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Issues Involved:
1. Entitlement to deduction of the entire amount of interest paid on the mortgage of buildings and machineries under section 24(1)(iii) of the Income-tax Act, 1961. Detailed Analysis: Entitlement to Deduction of Interest: The primary issue addressed in this judgment is whether the assessee-company is entitled to deduct the entire amount of interest paid on the mortgage of buildings and machineries under section 24(1)(iii) of the Income-tax Act, 1961, for the assessment years 1962-63 to 1967-68. The assessee-company had paid interest on a loan secured by a mortgage of properties, including buildings and machineries, and claimed deduction of the entire interest amount. The Income-tax Officer, however, apportioned the interest between the properties and the machineries, allowing deduction only for the interest attributable to the mortgage of the properties. This decision was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal. Legal Provisions and Interpretation: Sections 22 to 27 of the Income-tax Act, 1961, deal with the computation of income from house property. Section 24(1)(iii) allowed for the deduction of interest on a mortgage or other capital charge on the property. The court examined the language of section 24(1)(iii) in conjunction with sections 22 and 23, which pertain to the annual value of property and its computation. The court noted that "the property" in section 24(1)(iii) refers specifically to house property, excluding portions occupied for business or professional purposes. Therefore, the interest deduction under section 24(1)(iii) applies only to the mortgage on the house property, not on machineries. Arguments and Precedents: The assessee's counsel, Mr. Shah, argued that the entire interest on the composite mortgage should be deductible, citing the indivisibility of such mortgages under the Transfer of Property Act. He referenced several Supreme Court and High Court decisions to support the contention that there should be no apportionment of interest. However, the court found that the specific language of the Income-tax Act necessitates apportionment. The court referred to its earlier judgment in Commissioner of Income-tax v. Sabarkantha Zilla Kharid Vechan Sangh Ltd., where it was held that apportionment of expenditure is required to separate taxable and non-taxable activities. Conclusion: The court concluded that the apportionment of interest between machineries and house property, as done by the Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal, was correct. The scheme of sections 22, 23, and 24(1)(iii) of the Income-tax Act, 1961, clearly indicates that only the interest attributable to the mortgage of the house property can be deducted. Therefore, the court answered the referred question in the negative, against the assessee and in favor of the revenue. The assessee-company is not entitled to the deduction of the entire amount of interest paid on the mortgage of buildings and machineries. The bifurcation and apportionment of interest were required, and the deduction could be granted only for the interest attributable to the buildings and lands appurtenant thereto. The assessee was ordered to pay the costs of the reference to the Commissioner.
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