding title before reaching the assessee, thus not forming part of his real income. Consequently, the court answered the question in the negative, i.e., in favor of the assessee and against the revenue. The Commissioner was ordered to pay the costs of the reference to the assessee.
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