1980 (8) TMI 74 - HC - Income Tax

Summary

Issues:
- Deductibility of interest paid to LIC against interest from Government securities in assessment years 1968-69 and 1969-70.

Analysis:
The case involved a co-operative housing finance society claiming deductions under sections 80P(2)(a)(i) and 19(ii) of the Income Tax Act, 1961. The society derived income from providing credit facilities to members and interest from Government securities. The Income Tax Officer (ITO) disallowed the deduction claimed on interest from Government securities under section 80P(2)(a)(i) and section 19(ii) due to lack of evidence linking borrowed funds to investments. The Appellate Assistant Commissioner (AAC) allowed a partial deduction under section 19(ii) based on the proportion of funds invested in Government securities. However, the Income-tax Appellate Tribunal held that no specific link was established between the borrowings and investments, leading to disallowance of the deduction. The Tribunal emphasized the necessity of establishing a direct nexus between borrowed funds and interest payments for deduction under section 19(ii.

Regarding the claim under section 80P(2)(a)(i), the High Court held that the assessee could not raise this claim as it was impliedly rejected by the AAC, and no appeal was made to the Tribunal. The court emphasized that the controversy under section 80P(2)(a)(i) was not reflected in the Tribunal proceedings, preventing consideration at the High Court level. Therefore, the court rejected the assessee's attempt to revive the claim under section 80P(2)(a)(i) at that stage.

The High Court upheld the Tribunal's decision on the deduction under section 19(ii), emphasizing the requirement of establishing a direct link between borrowed funds and investment for interest deduction. As the Tribunal's finding on this matter was not challenged on permissible grounds, the court deemed the disallowance of deduction under section 19(ii) as legally correct. Consequently, the court answered the referred question in favor of the revenue and directed the assessee to bear the costs of the reference to the Commissioner.