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TMI Blog1991 (6) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's family, namely, his wife, brother, brother's wife, mother and other private limited companies in which the assessee and/or other members of his family have interest are holding shares. Opening balance in the assessee's individual account with Messrs. C. Prabhudas and Co. was Rs. 3,17,665. The assessee had paid interest of Rs. 40,193 on the outstanding amount in this account and claimed that interest to the extent of Rs. 39,801 should be allowed as deduction under section 57(iii) of the Income-tax Act, 1961 ("Act" for short), while computing the income chargeable under the head "Income from other sources". However, since, in the view of the Income-tax Officer, investments made out of the money borrowed from Messrs. C. Prabhudas and Co. were for controlling the affairs of the aforesaid companies, and not for earning the income as envisaged under section 57(iii) of the Act, the assessee was not entitled to claim deduction of the interest amount of Rs. 39,801 as claimed by him. He, therefore, rejected the claim of the assessee and proceeded to compute the total income for the assessment year 1974-75. The total income computed came to Rs. 1,81,144 as against the returned tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the interest amount of Rs. 30,773 was in the nature of compound interest and, therefore, allowable as deduction under section 57(iii). The Revenue, on the other hand, contended that such interest could not be allowed as expenditure under section 57(iii). The Tribunal held that the assessee's claim could not be accepted, inasmuch as the interest of which the assessee claimed deduction was interest payable on the interest of the preceding year. Such interest became payable because the interest for the preceding year remained unpaid. It was not paid on the borrowings utilized for the purchase of shares and, therefore, it had no connection with the earning of dividend income as such. The Tribunal observed that, if the assessee's claim were to be accepted, it would lead to the result that the debtor need not pay the interest regularly but utilise that amount for other purposes and make the Revenue pay compound interest payable by him and thus derive an advantage out of his own omission. The Tribunal sought to derive support for the conclusion reached by it from the decision of the Supreme Court in Shew Kissen Bhatter v. CIT [1973] 89 ITR 61. The Tribunal, therefore, directed the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction cannot have a different nature or character. Therefore, according to the assessee, the expenditure he has incurred by way of interest on outstanding interest for the preceding year is an expenditure incurred in relation to the same transaction and such interest will have the same character as the interest payable on the borrowing. It was urged that, applying the test of commercial expediency, the expenditure, deduction whereof is allowable under section 57(iii), may have a direct or indirect connection with the making or earning of such income. If the assessee has bona fide and voluntarily incurred expenditure out of commercial expediency, the expenditure is deductible and it is immaterial whether it is beneficial for the assessee to incur such expenditure or whether it is expedient on his part to do so. In the alternative, it is urged that the expenditure by way of interest on outstanding interest will have the same character as the interest on the borrowings. Under the principles of accountancy also, interest would include compound interest. According to the assessee, there is no prohibition to allow deduction of compound interest. We do not find any substance in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the principal amount which he has borrowed and invested in the shares which is relevant for the purpose of computing interest which could be treated as expenditure for the purpose of earning income. As rightly observed by the Tribunal, if the assessee's contention is correct, all that the debtor need to do is not to pay interest regularly, but utilize that amount for other purposes and make the revenue pay compound interest payable by him and, thus, derive advantage out of his own omission. Such an interpretation of section 57 (iii) of the Act is not permissible. We derive support, in the view which we are inclined to take, from the decision of the Supreme Court in Shew Kissen Bhatter v. CIT [1973] 89 ITR 61, on which reliance was placed by the Tribunal. That was a case in which the assessee was a trustee of a house property at Chandmari Road, Howrah. In respect of that house, there was a title suit filed by one Durga Prasad Chamria against Smt. Anardeyi and others, claiming title over that property and for other reliefs. A consent decree was passed in that suit on April 19, 1928. Under the terms of that decree, the aforementioned house property was held to belong to Smt. Ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rently, when the interest payable is not paid, the same became a part of the principal and, thereafter, interest had to be paid not only on the original principal but also on the part of the interest which had become a part of the principal amount. The Supreme Court held that it could not be said that the interest which became a part of the principal could be considered as a capital charge. What the assessee was entitled to deduct was the interest payable by him on the capital charge and not the additional interest which, because of his failure to pay the interest on the due date, had been considered as a part of the loan. In fact, the real capital charge was only that which was originally due. The other portion was merely an interest on which the assessee had agreed to pay interest. The Supreme Court, therefore, did not accept the contention of the assessee that the interest paid on interest was interest paid on the capital charge. The Supreme Court rejected the assessee's contention that law permitted him to deduct any interest payable by him on the capital borrowed or charged and "any interest" included compound interest also. The Supreme Court observed that compound interest wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt borrowed by him which he invested in shares and not the additional interest which, because of his failure to pay the interest on due date, had been considered to be part of the loan or the amount borrowed. We, therefore, find ourselves unable to accept the assessee's contention that interest paid on interest takes the colour of the interest payable on the amount borrowed, which was invested and that the nature and character of such interest is not different from the interest payable on such borrowed amount. Whether interest payable on interest is part of the same transaction and whether it becomes part of the principal amount borrowed under the principles of accountancy is of no consequence. There is another aspect of the matter which requires serious consideration. As pointed out above, the assessee was allowed deduction of the interest amount of Rs. 30,773 in the preceding year, i.e., assessment year 1973-74. The assessee is now claiming deduction of interest paid on the said amount of interest of Rs. 30,773 in the year under reference. In our opinion, the assessee's liability in regard to the interest of Rs. 30,773, deduction whereof has already been granted in the precedi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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