Gujarat H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the deduction of Rs. 1,800 under s. 23(2) of the IT Act, 1961 ?

Counsel Appeared

J.P. Shah, for the Assessee : S.N. Soparkar i/b R.P. Bhatt of M/s R.P. Bhatt & Co., for the Revenue

A.M. AHMADI, J.:

The assessee, a married lady, resides with her husband in the latter’s property in Ahmedabad. She has one property in her ownership which is occupied by her cousin free of rent. The assessee claimed that her said property should be considered as self-occupied and she should be permitted statutory deduction of Rs. 1.800 in computing the value of the property. This contention has been negatived by all the authorities below. That has given rise to the following question on which our opinion is sought :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the deduction of Rs. 1,800 under s. 23(2) of the IT Act, 1961 ?”

After some discussion at the bar and after analysing the relevant provisions of law, Mr. Shah stated that having regard to the fact that the amount involved is Rs. 1,800 only, he does not press his claim in that behalf. Notwithstanding the concession made at the bar, we would prefer to indicate the reasons why we are of the view that the question must be answered against the assessee and in favour of the Revenue. Sec. 23(2) of the IT Act, as it stood at the relevant point of time, was as under : “23. (2) Where the property is in the occupation of the owner for the purposes of his own residence, the annual value shall first be determined as in sub-s. (1) and further be reduced by one-half of the amount so determined or one thousand eight hundred rupees, whichever is less.”

We are not concerned with the proviso to the said section. On a plain reading of the above sub-section, it is obvious that the property in question must be in the occupation of the owner for her own residence to avail of the benefit of the said provision. In the present case, admittedly, the property in question was in the occupation of her cousin who was residing therein, albeit, rent-free. It is, therefore, clear that the assessee was not making use of the property for the purposes of her own residence during the year under reference. The property was in the actual possession and occupation of her cousin who was residing therein with his family. We are, therefore, of the opinion that the authorities were right in coming to the conclusion that the assessee was not entitled to the deduction of Rs. 1,800 under the said sub-section.

In CIT vs. Rani Kaniz Abid (1972) Tax LR 587 (All), the assessee owned a house in Karachi which she had purchased in 1946. The assessee was not residing in that property but she used to go there occasionally. The property was occupied by her married daughter and son-in-law who were residing in Karachi. Even though the property was in the actual occupation of her daughter and son-in-law, the evidence on record disclosed that she had retained the property for her personal occupation and she occasionally went and resided therein. This, the Tribunal found on the basis of an endorsement made in her passports in the relevant years. It is, therefore, clear from the facts brought on record that the assessee visited Karachi at intervals and resided in the property along with her daughter and son-in-law. The Court, therefore, came to the conclusion that she had retained the house for her occupation while permitting her daughter and son-in-law to reside therein. In the background of these facts, the Court came to the conclusion that she was entitled to the deduction under s. 23(2) of the IT Act. In the present case, there is no material on record to show that the assessee at any time went and lived in the property which was occupied by her cousin. The decision must turn on the facts of each case. In the facts of the case on hand, it is not possible to say that the assessee had retained the property for her occupation or that she occasionally went and lived therein. We, are, therefore, of the opinion that the ratio of the above decision has no application.

In the above circumstances, Mr. Shah realised that it was not possible for him to contend, in the absence of the relevant facts, that the assessee had retained the property for her occupation, may be occasionally. He, therefore, conceded, and, in out opinion rightly, that question No. 1 must be answered in the affirmative, that is, in favour of the Revenue and against the assessee. We hold accordingly.

