1997 (4) TMI 15 - SC - Income Tax

Held that the Tribunal was right in taking the view that the assessee could not claim deduction in respect of the interest that was paid to the bank on the loan advanced in the overdraft account on the ground that the said loan was paid out of the dividend received on the shares pledged with the bank for securing the overdraft. The High Court was in error in taking the contrary view

Summary

Issues:
1. Deductibility of interest payments made to a bank on an overdraft account from dividend income for income tax computation.

Detailed Analysis:
The case involves appeals by the Revenue against a judgment of the Gujarat High Court regarding the deductibility of interest payments made by the assessee to a bank on an overdraft account from dividend income for the assessment years 1966-67 to 1969-70. The High Court granted a certificate of fitness under section 261 of the Income-tax Act, 1961, and held in favor of the assessee, allowing the deduction of interest payments. The dispute arose from the assessee inheriting assets and liabilities from his deceased father, including an overdraft account with the bank secured by shares. The assessee argued that the interest payments made to the bank should be deducted from the gross receipts to compute the real income earned. However, the Income-tax Officer, Appellate Assistant Commissioner, and Tribunal rejected this claim.

The High Court relied on its previous judgment in Udayan Chinubhai v. CIT and held that the interest payments made to the bank were not part of the assessee's real income as they were for meeting the claims of the secured creditor. The High Court emphasized that these amounts needed to be deducted before computing the chargeable income for the relevant assessment years. The Revenue contended that the High Court's decision was not in line with the law established by the Supreme Court in previous cases. The Revenue highlighted the distinction between assets being charged with a liability and income being charged with the obligation to pay interest.

The Supreme Court agreed with the Revenue's argument, stating that the pledging of shares by the assessee's father to secure the loan from the bank did not mean that the income from the shares was charged with the liability to pay interest. The Court referred to a Privy Council decision to support its reasoning that in cases where income is diverted by overriding title, the situation is different from mere application of income. Therefore, the Tribunal's decision to disallow the deduction of interest payments was upheld, and the High Court's judgment was set aside. The question was answered in favor of the Revenue, and the appeals were allowed with no order as to costs.