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TMI Blog1985 (8) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... of the view that the order of the ITO is erroneous and prejudicial to the interests of the revenue. Accordingly, he issued notice under section 263 in response to which the assessee filed a reply and appeared before the Commissioner. After considering the objections of the assessee, the Commissioner held that the immediate purpose in taking the loan from the bank being to discharge estate duty liability, the connection between the payment of interest and earning of interest income from fixed deposits is too remote to be taken into account and it would not qualify for deduction under section 57(iii) of the Act. Thus, the sum of Rs. 15,940 should not have been allowed as a deduction by the ITO. He further held that the legal expenses of Rs. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so urged that the audit fee of Rs. 600 is also allowable. The learned departmental representative strongly urged that the interest paid on the loan taken for the discharge of estate duty liability is not an allowable expenditure under section 57(iii) as it is not connected with the earning of the income. Hence, the Commissioner was right in directing the ITO to disallow the sum of Rs. 15,940. He placed reliance on the decisions in Padmavati Jaykrishna v. CIT [1981] 131 ITR 653 (Guj.) and CIT v. Mrs. Indumati Ratanlal [1968] 70 ITR 353 (Guj.). Coming to legal expenses he submitted that it is not an allowable deduction under section 24 of the Act. The audit fee of Rs. 600 is also not allowable. Thus, he supported the order of the Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowable deduction under section 57(iii) as there is nexus between the expenditure incurred and the earning of the income. In H.H. Maharani Shri Vijaykuverba Saheb of Morvi's case this very issue came up for consideration before the Bombay High Court. It was held therein that the expenditure in the form of interest paid to the bank on the borrowings for discharging the estate duty liability would have to be regarded as expenditure incurred solely for the purpose of earning such income and would fall within section 12(2) of the Indian Income-tax Act, 1922. The above decision was approved by the Supreme Court in Seth R. Dalmia's case. It was observed as under: "In CIT v. H.H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to pay estate duty. However, it was observed as under : "... But one thing is clear that if property is received by an assessee subject to a charge for payment of a liability and moneys are borrowed for clearing the charge by discharging the liability, interest paid on the borrowed moneys would be an allowable expenditure. The purpose of the borrowing would be to save the property by freeing it from the encumbrance and thus to facilitate the earning of the income and there would accordingly be the requisite connection or nexus between the borrowing of the moneys and the earning of the income. To illustrate the point, take a case where property is received by an assessee subject to a charge for payment of money with growing interest. Wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Morvi's case which has met the approval of the Supreme Court in Seth R. Dalmia's case. In our view, the Commissioner was not right in directing the ITO to disallow the sum of Rs. 15,940 being interest paid to the bank. 5. The next item is with regard to the legal expenses of Rs. 7,200. It appears that buharis were the tenants of a building belonging to the assessee. They had filed a suit for specific performance of an agreement to sell the property which was in their occupation. The assessee had to defend that suit. Legal expenditure of Rs. 7,200 incurred in defending that suit has been claimed as an allowable deduction. In our view the sum of Rs. 7,200 is not an allowable deduction under section 24. It is only the deduction specified un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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