TaxTMI 
TaxTMI 
1979 (4) TMI 2
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....terest that was to accrue on the sum of Rs. 10 lakhs earlier donated to the college. In pursuance of the promise made on October 21, 1955, she actually made over a sum of Rs. 5.5 lakhs by depositing the same in a joint account opened in the names of the District Magistrate, Bulandshahr and Smt. Indermani Jatia for the college while the balance of Rs. 4.5 lakhs was left with the assessee and was treated as a debt to the institution and interest thereon at 6% per annum with effect from October 21, 1955, was to be finally deposited in the technical institute account. These facts become clear from a certificate dated October 17, 1958, issued by the District Magistrate, Bulandshahr, which was produced before the Appellate Tribunal. The aforesaid transaction came to be recorded in the books of the assessee as follows : At the beginning of the accounting year (Samvat year 2012-13--accounting period November 13, 1955, to November 1, 1956) relevant to the assessment year 1957-58, the capital account of the assessee showed a net credit balance of Rs. 23,80,753. Initially, on November 21, 1955, a sum of Rs. 10 lakhs was debited to her capital account and corresponding credit was given to t....
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....llege account on Rs. 4.5 lakhs was disallowed. The assessee preferred appeals to the Appellate Tribunal. It was contended on behalf of the assessee that she had promised a donation of Rs. 10 lakhs to the engineering college on October 21, 1955, that the obligation to pay the said amount arose on November 21, 1955, when the amount was debited to her capital account and the corresponding credit was given to the account of the institution, and that out of this total donation a sum of Rs. 5.5 lakhs was actually deposited in the joint account of the assessee and the District Magistrate, Bulandshahr, on January 7, 1956, for which the overdraft with the Central Bank was operated and hence the interest was deductible as business expenditure. As regards interest on Rs. 4.5 lakhs that was debited to her account and credited to the institute's account it was urged that this balance amount was kept in trust for the institution and hence the accruing interest thereon which was debited to her account should be allowed as a deduction. In support of these submissions, a certificate issued by the District Magistrate, Bulandshahr, dated October 17, 1958, was produced before the Tribunal. The App....
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....o. 775 of 1970, the case of the assessee was that there was an obligation to pay Rs. 10 lakhs to the engineering college, that for the time being the assessee decided to pay Rs. 5.5 lakhs, that it was open to the assessee to pay the amount from her business assets or to preserve the business assets for the purposes of earning income and instead borrow the amount from the bank and that she had accordingly borrowed the amount from the bank and, therefore, since the borrowing was made to preserve the business assets, the interest thereon was deductible under s. 10(2)(iii) or s. 10(2)(xv) of the Act. The High Court observed that there was nothing to show that the assessee would necessarily have had to employ the business assets for making payment of that amount, and secondly, it was only where money is borrowed for the purposes of business that interest paid thereon becomes admissible as a deduction, and since in the instant case, the sum of Rs. 5.5 lakhs was admittedly borrowed from the bank for making payment to the engineering college it was not a payment directed to the business purposes. According to the High Court, the mere circumstance that otherwise the assessee would have to r....
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....thorities, the Tribunal and the High Court have confused the issue by considering the claim for deduction under s. 12(2) of the Act. According to him the scope for allowing the deduction under s. 10(2)(iii) or 10(2)(xv) was much wider than under s. 12(2) of the Act. He urged that by applying the ratio of the decision in Bhuriben's case [1956] 29 ITR 543 (Bom), which was admittedly under s. 12(2) of the Act, to the facts of the instant case the lower authorities as well as the High Court had adopted a wrong approach which led to the inference that the deduction claimed by the assessee was not admissible. Secondly, he urged that considering the case under s. 10(2)(iii) or s. 10(2)(xv) the question was when could the obligation to pay Rs. 10 lakhs to the engineering college be said to have been incurred by the assessee and according to him such obligation arose as soon as the donation or gift was complete and in that behalf placing reliance upon the certificate dated October 17, 1958, issued by the District Magistrate, Bulandshahr, as well as the entries made by the assessee in her books, he urged that the gift was complete no sooner the capital account of the assessee was debited....
