Court disallows interest deductions, emphasizes real income determination over trust's books. Leave to appeal granted.

The court affirmed the disallowance of interest deductions in both references, citing a previous decision against the assessee. Regarding the determination of income, the court rejected the assessee's argument that only income shown in the trust's books should be taxed, emphasizing the need to ascertain real income as per the Income-tax Act, considering permissible deductions. The court answered questions against the assessee in both references, granting leave to appeal to the Supreme Court due to substantial legal issues involved.

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Issues Involved:

1. Admissibility of interest deduction.
2. Determination of income includible in the assessee's total income.

Issue-wise Detailed Analysis:

1. Admissibility of Interest Deduction

Income-tax Reference No. 7 of 1973:

The primary issue was whether Rs. 6,199 out of Rs. 10,880 paid as interest by the Ahmedabad trust to the estate account was an admissible deduction. The Income-tax Officer determined that this amount was related to personal expenses of the assessee and thus disallowed it as a deduction. This decision was upheld by the Appellate Assistant Commissioner and the Tribunal.

Income-tax Reference No. 29 of 1973:

Similarly, for the assessment year 1966-67, the Income-tax Officer disallowed Rs. 12,833 out of Rs. 25,496 paid as interest for non-investment purposes. This decision was also upheld by the Appellate Assistant Commissioner and the Tribunal.

Court's Decision:

The court referenced a previous decision in Income-tax Reference No. 35 of 1972, where a similar issue was decided against the assessee. The learned Advocate-General, representing the assessee, acknowledged this precedent and did not argue further. Consequently, the court affirmed the disallowance of the interest deductions in both references.

2. Determination of Income Includible in the Assessee's Total Income

Contention of the Assessee:

The assessee argued that only the income actually received from the trust, as shown in the trust's books, should be considered for tax purposes. The learned Advocate-General cited several Supreme Court cases emphasizing that only real income, not hypothetical or book-entry income, should be taxed.

Relevant Provisions and Case Law:

The court discussed the provisions of sections 160 to 164 of the Income-tax Act, 1961, which deal with representative-assessees. It was noted that the income could be assessed either in the hands of the trustee or the beneficiary, but the real income must be ascertained, considering permissible deductions.

Court's Analysis:

The court rejected the assessee's contention, stating that the income includible in the assessee's total income is the real income of the trust, determined as per the provisions of the Income-tax Act, 1961, and not merely the income shown in the trust's books. The court emphasized that permissible deductions must be considered to ascertain the real income of the trust.

Conclusion:

Income-tax Reference No. 7 of 1973:

- Question No. (1): Answered in the affirmative, against the assessee.
- Question No. (2): Affirmative as to the first part and negative as to the second part, against the assessee.

Income-tax Reference No. 29 of 1973:

- The question was answered in the affirmative, against the assessee.

The court granted leave to appeal to the Supreme Court under section 261 of the Income-tax Act, 1961, acknowledging that substantial questions of law were involved.

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