In the assessment year under reference (1971-72), the assessee maintained three accounts in different names with M/s Swastic Textile Distributors. The first account was in the name of Smt. Jashvidyaben Chandrakant Mehta, the second was in the name of Smt. Jashvidyaben Kantilal Choksi and the third was in the name of Jashvidyaben Kantilal (Trust-set). These accounts are collectively produced at annexure A-11. During the assessment year under reference, she borrowed a sum of Rs. 35,647 from Swastic Textile Distributors in the first account for the purposes of paying tax dues and meeting certain personal expenses. At the end of the year, an entry in the sum of Rs. 23,827 was made towards interest paid at 10 per cent p.a. In the year in question, the assessee received interest income of Rs. 13,174, vide annexure “C”, and paid interest of Rs. 12,280, vide annexure “D”, out of total interest payment of Rs. 25,518. She, therefore, claimed a deduction or Rs. 12,280 out of the income of Rs. 13,174 received during the year. As against her claim of deduction of Rs. 12,280, the Tribunal allowed a deduction or Rs.

1,070, being the interest on Rs. 10,700 spent for purchase of shares. The assessee is, therefore, claiming deduction of the balance amount of Rs. 11,210. The question which is referred for our opinion reads as under :

In order to appreciate the contentions urged by learned counsel for the assessee, it is necessary “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in disallowing the interest claim of Rs. 11,210 against the interest income of Rs. 13,174 ?” to note that while under the first account the assessee became liable to pay interest in the sum of Rs. 23,827, she was entitled to interest on the amount lying credited to her account in the other two accounts in the sum of Rs. 436.98, that is, Rs. 347 and Rs. 4,665.38 (sic), respectively. The amount of interest has been credited to her account in the said two accounts produced at annexure A-11. The total amount of interest credited to her account, therefore, comes to Rs. 5,102.36. If this amount is deducted from the interest debited to her account, i.e., Rs. 23,827 (the interest debited to her account in the first account), the balance that remains is Rs. 18,724.84. This, Mr. J. P. Shah, learned counsel for the assessee, concedes is not deductible in view of the decision of the Supreme Court in the case of Smt. Padmavati Jaikrishna vs. Addl. CIT (1987) 166 ITR 176 (SC) : TC41R.622. In the view of this concession, we are required to consider whether the assessee entitled to deduction of Rs. 5,102.36 and the amount of Rs. 1,691 paid by way of interest to the minor children of the assessee.

The submission of Mr. Shah was that since the assessee had three accounts with M/s. Swastic Textile Distributors for the sake of convenience only, for the purpose of working out the income of the assessee, these three accounts must be considered as a single account as, in law, only the real income of the assessee can be brought to tax. He submitted that the assessee could not be a debtor and a creditor of M/s. Swastic Textile Distributors at one and the same time and, therefore, the interest amount paid by her on her borrowings and outstandings and the interest amount received by her in the other two accounts on her credits must be adjusted for the purpose of determining her real income. If that is done, Mr. Shah contends that the assessee must be given a set off for the amount of Rs. 5,102.36 which she had received by way of interest on her credits. To put it differently, according to Mr. Shah, since the assessee was a creditor to the extent of Rs. 72,431.14, the amount to which she was indebted to M/s. Swastic Textile Distributors as shown in the first account would stand depleted to that extent and she would be liable to pay interest on reduced amount only. The authorities below have, however, come to the conclusion that the assessee had failed to establish that the expenditure (interest of Rs. 23,827) was incurred wholly or exclusively for the purpose of earning income and unless this was satisfied, no deduction could be allowed under s. 57(iii) of the IT Act. The Tribunal also came to the conclusion that the assessee had failed to establish a nexus between the moneys borrowed and the interest income received. It, therefore, took the view that in view of the decision of this Court in Smt. Padmavati Jaykrishna vs. CIT (1975) 101 ITR 153 (Guj) : TC41R.624 [now confirmed by the Supreme Court in Smt. Padmavati Jaikrishna vs. Addl. CIT (1987) 62 CTR (SC) 14 : (1987) 166 ITR 176 (SC) : TC41R.622], the assessee was not entitled to the deduction claimed. The assessee, feeling aggrieved by this view, sought a reference under s. 256(1) of the IT Act on the question extracted above.

