9911796707
TMI Blog1980 (8) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... the borrowing from the Bank of India by the assessee's father. The bank liabilities represented overdraft taken by the assessee's father for the purpose of paying his tax liabilities. The assessee's father in his lifetime had paid interest on the overdrafts for four years. Out of the assets which included shares and buildings, the shares had been pledged by the father of the assessee with the Bank of India as security for the overdrafts for the relevant assessment years 1966-67, 1967-68, 1968-69 and 1969-70. The ITO did not allow the claim of the assessee to deduction of interest payment to the Bank of India from the income from assets inherited by him on the death of his father. The assessee's case before the ITO was that when the revenue was assessing the dividends from such shares which he had inherited from his father and when it was also assessing the rental income of the assessee from the property inherited by him, as necessary corollary the assessee should be allowed a deduction of interest payment made by him on such liabilities. The ITO took, the view that the assessee was not able to prove that the interest payment was for the purpose of investment, income from which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court in the case of Padmavati Jaykrishna v. CIT [1975] 101 ITR 153. The Tribunal held that the assessee was not entitled to a deduction of interest payments of Rs. 20,435, Rs. 54,632, Rs. 50,025 and Rs. 5,497 for the assessment years 1966-67, 1967-68, 1968-69 and 1969-70, respectively, as claimed by the assessee. As stated above, the assessee thereafter moved the Tribunal for referring the question of law which has arisen from the Tribunal's common order in I.T.As. Nos. 506 to 509 (Ahd) of 1973-74 and thereupon the Tribunal has referred a common question for our decision under s. 256(1) of the I.T. Act.. We have already extracted the said question in the earlier part of this judgment. Mr. J. P. Shah, the learned advocate appearing for the assessee, contended that what the assessee inherited from his father were encumbered properties and, therefore, there could be no justification for disallowing the interest payment on the liabilities inherited from the assessable income because what is assessable must be the real and not the fictional income. Mr. Shah submitted that on the principle of real income received by the assessee it ought to have been held that the interest amount paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om his father he had also to meet with the liability which had, accrued due on the inherited assets. The assessee was, therefore, obliged to pay interest to the Bank of India on the overdraft which his father had taken from the Bank of India. The dividend income which the assessee derived from the shares was sought to be brought to tax. At that stage, the assessee contended that during the concerned assessment years he had also paid interest to the Bank of India on the overdraft account. These amounts of interest which he had paid to the Bank of India were required to be deducted from the gross receipts in order to compute the real income earned by the assessee during the assessment years for the purpose of income-tax. This claim of the assessee has been turned down by the lower authorities. The short question which has been posed for our consideration is as to whether the assessee is entitled to get a deduction of interest payment made by him to the Bank of India from the income from the assets inherited by him on the death of his father so far as the relevant assessment years are concerned. It may be stated at the outset that the revenue had at no stage before the lower authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not include the amount of interest paid by the assessee to the secured creditor to meet the liability incurred by his deceased father. In short, the submission of Mr. Shah was that when he inherited assets from his father he also inherited the liability attaching to his assets and while assessing the real income of the assessee, the liability, which the assessee had to discharge on account of the encumbered assets which he had inherited from his father, was required to be deducted in order to arrive at the correct figure of the real income earned by the assessee during the relevant period. In order to support the aforesaid contention, Mr. Shah heavily relied upon the recent decision of this court in Udayan Chinubhai v. CIT [1978] III ITR 584. In the aforesaid decision, this court had to consider the question as to whether the assessee who paid interest to unsecured creditors with a view to meet the debts incurred by the assessee's father was entitled to deduct the interest from the gross receipts of the assessee for arriving at the figure of real income earned for the purpose of being brought to tax under the I.T Act, 1961. This court upheld the aforesaid contention of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the concerned assessment years.. The question before this court was whether the said view of the ITO, as confirmed by the higher authorities, was sustainable, and whether the interest amounts paid by the assessees during the relevant assessment years to unsecured creditors were forming part of the real income of the assessees' mother and her sons, Udayan Chinubhai, Achyut Chinubhai and Kirtidev Chinubhai. Two contentions were raised by the assessees before this court in Udayan Chinubhai's case [1978] 111 ITR 584. The first contention was that these various interest amounts paid by the assessees to the unsecured creditors should be held to be allowable as a permissible deduction under s. 57(iii) of the I.T. Act. Alternatively, it was submitted, while computing the real income of the concerned assessees during the relevant assessment years as not having formed a part and parcel of the real income of the assessees as they represented various sums which were diverted from the income of the assessees for meeting the claims of creditors having overriding title in that case. This court negatived the first contention on behalf of the assessees and held that the provisions of s. 57(iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the arbitrator in that case. It was further observed that it was by virtue of an overriding title in favour of the creditors that the total income which the assessees received did not represent their " real income ". By virtue of the overriding title in favour of the creditors, the income of the family had to be diverted to pay off the interest amounts on, the outstanding liabilities and the case would fall within the principle in Bejoy Singh Dudhuria's case [1933] 1 ITR 135 (PC) rather than under the principle in P. C. Mullick's case [1938] 6 ITR 206 (PC). This court adopted the phraseology employed by the Supreme Court in Sitaldas Tirathdas' case [1961] 41 ITR 367 and observed that it must be held that the amounts sought to be deducted in truth never reached the assessee as their income. By the very nature of the obligation which the assessee undertook under the scheme of the consent decree and the awards, the income, in the shape of interest payable on the outstanding Liabilities of the HUF assigned to them, could never be said to be a part of their income. Because of the obligation on the assessees, the income was diverted before it reached them and, hence, the amount of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res and buildings, and the shares were already pledged with the Bank of India by his father in his lifetime, These shares were of course pledged with the Bank of India by his father to meet the claim of the secured creditor, the Bank of India, arising out of the overdraft account. It is, therefore, claimed that as and when the assessee effected payment of interest in favour of the Bank of India to meet his outstanding liability which he had inherited from his father, he can be said to have diverted part of his gross revenue receipts to meet the liability arising in favour of the secured creditor on account of the overriding title. These receipts never came to the assessee as part and parcel of his real income. These amounts which were sought to be deducted by the assessee for the concerned assessment years never reached him as his income by the very nature of the obligation which the assessee had undertaken, to pay interest to the secured creditor. On account of the outstanding liability inherited from his father, the interest amounts paid by him to discharge this liability to the secured creditor can never be said to be part and parcel of the assessee's income. These amounts repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not his income. " In the present case also, whatever the interest amounts the assessee had to pay to the secured creditor, the Bank of India, to meet the outstanding obligation towards the secured creditor, did not represent his income at all. The said amounts represented part of his revenue receipts which were diverted from him and were directed to the secured creditor and to that extent what was received by the secured creditor was not the assessee's income at all. Applying the aforesaid principles enunciated by the Privy Council to the facts of the present case, it appears clear to us that the assessee was entitled to get a deduction of the various amounts of interest which the assessee had paid during the relevant assessment years to the secured creditor, the Bank of India, and to get them treated as not forming part of his, real income during the relevant years. The first submission of Mr., Shah has, therefore, got to be upheld. Once we hold that the various amounts of interest which the assessee had paid to the secured creditor, namely, the Bank of India, were for meeting the claims of the secured creditor emanating out of the overriding title in its favour, then, the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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