1971 (9) TMI 49 - HC - Income Tax

Interest on the borrowals - amounts were borrowed for making donation to educational institution - donation was not made on commercial expediency therefore, interest is not deductible under section 10(2)(iii) or (xv)

Summary

Issues Involved:
1. Deduction of interest on Rs. 5,50,000 overdraft for assessment years 1957-58, 1958-59, and 1959-60.
2. Deduction of interest credited to the account of Ganga Sagar Jatia Engineering College on the sum of Rs. 4,50,000 for assessment years 1958-59 and 1959-60.

Issue-wise Detailed Analysis:

1. Deduction of Interest on Rs. 5,50,000 Overdraft for Assessment Years 1957-58, 1958-59, and 1959-60:

The assessee claimed deduction of interest paid to the bank on the overdraft account used to pay Rs. 5,50,000 to the engineering college. The Income-tax Officer disallowed the interest, stating the payment was not related to any business project. The Appellate Assistant Commissioner upheld this decision. The Income-tax Appellate Tribunal also confirmed the disallowance, holding that the payment was a donation and not for a business purpose, thus not allowable under section 10(2)(iii) of the Indian Income-tax Act, 1922.

The court examined whether the borrowing was made to preserve business assets. It concluded that there was no necessity to employ business assets for the payment, and borrowing for non-business purposes does not qualify for deduction. The court cited similar cases, like Bhai Buribhen Lallubhai v. Commissioner of Income-tax and Mannalal Ratanlal v. Commissioner of Income-tax, where interest on borrowings for personal expenses was disallowed. The court distinguished the case from Commissioner of Income-tax v. Gopikrishna Muralidhar, where borrowings were for business purposes, and Commissioner of Income-tax v. Tingri Tea Co. Ltd., where the payment of dividends was considered a business purpose.

The court held that no commercial expediency was involved in making the payment to the engineering college. The borrowing was unrelated to the business, and the interest was not allowable as a deduction under section 10(2)(iii) or 10(2)(xv) of the Act. Therefore, the questions referred in Income-tax Reference No. 775 of 1970 were answered in the negative.

2. Deduction of Interest Credited to the Account of Ganga Sagar Jatia Engineering College on the Sum of Rs. 4,50,000 for Assessment Years 1958-59 and 1959-60:

The assessee contended that she had promised a donation of Rs. 10 lakhs to the engineering college, out of which Rs. 5,50,000 was deposited, and Rs. 4,50,000 was left as a loan with interest accruing in favor of the college. The Tribunal disallowed the interest, stating no donation of Rs. 4,50,000 had been made, and it was merely a promise. The entry in the assessee's account books crediting the trust did not amount to a gift or trust for charitable purposes.

The court found no evidence of an actual donation of Rs. 10 lakhs. The certificate from the District Magistrate, issued three years later, only mentioned a promise and was not contemporaneous with the transaction. The Tribunal rightly disregarded this certificate. The amount credited remained under the assessee's control, and no trust had come into existence. Thus, the interest credited on Rs. 4,50,000 continued to belong to the assessee, and she was not entitled to the deduction.

Accordingly, the question referred in Income-tax Reference No. 342 of 1964 was answered in the negative. The Commissioner of Income-tax was entitled to costs of Rs. 200, as one consolidated set of costs in both cases.