1998 (3) TMI 175 - AT - Income Tax

Disallowance of Rebate for Provident Fund Deposits from Borrowed Funds under Section 88

The Tribunal upheld the disallowance of rebate under section 88 for deposits in the Provident Fund A/c made out of borrowed funds, emphasizing the ... Tax Rebate Issues:Disallowance of rebate under section 88 in respect of deposit in the Provident Fund A/c.Analysis:The appeals were directed against the orders passed by the DCIT(A) relating to the assessment year 1993-94, upholding the disallowance of rebate under section 88 for deposits in the Provident Fund A/c. The first appeal, ITA No. 959/Chandi./94, involved an assessee who deposited Rs. 49,000 in the PPF A/c out of withdrawals from the Savings Bank A/c after raising an interest-free loan of Rs. 85,000 from his wife. The DCIT(A) upheld the disallowance, stating that the deposit was not made out of income chargeable to tax. The assessee argued that rebate under section 88 should not be denied even if the investment was made out of borrowed funds, citing relevant case law and circulars.The Tribunal considered whether investments made out of borrowed funds in the PPF A/c would qualify for rebate under section 88. It emphasized that the provision required the deposit to be made 'out of his income chargeable to tax,' and such clear language must be given effect. The legislative intent was to promote savings and thrift by ensuring that the investment was made from taxable income. The Tribunal rejected the argument that borrowed funds could qualify for the rebate, citing a Bombay High Court decision under the 1922 Act and the purpose of exemption under section 88.The Tribunal also analyzed the decisions cited by the assessee's counsel, distinguishing them based on the specific facts of each case. It highlighted that the circular relied upon by the counsel actually supported the revenue's position, stating that the benefit of rebate would not apply if the deposit was made out of borrowed funds. Ultimately, the Tribunal held that the assessee was not entitled to rebate under section 88 for deposits made in the PPF A/c out of borrowed funds.The second appeal, ITA No. 960/Chandi./94, involved a similar scenario where the assessee deposited Rs. 48,900 in the PPF A/c out of loans raised from his sons. The Assessing Officer also disallowed the rebate under section 88, and the Tribunal, based on the analysis in the first appeal, dismissed the second appeal as well. Both appeals were therefore dismissed, affirming the disallowance of rebate under section 88 for deposits made in the Provident Fund A/c out of borrowed funds.