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PETITIONER: SMT. PADMAVATI JAIKRISHNA

       Vs.

RESPONDENT: ADDL. COMMISSIONER OF INCOME ’FAX,GUJARAT AHMEDABAD

DATE OF JUDGMENT22/04/1987

BENCH: MISRA RANGNATH BENCH: MISRA RANGNATH PATHAK, R.S. (CJ) SINGH, K.N. (J)

CITATION:  1987 AIR 1723            1987 SCR  (2)1167  1987 SCC  (3) 448        JT 1987 (2)   230  1987 SCALE  (1)958  CITATOR INFO :  F          1989 SC1092  (6)

ACT:     Income Tax Act, 1961--Section  57(iii)--Deduction--Claim for  Expenditure incurred should be wholly  and  exclusively for purpose of earning income-Assessee to satisfy Income Tax Officer.

HEADNOTE:     The assessee, assessed as an individual, derived  income from  "other  sources" in the shape of  interest,  dividends etc. In the assessment year 1966-67 she claimed deduction of Rs.26,986  being interest paid on loans taken by her,  under s.  57(iii)  of  the Income Tax Act, 1961.  The  income  Tax Officer  found  that out of the loans  real  investment  was Rs.1,250  only.  He  disallowed the claim  of  Rs.10,275  on proportionate  basis. The Appellate  Assistant  Commissioner relying  upon  the  ratio of the decision  in  Bai  Bhuriben Lallubhai v. Commissioner of Income-tax, Bombay North  Cutch and  Saurashtra, [1956 ITR (XXIX) 543] dismissed the  appeal of the assessee.     Before  the  Tribunal the assessee contended:  (1)  that expenditure  under  the head of payment of  income  tax  and wealth  tax and annuity deposits should have been  taken  as revenue expenditure and the claim of interest in respect  of such loans should have been admitted and (2) that the asses- see  instead  of  liquidating  the  investments  which   was return-oriented, found it commercially expedient and  viable to  raise a loan instead of disturbing the investments  and, therefore, the claim became admissible. The Tribunal reject- ing the contentions and dismissing the appeal observed  that the  loans  were taken for meeting her  personal  obligation like  payment of taxes and deposit of annuity and these  had nothing to do with the business.     On  reference, the High Court held that at the  relevant time it was obligatory for the assessee to make the  annuity deposit and the earning of interest through such deposit was merely  incidental and that the portion of the loan was  not intended to meet expenditure wholly and exclusively for  the purpose  of earning the income and. therefore. did not  come

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under s. 57(iii) of the Act. 1168 Dismissing the appeal of the assessee the Court.     HELD: 1. Unless the claim comes within the purview of s. 57(iii) of the Income Tax Act. 1961 it would not be admissi- ble as a deduction. [1170C]     2.  The test to apply is that the expenditure should  be wholly  and exclusively for the purpose of earning  the  in- come. [1172C]     Eastern Investments Ltd. v. Commissioner of  income-tax, West Bengal, [1951] ITR 201 and Commissioner of  Income-tax, West  Bengal v. RaJendra Prasad Moody. [1978] 115  ITR  519, followed.     3.  In order that the claim for deduction could be  sus- tained,  it was for the assessee to satisfy the  Income  Tax Officer  that  the  loan, interest in respect  of  which  is claimed  as deduction, was laid out or expended  wholly  and exclusively  for  earning the income from out of  which  the deduction was claimed. [1170F-G]     4.  The  Income Tax Authorities as also the  High  Court have  clearly recorded a factual finding of facts  that  the expenditure in this case was to meet the personal  liability of payment of income-tax and wealth-tax and annuity and that no  part  of the expenditure came within  the  purview  ors. 57(ii) of the Act. [1171H-1172A, D]     5.  This Court is inclined to agree with the High  Court that  so  far  as meeting the liability  of  income-tax  and wealth-tax  is concerned, it was indeed a personal  one  and payment thereof cannot at all be said to be expenditure laid out  or expended wholly and exclusively for the  purpose  of earning income. So far as annuity deposit is concerned.  the Tribunal  and the High Court have come to the right  conclu- sion that the dominant purpose was not to earn income by way of  interest but to meet the statutory liability  of  making the deposit. [1172B-C]     6. Unless the loan is incurred for meeting the liability connected  with  the sources itself it would  ordinarily  be difficult to entertain the claims for deduction. [1172F]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 65 of 1975.     From  the  Judgment and Order dated 3.12.  1973  of  the Gujarat High Court in I.T.R. No. 35 of 1972. 1169 T.A. Ramachandran, Mrs. J. Ramachandran and S.C. Ratelh for the Appellant. V.S. Desai and Ms. A. Subhashini for the Respondent. The Judgment of the Court was delivered by     RANGANATH  MISRA, J. This appeal by certificate  is  di- rected against the judgment of the High Court of Gujarat.     Assessee  is assessed as an individual and  she  derived income from "other sources" being in the shape of  interest, dividends  etc. The relevant year of assessment is  1966-67. During  this  year assessee claimed  deduction  of  Rs.26986 being  interest  paid to Barivallabndas  Kalidas  Estate  on loans taken by her. The Income-tax Officer found that out of the loans real investment was of a sum of Rs. 1250 only.  He disallowed the claim to the extent of Rs. 10,275 on  propor- tionate  basis.  According to him this claim  could  not  be admitted  under  section 57(iii) of the  Income-tax  Act  of 1961.     Assessee’s  first  appeal  to  the  Appellate  Assistant