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.... by the taxing authorities and the taxing authorities held that such interest was not admissible under either of the provisions. He pointed out that so far as the Tribunal and the High Court were concerned the assessee's claim for deduction under s. 10(2)(iii) or s. 10(2)(xv) had been specifically considered and negatived. He sought to justify the view of the Tribunal and the High Court in regard to the disallowance of interest paid by the assessee on the sum of Rs. 5.5 lakhs to the bank in the three concerned assessment years as also the disallowance of interest credited by the assessee to the account of the engineering college on the sum of Rs. 4.5 lakhs and the accretion thereto ; as regards the sum of Rs. 5.5 lakhs, he contended that the real question was not as to when the obligation to pay to the college was incurred by the assessee but whether the obligation incurred by the assessee was her personal obligation or a business obligation and whether the expenditure by way of payment of interest to the bank was incurred for the purpose of carrying on business and as regards the sum of Rs. 4.5 lakhs whether the trust in favour of the college had at all come into existence on ....
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....ld necessarily have had to employ the business assets for making payment to charity. The High Court actually considered the assessee's case under s. 10(2)(iii) and s. 10(2)(xv) and disallowed the claim for deduction under these provisions principally on the ground that the said borrowing of Rs. 5.5 lakhs was unrelated to the business of the assessee. Proceeding to consider the claim for deduction made by the assessee under s. 10(2)(iii) or s. 10(2)(xv), we may point out that under s. 10(2)(iii), three conditions are required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the purpose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. As regards the claim for deduction in respect of expenditure under s. 10(2)(xv), the assessee must also satisfy three conditions, namely, (a) it (the expenditure) must not be an allowance of the nature described in clauses (i) to (xiv), (b) it must not be in the nature of capital expenditure or personal expen....
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....erdraft account, the Tribunal has noted that at the beginning of the accounting year the amount outstanding in the said overdraft was Rs. 2,76,965, that further overdrafts were raised during the accounting year with the result that at the end of the year the assessee's liability to the bank in the said account rose to Rs. 9,56,660 and that among the further debits to this account during the year was the said sum of Rs. 5.5 lakhs paid to the college on January 7, 1956. On a consideration of the aforesaid position of the overdraft and the other material on record, the Tribunal has recorded a clear finding of fact which has been accepted by the High Court that the said borrowing of Rs. 5.5 lakhs made by the assessee from the bank on January 7, 1956, had nothing to do with the business of the assessee but the amount was directly made over to the college in part fulfilment of the promised donation of Rs. 10 lakhs with a view to commemorate the memory of her deceased husband after whom the college was to be named. In other words, the borrowing was made to meet her personal obligation and not the obligation of the business and as such expenditure incurred by the assessee by way of pay....
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....t the requirement under s. 10(2)(iii) that the assessee must further show that the borrowing of the capital was necessary for the business so that if at the time of the borrowing the assessee has sufficient amount of its own the deduction could not be allowed and the High Court further took the view that in deciding whether a claim of interest on borrowing can be allowed the fact that the assessee had ample resources at its disposal and need not have borrowed, was not a relevant matter for consideration. The decision in Kishinchand Chellaram's case [1977] 109 ITR 569 (Bom) was rendered in the peculiar facts which obtained in that case. The Tribunal had recorded a clear finding that since the business of the assessee was that of banking there was no borrowal as such but only acceptance of deposits by the assessee from its clients which were made by the assessee in the course of and for the purposes of its business. In those circumstances, the Tribunal took the view that the aspect as to how these deposits, which were admittedly received by the assessee from the depositors in the course of its banking business, were subsequently utilised would not be material for the purpose of d....