1964 (2) TMI 81 - HC - Income Tax

Interest on Borrowed Money Not Deductible for Income Tax Purposes

MANNALAL RATANLAL Versus COMMISSIONER OF INCOME-TAX, CALCUTTA

The court held that the interest payment made by the assessee on borrowed money for income tax purposes was not allowable as a deduction against taxable ... - Issues:- Allowability of interest payment as a deduction against taxable income.Detailed Analysis:The case involves an application by the assessee to refer a question of law to the High Court regarding the deduction of interest paid on borrowed money for income tax purposes. The assessee, a partner in a registered firm, borrowed money to pay income tax for preceding years. The Income-tax Officer disallowed the deduction of the interest paid. The Appellate Assistant Commissioner and the Appellate Tribunal both upheld the disallowance, citing a lack of connection between the expenditure and the income earned. The Tribunal specifically referenced a judgment of the Bombay High Court in a similar matter.The primary contention of the assessee was that the borrowing was necessary to maintain income-yielding assets intact, preventing liquidation that would reduce assessable income. The assessee argued that the interest payment should be allowed as a deduction against income. However, the departmental representative argued against allowing the deduction, stating the absence of a direct connection between the expenditure and the income sought to be taxed.The judges analyzed the statutory provisions cited by the assessee, including section 10(2)(iii), section 10(2)(xv), and section 12(2). They found that none of these provisions supported the deduction claimed by the assessee. Additionally, they referenced a decision of the Patna High Court, which held that income tax paid by an assessee cannot be deducted as a business expenditure. The judges agreed with this view, stating that income tax is not part of an assessee's expenditure for earning profits.Ultimately, the judges answered the question of whether the interest payment constituted an allowable deduction against the income in the negative. They held that since there was no statutory provision supporting the deduction and income tax is not a deductible expenditure, the assessee's claim could not be entertained. The applicant was ordered to pay the costs of the reference.In a separate judgment, SEN J. concurred with the decision, and the question was answered in the negative.