1984 (12) TMI 90 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of interest on borrowed funds used for acquiring shares.
2. Applicability of Section 57(iii) of the Income-tax Act, 1961.
3. Allowability of interest on borrowings when the source of income (shares) is no longer held by the assessee.
4. Calculation of the allowable interest deduction.

Issue-wise Detailed Analysis:

1. Deduction of interest on borrowed funds used for acquiring shares:
The primary issue in this case is whether the interest paid by the assessee on borrowed funds used to acquire shares can be deducted in computing the assessee's income. The Income Tax Officer (ITO) disallowed Rs. 59,280 of the claimed interest deduction on the grounds that the shares, which were acquired using the borrowed funds, had been partitioned out of the assessee's holdings by the end of March 1975. Consequently, the ITO allowed only Rs. 1,556 as a deduction.

2. Applicability of Section 57(iii) of the Income-tax Act, 1961:
The assessee contended that the interest paid on borrowings should be deductible under Section 57(iii) of the Income-tax Act, 1961, which allows deductions for expenses incurred wholly and exclusively for earning income. The assessee argued that the deduction should be allowed irrespective of whether the shares yielded income in the particular year. The Appellate Assistant Commissioner (AAC) initially distinguished the case from the precedents cited by the assessee, noting that the shares had been partitioned and were no longer held by the assessee-HUF, thus making the Supreme Court decision inapplicable. However, the AAC later allowed the deduction on the grounds that the interest payment helped the assessee avoid liquidating other investments, thereby indirectly aiding in earning income.

3. Allowability of interest on borrowings when the source of income (shares) is no longer held by the assessee:
The revenue's appeal argued that the AAC erred in allowing the interest deduction since the shares were no longer held by the assessee-HUF. The Tribunal examined several precedents, including the Allahabad High Court decision in Seth Shiv Prasad v. CIT, which held that interest on borrowings is not deductible if the source of income (shares) is no longer held by the assessee. The Tribunal agreed with the revenue, concluding that since the 1,350 shares had been partitioned and were no longer held by the assessee-HUF, the interest on the borrowing related to these shares could not be allowed as a deduction.

4. Calculation of the allowable interest deduction:
The Tribunal also addressed the assessee's cross-objection regarding the quantum of interest disallowed. Upon examining the particulars of interest payments, the Tribunal found that the ITO had incorrectly calculated the disallowed interest. The correct amount of interest paid by the assessee on the relevant borrowing was Rs. 50,738, not Rs. 59,280. After excluding the interest attributable to the 8 shares still held by the assessee-HUF, the allowable interest deduction was determined to be Rs. 11,458 instead of Rs. 1,556 allowed by the ITO.

Conclusion:
The Tribunal partly allowed both the revenue's appeal and the assessee's cross-objection. It concluded that the interest on borrowings related to the partitioned shares could not be deducted, but corrected the allowable interest deduction to Rs. 11,458 based on the actual interest paid on the remaining shares held by the assessee-HUF.