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Commissioner  was rejected. The Appellate  Authority  relied upon  the ratio of the decision of the Bombay High Court  in Bai Bhuriben Ballubhai v. Commissioner of Income-tax, Bombay North  Cutch and Saurashtra. [1956] ITR (XXIX) 543 and  dis- missed the appeal.     In  further appeal before the Tribunal the claim of  the assessee was reiterated by contending that expenditure under the head of payment of income-tax and wealth-tax and annuity deposits  should have been taken as revenue expenditure  and the  claim of interest in respect of such loans should  have been  admitted. It was further contended that  the  assessee instead  of  liquidating the investments which  were  return oriented,  found  it commercially expedient  and  viable  to raise  a  loan instead of disturbing  the  investments  and, therefore, the claim became admissible in law. The  Tribunal did  not accept this contention and observed that the  loans were taken for meeting her personal obligation like  payment of taxes and deposit of annuity and these had nothing to  do with  the business. The Tribunal also relied upon the  ratio of  Bombay  High Court decision referred to  above.  As  the Tribunal dismissed the appeal assessee asked for the case to be  stated to the High Court and the following question  was referred for its opinion:               "Whether on the facts and in the circumstances               of the case,               1170               payment of interest to the extent of Rs. 10.27               was not an admissible deduction under  section               57(iii) of the Incometax Act?" The  High Court referred to various authorities and  decided against the assessee by concluding that at the relevant time it  was  obligatory  for the assessee to  make  the  annuity deposit and the earning of interest through such deposit was merely  incidental.  The High Court further found  that  the portion  of  the loan was not intended to  meet  expenditure wholly and exclusively for the purpose of earning the income and therefore did not come under section 57(iii) of the Act.     It  is not disputed by Mr. Ramchandran for the  assessee that  unless the claim comes within the purview  of  section 57(iii)  of the Act it would not be admissible as  a  deduc- tion. That section as far as relevant provides:               "The-income chargeable under the head  ’income               from  other sources’ shall be  computed  after               making the following deductions, namely:-               (i)......               (ii) ...               (iii) any other expenditure (not being in  the               nature  of  capital expenditure) laid  out  or               expended  wholly and exclusively for the  pur-               pose of making or earning such income;-               P               r               ovided  .............................. .......               E               x               p               l               a               n               a               t               ion:  .....................................  .     In  order  that  the claim for the  deduction  could  be sustained, it was for the assessee to satisfy the Income-tax Officer  that  the  loan interest in  respect  of  which  is