In view of the above rival points of view and in view of the concession made by counsel for the assessee, what we are required to consider is whether the assessee was entitled to deduction of Rs. 5,102.36 being the interest credited in her two accounts and Rs. 1,691 being the interest paid to her minor children on the dividend and sale proceeds realised by the sale of share coupons and shares belonging to the minors and received by the assessee and wrongly retained by her and merged with her other receipts in the accounts of Smt. Jashvidyaben Kantilal Choksi and which amount was invested for earning interest and on which interest was earned to the tune of Rs. 1,901, as detailed in annexure “D” hereto. Mr. Shah was fair in stating that the assessee would not be entitled to a deduction of these amounts purely under s. 57(iii) of the Act as in that case the assessee would be required to show that the expenses in question were incurred for the purpose of earning the income sought to be taxed and that such expenditure was incurred wholly and exclusively for the said purpose. In other words, according to him, in order to bring the case within the scope of s. 57(iii) of the Act, it would be incumbent on the assessee to establish a nexus between the moneys borrowed and the income received. In the present case, the finding of fact recorded in this behalf is against the assessee. If we turn to paragraph 14 of the Tribunal’s order in appeal, we find that the Tribunal came to the conclusion that no new facts other than those placed on the record of the earlier case relating to the asst. yrs. 1968-69 and 1969-70 were brought to light and, therefore, it had no reason to depart from the view taken in the earlier case. If we turn to the order passed by the Tribunal in appeal in the earlier case, we find that the Tribunal came to the conclusion that the amount of interest paid by the assessee on the debit balance with M/s. Swastic Textile Distributors could not be deducted under s. 57(iii), since the assessee had failed to satisfy the ingredients of the said provision. While making a reference to this Court also, the Tribunal observed that there was no nexus between the moneys borrowed and the interest income received by the assessee. Mr. Soparkar, for the Revenue, therefore, contended that the case is clearly covered by the decision of the Supreme Court in Smt. Padmavati’s case (supra) and, therefore, the question framed for determination must be answered in favour of the Revenue. If the question of deduction is strictly within the purview of s. 57(iii) of the Act, the contention urged on behalf of the Revenue would undoubtedly have to be upheld in view of the decision of the Supreme Court in Smt. Padmavati’s case (supra). However, so far as the facts of the present case are concerned in regard to the interest claim of Rs. 5,102.36, we are of the opinion that the case does not fall strictly within the purview of s. 57(iii) of the Act. It is, indeed, true that the assessee was maintaining three accounts with M/s. Swastic Textile Distributors but that was by way of convenience only. It is not the contention of the Revenue that by maintaining three accounts, the assessee had derived any benefit or advantage so far as her tax liability is concerned. For all practical purposes, therefore, the account with M/s. Swastic Textile Distributors was a single account and, therefore, we see force in the contention of Mr. Shah that, on the facts and circumstances of the case, the assessee could not be both a debtor and a creditor of M/s. Swastic Textile Distributors at one and the same time. In the first account maintained in the name of Smt. Jashvidyaben Kantilal, we find that the assessee was indebted to M/s. Swastic Textile Distributors to the tune of Rs. 2,84,266.48. During the year under reference, she borrowed a further amount of Rs. 35,647 from the said firm and was required to pay interest to the tune of Rs. 23,827. As against that, in the other two accounts, she was a creditor of the firm in the sum of Rs. 5,777.33 and Rs. 46,653.81 aggregating to Rs. 72,431.14 and she had received interest on the said credit to the tune of Rs. 5,102.36. For the purpose of working out her real income, Mr. Shah contended that the assessee was entitled to set off this amount of interest against her liability under the first account which had been wrongly denied by the authorities below. If the account is taken as one single composite account, though written on three different sheets of paper, the contention of Mr. Shah would appear to be well-founded. After all, the assessee is liable to pay tax on her real income and for the purpose of working out the real income, she would be entitled to deduct or set off Rs. 5,102.36. The authorities below did not permit the deduction because they did not accept the assessee’s contention that all the three accounts maintained with M/s. Swastic Textile Distributors constituted a single account and the assessee was entitled to deduction of Rs. 5,102.36 being interest credited to her account in the two accounts maintained in the names of Jashvidyaben Kantilal Choksi and Jashvidyaben Kantilal (Trust-set). We are, therefore, of the opinion that having regard to the peculiar facts of this case, the assessee is entitled to adjustment of Rs. 5,102.36. Mr. Soparkar invited our attention to a decision of the Madras High Court in Addl. CIT vs. Madras Fertilisers Ltd. (1980) 122 ITR 139 (Mad) : TC41R.734. In that case, the assessee, a public limited company, required funds to meet the cost of construction of its plant. It entered into a loan agreement with the Chemical Bank New York Trust Company for borrowing 23 million dollars to be drawn in convenient instalments. A provision for the payment of interest by the assessee-company to the lending company was made under the agreement. It provided that interest on each loan shall be payable semi-annually on the first day of January and July in each year, commencing with the first of such dates next following the issuance thereof and at maturity. For the year ending 31st March, 1969, the assessee filed a return admitting a net loss of Rs. 20,35,408 to be carried forward as business loss. The assessee claimed a total interest payment of Rs. 35,53,829 and claimed the loss to be carried forward, whereas the ITO was of the view that the total claim was not allowable because the company was still under construction and so the borrowing was used only for capital construction and not for business purposes. Thereupon, counsel for the assessee requested the ITO to allow at least the interest paid for the said period for which interest had been received. Accordingly, the net interest was worked out at Rs. 2,67,735. Adding further interest on the rupee capital, the interest was determined at Rs. 3,26,759 and deducting 20 per cent of the salaries and other expenses as claimed and allowed in the preceding year, the net income was determined at Rs. 2,19,394. For the year 1970-71 also, the ITO fixed the net interest at Rs. 6,97,428 and allowed an expenditure of Rs. 66,350 which is 20 per cent of the other expenses amounting to Rs. 3,31,750 and he also allowed 1/4th of the salaries of the finance and administration Department and thus arrived at a net income of Rs. 5,86,242. The assessee then went up in appeal to the AAC claiming that the ITO should have allowed the entire interest amount. In the meantime, it appears that the Addl. CIT had taken action under s. 263 of the Act to revise the order of the ITO in so far as it related to allowing of 20 per cent of the sums claimed as overhead expenses, etc. He further held that the assessee would not be entitled to deduction under s. 57(iii) of the Act since he was of the view that the payment of interest by the assessee to the lending bank had really no direct nexus with the interest received and, therefore, the interest paid was in the nature of expenses concerning the erection of the factory, etc. The AAC dismissed the appeal of the assessee on the ground that the order of the ITO had merged in the order of the Addl. CIT. On further appeal to the Tribunal, the main contention urged on behalf of the assessee was that the interest amounts received on the deposits should not have been viewed in isolation but should have been considered as one transaction, namely, that it was a part of the loan transaction. The Revenue, on the other hand, contended that there was no nexus between the borrowings and the deposits and hence the assessee’s claim should not be entertained under s. 57(iii) of the Act. It rejected the assessee’s contention that the interest paid should be allowed on the footing that even the act of borrowing and depositing was in the course of the same business. Against this view of the Tribunal, the assessee obtained a reference.

