Deductibility of interest: immediate-purpose expenditure is allowed to the extent attributable to funds deposited to earn included income, with apportionment.
Income included in the assessee's total under a provision attributing another's income is treated as income from other sources for the assessee, and expenditure incurred solely for the immediate purpose of making or earning that included income is deductible; the test of "purpose" is the immediate object at the time of the transaction. Relief is therefore limited to the proportion of total interest in the relevant year that can be attributed to the original sum withdrawn and deposited to earn interest, and that attributable amount must be ascertained and set off against the interest income.
Issues: (i) Whether the assessee is entitled under section 12(2) to deduct interest paid to the firm in respect of funds withdrawn and deposited in the name of his minor son (income included under section 16(3)); (ii) If so, on what basis the allowable portion of the interest is to be computed.
Issue (i): Whether the interest paid by the assessee is an allowable deduction under section 12(2) against the interest income included in his total income by virtue of section 16(3).
Analysis: Section 12(1) brings within the head "income from other sources" income which "may be included in his total income"; subsection (2) permits allowance for expenditure incurred solely for the purpose of making or earning such income. The income arising from assets transferred to a minor and included under section 16(3) falls within "such income" for the purposes of section 12(1) and (2). The word "purpose" in section 12(2) requires examination of the object or immediate intention (not the ulterior motive) at the time of the transaction; where funds withdrawn were contemporaneously deposited to earn interest, the objective was to earn income notwithstanding a motive to benefit the minor.
Conclusion: In favour of the assessee. The interest charged by the firm is deductible under section 12(2) to the extent it was incurred solely for the purpose of earning the interest income included in the assessee's total income under section 16(3).
Issue (ii): The method or basis for computing the portion of the total interest paid that is attributable to the original sum withdrawn and deposited to earn interest.
Analysis: Only that part of the total interest paid in the relevant year which is truly attributable to the original borrowing of Rs. 3,75,000 (the amount deposited to earn interest) qualifies as expenditure "incurred solely for the purpose of making or earning" the included income. Transactions in intervening years affected the overall account balance; the precise attributable amount depends on ascertaining interest attributable to the original outstanding borrowing and cannot exceed the total interest charged in the year.
Conclusion: In favour of the assessee. The assessee is entitled to deduction of that proportion of the total interest paid in the relevant year which is attributable to interest on the original Rs. 3,75,000; that allowable amount is to be ascertained and set off against the interest income received.
Final Conclusion: The assessee's claim to deduction of interest is sustained in principle; relief is limited to the portion of interest proved to be attributable to the original sum withdrawn and deposited to earn interest, and the Commissioner is directed to give effect to that apportionment.
Ratio Decidendi: Where income of another person is included in an assessee's total income under a statutory provision, that included income falls under the head "income from other sources" for the assessee and expenditure incurred solely for the purpose of making or earning that included income is deductible under section 12(2); "purpose" requires consideration of the immediate object of the transaction, not the ulterior motive.
TaxTMI 
AI Drafter ✕
TaxTMI 
