1989 (9) TMI 147 - AT - Income Tax

Assessment Year, Deduction Of Interest, From Other Sources, House Property, Insurance Company, Interest On Securities

Summary

Issues Involved:
1. Admissibility of interest paid to banks.
2. Admissibility of interest paid to the assessee's wife.
3. Nexus between the expenditure on interest and the income earned.
4. Interpretation of Section 57(iii) of the Income Tax Act.

Detailed Analysis:

1. Admissibility of Interest Paid to Banks:
The Tribunal initially held that the interest paid to banks was an allowable deduction, although it restricted the quantum of such interest to Rs. 12,237 for the first three years and Rs. 5,056 for the assessment year 1977-78. This finding was not contested in the subsequent miscellaneous applications filed by either the assessee or the department. Therefore, the Tribunal reaffirmed this position, concluding that the interest paid by the assessee to the banks is admissible.

2. Admissibility of Interest Paid to the Assessee's Wife:
The primary contention revolved around whether the interest paid on the loan taken from the assessee's wife, Her Highness Maqbul Jehan Begum, was allowable as a deduction. Initially, the Tribunal denied the deduction, stating that there was no direct nexus between the expenditure incurred on taking the loan and the purpose of preserving income-yielding assets. However, upon reconsideration, the Tribunal acknowledged the agreement dated 7-10-1973, which indicated a commitment to purchase shares of M/s Shalimar Biscuit Co. Ltd. The Tribunal concluded that the interest payable on the loan taken from the assessee's wife would be allowable as a deduction, modifying their original order to this extent.

3. Nexus Between the Expenditure on Interest and the Income Earned:
The Tribunal considered whether the expenditure on interest had a direct or indirect nexus with the income earned. The assessee argued that the borrowed funds were used to safeguard his income-earning assets by securing a release from a counter-guarantee given to Dena Insurance Co. Ltd. This was necessary to maintain his financial status and directorships in various companies. The Tribunal agreed with this reasoning, noting that the deposit with Shalimar Biscuits (P) Ltd. was intended for purchasing shares and preserving the assessee's income-earning assets.

4. Interpretation of Section 57(iii) of the Income Tax Act:
The Tribunal referred to the Supreme Court's decision in CIT v. Rajendraprasad Modi [1978] 115 ITR 519, which established that it is not necessary for the expenditure to yield income during the accounting year to qualify for deduction under Section 57(iii). The Tribunal also cited the Bombay High Court decision in CIT v. H.H. Maharani Shri Vijaykuverba Saheb of Morvi [1975] 100 ITR 67, which supported the view that even an indirect connection between the expenditure and the income earned could prove the necessary nexus.

Conclusion:
The Tribunal concluded that the interest paid by the assessee to his wife was an admissible deduction, as it was incurred for preserving his income-earning assets. The order of the first appellate authority allowing the deduction was confirmed, and the departmental appeals were dismissed.