The High Court pointed out that the stand of the assessee was that the interest received by it from the bank in respect of the amount deposited in a special account with that bank is not an income at all. As the assessee could not substantiate this contention, the first question was answered in the affirmative. With regard to the second question, counsel for the assessee argued that during the two years in question, the assessee was engaged in putting up the plant and that formed part of the carrying on of the business by the assessee and, therefore, the interest income earned must be treated as business income. This contention was also negatived and the question was answered against the assessee. It thereafter proceeded to deal with the contention based on s. 57(iii) of the Act. It came to the conclusion that as borrowing was for putting up the plant and investment in the special account was only till the money was utilised for the said purpose or purchasing capital goods, the borrowing itself was not for the purpose of depositing the money and earning interest and hence the interest paid could not have any direct connection with the receipt of the interest. It further held that the interest paid by the assessee to the bank cannot be said to be an expenditure laid out or expended wholly and exclusively for the purpose of earning interest from the deposit which the assessee had made in the special account and the assessee was not entitled to deduction of interest paid on the borrowings from the interest received on the deposits under s. 57(iii) of the Act. It will be seen from the judgment of the High Court that the interest earned by the assessee in the special account with the bank was an independent arrangement and had nothing to do with the interest paid by the assessee. The decision, therefore, turned on the special facts of that case. In that case, there was a definite and special purpose for maintaining a separate account and the funds deposited thereunder were to be applied by the company in connection with the project and for no other purpose. The Court negatived the contention urged on behalf of the assessee that the deposit of the amount lent by the bank in the special account with that bank constituted one single transaction and was not an independent transaction and hence the assessee was entitled to adjust the interest against the interest payable by the assessee to the bank. The Court, therefore, reached a finding of fact that the transactions were not integrated and did not constitute a single transaction so as to entitle the assessee to make the adjustment contended for. The Court found that there was a special purpose in maintaining separate accounts unlike in the present case. In the present case, we find that the assessee had maintained three separate accounts with M/s. Swastic Textile Distributors only for the sake of convenience and there was no special purpose for maintaining separate accounts. It is not the contention of the Revenue that these separate accounts were maintained for any special purpose or that the assessee had taken advantage thereof in the past. The assessee, a lady, was presumably advised that it would be convenient to maintain separate accounts with M/s. Swastic Textile Distributors. In the absence of any material on record to show that there was any special purpose in maintaining separate accounts, the assessee’s contention that separate accounts were maintained merely for the sake of convenience but they were for all practical purposes an integrated account cannot be doubted. The authorities below have merely examined the question from the angle of applicability of s. 57(iii) of the Act. There can be no doubt that if all the three accounts are consolidated and taken as constituting a single account, the assessee would be entitled to adjust the interest income of Rs. 5,102.36 in working out the taxable income. We are, therefore, of the view that having regard to the facts and circumstances which are peculiar to this case, the assessee should be allowed the adjustment of Rs. 5,102.36.

