1989 (3) TMI 4 - SC - Income Tax

Trust - Income from other Sources - Interest On Borrowed Money - held that interest on borrowings is not allowable to the extent borrowings relate to personal expenses - held that beneficiary is to be assessed on real income received by trust

Summary

Issues:
1. Disallowance of part of the interest claimed as a deduction by the assessee for the assessment years 1964-65 and 1966-67.
2. Determination of the income includible in the total income of the assessee from a trust.

Analysis:

1. Disallowed Interest Deduction:
The appellant, an assessee deriving income from various sources, including a trust, had interest debited to the trust's account for personal expenses. The Income-tax Officer disallowed a portion of the interest as a deduction, considering withdrawals for personal expenditure. The appellant appealed to higher authorities, but the appeals were dismissed. The High Court upheld the disallowance, relying on precedent. The Supreme Court affirmed the High Court's decision, emphasizing that the real income of the trust, after permissible deductions, should be included in the assessee's total income. The Court concluded that the disallowed interest deduction was rightly decided against the assessee.

2. Income Determination from Trust:
Regarding the determination of income includible in the assessee's total income from the trust, the Supreme Court analyzed the provisions of the Income-tax Act. The Court highlighted that a trustee, as a representative assessee, is subject to duties and liabilities as if the income were received beneficially. The Court explained that the trustee receives income under an obligation to pass it to the beneficiary after meeting expenses. It clarified that the net income reaching the beneficiary should be considered for assessment, not the income shown in the trust's books after deductions. The Court agreed with the High Court's interpretation, stating that the real income of the trust, considering permissible deductions, should be included in the assessee's total income. Consequently, the Court held in favor of the Revenue, dismissing the appeals.

In conclusion, the Supreme Court upheld the disallowance of part of the interest claimed as a deduction by the assessee and determined that the income includible in the total income of the assessee from the trust should be the real income of the trust after permissible deductions. The Court's decision favored the Revenue, dismissing the appeals with costs.