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claimed  as  deduction was laid out or expended  wholly  and exclusively  for  earning the income from out of  which  the deduction  was claimed. There is no dispute that the  provi- sion  of section 57 of the Act corresponds to section  12(2) of the Act of 1922. Dealing with a claim under section 12(2) of  the 1922 Act this Court in Eastern Investments  Ltd.  v. Commissioner  of Income-tax, West Bengal, [ 1951] ITR  20  1 summarised the position of law thus:-               "On  a  full review of the facts it  is  clear               that this transaction was voluntarily  entered               into in order indirectly to facilitate               1171               the carrying on of the business of the company               and  was  made  on the  ground  of  commercial               expediency.  It  therefore  falls  within  the               purview  of  Section 12(2) of  the  Income-tax               Act. 1922, before its amendment  .........  "                        "This being an investment company, if               it  borrowed money and utilised the  same  for               its investments on which it earned income. the               interest paid by it on the loans will  clearly               be a permissible deduction under section 12(2)               of the Income-tax Act."     In  Commissioner of Income-tax, West Bengal v.  Rajendra Prasad Moody, [1978] ITR 115.5 19 this Court observed:                    "The determination of the question before               us turns on the true interpretation of section               57(iii) and it would, therefore. be convenient               to refer to that section, but before we do so,               we  may point out that section 57(iii)  occurs               in a fasciculus of sections under the  heading               "F--Income  from other sources".  Section  56,               which is the first in this group of  sections,               enacts  in sub-section (1) that  specified  in               section 14, Items A to B, shall be  chargeable               to  tax  under  the head  "Income  from  other               sources" and sub-section (2) includes in  such               income  various items, one of which is  "divi-               dends".  Dividend  on shares  is  thus  income               chargeable  under the head "Income from  other               sources".  Section  57  provides  for  certain               deductions to be made in computing the  income               chargeable  under the head "Income from  other               sources"  and one of such deductions  is  that               set  out in clause (iii). which reads as  fol-               lows:  ..............  "                         "The  expenditure to  be  deductible               under  section  57(iii) must be  laid  out  or               expended  wholly and excluSively for the  pur-               pose of making or earning such income               In the said decision this Court clearly  indi-               cated that:               "It is the purpose of the expenditure that  is               relevant  in determining the applicability  of               section  57(iii)  and  that  purpose  must  be               making or earning of income." The  taxing authorities as also the High Court have  clearly recorded a 1172 factual finding facts that the expenditure in this case  was to meet the personal liability of payment of income-tax  and wealth-tax  and annuity. From the order of the  Tribunal  as also  the  judgment of the High Court it  appears  that  the assessee had taken the stand that even if the claim relating to  income-tax and wealth-tax was not admissible. that  part

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of  the claim relatable to annuity deposit should have  been admitted  as it fetched interest. We are inclined  to  agree with the High Court that so far as meeting the liability  of income-tax  and  wealth-tax  is concerned it  was  indeed  a personal one and payment thereof cannot at all be said to be expenditure laid out or expended wholly and exclusively  for the purpose of earning income. So far as annuity deposit  is concerned  the Tribunal and the High Court have come to  the right  conclusion that the dominant purpose was not to  earn income by way of interest but to meet the statutory liabili- ty  of  making the deposit. The test to apply  is  that  the expenditure should be wholly and exclusively for the purpose of  earning  the income. The fact finding  authorities  have come to the conclusion that no part of the expenditure  came within the purview of section 57(iii,) of the Act.     Mr.  Ramchandran then maintained that even if there  was an  indirect  link between the expenditure  and  the  income earned,  the claim would be admissible and relied  upon  the observations  of  Bose. J. in Eastern Investments  Case.  No attempt  has been made by the assessee to point  out  before the  taxing  authorities or even before the  High  Court  by placing the necessary facts to justify such a claim. On mere assumptions such a point cannot be allowed to be raised here for  consideration. In fact unless the loan is incurred  for meeting  the liability connected with the sources itself  it would  ordinarily be difficult to entertain the  claims  for deduction.     This appeal has to fail and the order of the High  Court has  to be affirmed. We accordingly dismiss the  appeal  but leave the parties to bear their respective costs. A.P.J.                                                Appeal dismissed. 1173