The next question is whether the assessee is entitled to adjustment of Rs. 1,691 being the interest paid to the daughter and son in respect of the amount of dividend and the sale proceeds of share coupons and shares sold by the assessee which belonged to the children. By the sale of the share coupons and shares, the assessee received the price which she retained and which got merged with her other receipts. She invested the amount, that is, the sale price, along with her other amounts and earned interest thereon to the tune of Rs. 1,901. She allowed interest of Rs. 1,969 to her minor children on the sale price of share coupons and shares sold by her during the relevant period. The authorities below came to the conclusion that the assessee is not entitled to adjust this amount under s. 57(iii) of the Act. On that, on the premise that the assessee had failed to establish any nexus between the money borrowed and the income received, we are of the view that the stand taken by the Revenue in this behalf is well- founded. The income of Rs. 1,901 was earned by the assessee by investing a certain amount whereas she paid interest of Rs. 1,691 to the children on the capital comprising dividends and the sale proceeds of share coupons and shares belonging to the minors. These two transactions were totally independent transactions and there was no nexus between the two so as to attract the application of s. 57(iii) of the Act. We are, therefore, of the view that the contention canvassed in this behalf by learned counsel for the assessee cannot be accepted. We, therefore, answer the second question in the affirmative except to the extent of Rs. 5,102.36.

In the result, this reference is partly allowed. So far as question No. 1 is concerned, we answer the same in the affirmative, that is, in favour of the Revenue and against the assessee. So far as question No. 2 is concerned, we hold that the Tribunal was right in disallowing the interest except to the extent of Rs. 5,102.36. There will be no order as to costs.

[Citation : 172 ITR 680]