1967 (3) TMI 39 - HC - Income Tax

Deposits made by assessee with K Ltd. - purpose was to earn the income from that amount - necessary condition for the grant of the allowance contemplated in s. 12(2) was fulfilled and the assessee would be entitled to set off the interest paid to the firm, K & Co., against the interest earned from K Ltd.

Summary

Issues Involved:
1. Entitlement to claim deduction for interest paid on borrowed amount.
2. Basis for computing the allowable interest for deduction.

Issue-wise Detailed Analysis:

1. Entitlement to Claim Deduction for Interest Paid on Borrowed Amount:
The primary issue in this case is whether the assessee is entitled to claim a deduction for the interest amounting to Rs. 26,197 paid to the firm, Kapurchand & Co., from which he borrowed Rs. 3,75,000. The Income-tax Officer disallowed the deduction, stating it was not referable to any source of income of the assessee. The Appellate Assistant Commissioner and the Tribunal upheld this decision, noting that the withdrawal was for the purpose of making a gift to his minor son, and thus, the interest paid was not an expenditure incurred solely for the purpose of making or earning any income as required by section 12(2) of the Income-tax Act.

The court noted that the income earned from the amount deposited with Kapurchand Ltd. was included in the assessee's total income under section 16(3), even though it was technically the income of the minor child. The court interpreted section 12(2) to mean that the expenditure incurred for earning income that is included in the assessee's total income should be allowable as a deduction. The court emphasized that the purpose of the expenditure should be judged from the circumstances surrounding the actions and the nature of the action itself.

The court concluded that the assessee deposited the amount with Kapurchand Ltd. to earn interest, and although the motive might have been to benefit his son, the purpose was to earn income. Therefore, the interest paid to Kapurchand & Co. was an expenditure incurred solely for earning income, fulfilling the condition for deduction under section 12(2).

2. Basis for Computing the Allowable Interest for Deduction:
The second issue pertains to the computation of the allowable interest for deduction. The court noted that the entire interest of Rs. 26,197 paid in Samvat year 2014 was not solely attributable to the borrowing of Rs. 3,75,000, as various other amounts were debited to the assessee's account over time.

The court stated that the assessee could only claim an allowance for the interest that represents the expenditure incurred solely for earning the income from the borrowed amount of Rs. 3,75,000. The exact amount of interest attributable to this borrowing needed to be determined, and it should not exceed the overall interest paid of Rs. 26,197.04. The department was instructed to allow the assessee the interest attributable to the original borrowing of Rs. 3,75,000, and this amount should be set off against the interest earned from Kapurchand Ltd., which was Rs. 25,375.

Conclusion:
The court answered the first question in the affirmative, allowing the deduction for the interest paid. For the second question, the court directed that the assessee be allowed the part of the total interest paid during Samvat year 2014 that is attributable to the interest on the outstanding amount of the original borrowing of Rs. 3,75,000. The Commissioner was ordered to pay half the costs to the assessee.