1979 (4) TMI 2 - SC - Income Tax

Assessee carried on money-lending and other businesses - withdrew money from overdraft account for donation - borrowing was made by the assessee to meet a personal obligation not for the business obligation hence interest paid to the bank was not deductible - Interest credited on balance donation is also not allowable - Assessee appeal dismissed

Summary

Issues Involved:
1. Deductibility of interest on Rs. 5.5 lakhs borrowed for donation under sections 10(2)(iii) and 10(2)(xv) of the Indian Income Tax Act, 1922.
2. Deductibility of interest credited on Rs. 4.5 lakhs left as a loan with the assessee under sections 10(2)(iii) and 10(2)(xv) of the Indian Income Tax Act, 1922.

Issue-wise Detailed Analysis:

1. Deductibility of Interest on Rs. 5.5 Lakhs Borrowed for Donation:

The assessee, Smt. Indermani Jatia, borrowed Rs. 5.5 lakhs from her overdraft account to fulfill a part of her Rs. 10 lakhs donation promise to an engineering college. The assessee claimed the interest on this borrowed amount as a deduction under sections 10(2)(iii) and 10(2)(xv) of the Indian Income Tax Act, 1922. The taxing authorities and the Tribunal disallowed the deduction, stating that the borrowing was not for business purposes but for making a donation, and hence the interest could not be claimed as a business expenditure.

The High Court upheld this view, explaining that the borrowing was unrelated to the business of the assessee and was made to meet a personal obligation. The court emphasized that the mere fact that the assessee would have had to liquidate her income-yielding assets if she had not borrowed the money did not transform the interest into a business expenditure. The Supreme Court agreed with this reasoning, noting that the borrowing was for a personal purpose and not for carrying on the business, thus confirming that the interest paid on Rs. 5.5 lakhs was not deductible under sections 10(2)(iii) or 10(2)(xv).

2. Deductibility of Interest Credited on Rs. 4.5 Lakhs Left as a Loan:

The assessee also claimed a deduction for the interest credited on the remaining Rs. 4.5 lakhs, which was left as a loan with her and treated as a debt to the engineering college. The Tribunal and the High Court disallowed this deduction, stating that the donation of Rs. 4.5 lakhs was not complete, and the trust in favor of the college had not come into existence. The High Court noted that the entries in the assessee's books crediting the trust did not constitute an actual gift or charity, as the amount remained within the assessee's control.

The Supreme Court upheld this view, stating that the certificate from the District Magistrate and the entries in the assessee's books did not establish that the Rs. 4.5 lakhs had been donated to the college. The court emphasized that there was no material to show that the college had accepted the donation or that the trust had come into existence. Consequently, the interest credited on Rs. 4.5 lakhs continued to belong to the assessee, and she was not entitled to the deduction.

The Supreme Court dismissed the appeals, confirming that the interest on Rs. 5.5 lakhs borrowed for donation and the interest credited on Rs. 4.5 lakhs left as a loan were not deductible under sections 10(2)(iii) or 10(2)(xv) of the Indian Income Tax Act, 1922.