TMI Blog2001 (2) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 2 crores as on March 31, 1980, in bank deposits. In respect of the assessment years 1969-70 to 1977-78, the assessee was required to pay wealth-tax to a tune of Rs. 41.29 lakhs, in addition to certain payments towards income-tax. For discharging the said liabilities, instead of liquidating either part or full of the fixed deposits, the assessee had resorted to raising a loan against such fixed deposits, in addition to a part on overdraft. The wealth-tax liability of Rs. 41.25 lakhs was discharged on December 11, 1979, and a sum of Rs. 16,62,587 was paid towards the income-tax liability on December 22, 1979. In the assessment proceedings for the assessment years in question, the assessee claimed deductions from the total income of the interest that was paid/payable in respect of the loans and overdrafts, incurred for the purpose of discharging the wealth-tax and income-tax liabilities. According to the assessee, only the net interest had to be considered for tax purpose. Alternatively, it was also contended that the interest that was incurred by the assessee in respect of the borrowals had to be allowed as deduction under section 57(iii) of the Act from the gross interest on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. When once the amount borrowed was for the purpose of protecting the income-yielding asset, the assessee is entitled to deduction of the expenditure incurred for protecting such income-yielding asset under section 57(iii) of the Act. Learned counsel also strongly contended that there were two options for the assessee either to liquidate the fixed deposits prematurely thereby suffering a loss of interest or to raise a loan against the fixed deposits, may be incurring a little expenditure over and above the interest that was being paid by the institutions. But in the process, the assessee had earned more income and in fact, paid higher tax to the Department also. Therefore, the borrowal should be construed to have been made for the purpose of protecting the income-yielding asset or the source of income and not merely a borrowal for discharging the personal liabilities. Learned counsel also contended that the Tribunal accepted the contention of the assessee and arrived at a finding that the borrowal was for the purpose of protecting the income-earning source. In the light of the said finding given by the Tribunal, which is the final fact-finding authority, it is not even open to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,986 paid by her on the monies borrowed by her, the Income-tax Officer disallowed a sum of Rs. 10,279 on proportionate basis on the ground that to the extent the loan was taken by her to discharge her liabilities for income-tax and wealth-tax and to pay annuity deposit, the interest thereon was not allowable under section 57(iii) of the Act. The Tribunal recorded a factual finding that the expenditure had been incurred to meet her personal liability of payment of income-tax and wealth-tax and annuity deposit and confirmed the disallowance. On a reference, the High Court also confirmed the disallowance and on further appeal the apex court, affirming the decision of the High Court, held that the sum of Rs. 10,279 was not an admissible deduction under section 57(iii) of the Act. The High Court was right in holding that meeting the liability for income-tax and wealth-tax was a personal one and the dominant purpose for paying annuity deposit was not to earn income but to meet the statutory liability of making the deposit. The expenditure was not wholly and exclusively for the purpose of earning income. The facts of the case further show that the assessee instead of liquidating the inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er-connected or inter-related. When the expenditure is laid out or expended wholly and exclusively for the purpose of earning income, then only the said expenditure is allowable as deduction under section 57(iii) of the Act and not otherwise. Apart from the above, a reference to section 58(1)(a) also shows that any personal expenses of the assessee shall not be allowed as a deduction notwithstanding anything contained in section 57 of the Act. As held by the apex court the wealth-tax and income-tax liabilities are said to be the personal liability of the assessee and, therefore, the expenditure claimed by the assessee in the present case is a personal expenditure. Even by virtue of section 58(1)(a) of the Act such expenditure shall not be allowed as a deduction. Learned counsel for the assessee relied upon a number of judgments of the High Courts as well as the Supreme Court, which are briefly discussed hereunder: The first decision is in the case of Aluminium Corporation of India Ltd. [1972] 86 ITR 11 (SC). In this case, the assessee-company claimed the payments made to the sole selling agent as a deduction as business expenditure. As per the terms of the agreement, the agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services of 22 employees, the managing director and a director and to pay compensation. The shareholders accepted the proposals for such termination. Under an agreement, the Davids agreed to sell to the Tatas all the shares in the company for Rs. 155 lakhs, the sum voted for payment of compensation to the employees being deductible therefrom. The agreement also provided that the Davids should arrange to terminate the services of all employees with effect from March 31, 1956, and arrange to have all the directors resign their offices, so that the Tatas should be entitled to appoint their own directors or employees. After the take over, the appellant-assessee re-employed 9 out of 22 employees. There was a substantial reduction in the wage bill as a consequence of the retrenchment. The appellant paid Rs. 1,64,899 during the calendar year 1956 relevant to the assessment year 1957-58, which amount, inter alia, included Rs. 16,188 paid to the managing director in lieu of six months' notice, Rs. 21,200 paid towards compensation for termination of pension allowance and Rs. 16,885, the first of five annual payments as compensation to the director. The appellant claimed deduction of the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the shareholders on the outstanding amount of purchase price. When the assessee claimed deduction under section 57(iii) of the Act, the Gujarat High Court held that in order to claim deduction of expenditure under the provisions of section 57(iii) of the Act, the connection between the expenditure incurred and the income earned need not be direct. Even if the connection is indirect or incidental, that can be regarded as sufficient for the purpose of section 57(iii). It was also held that for attracting section 57(iii), it is not necessary that any income in fact, should have been earned as a result of the expenditure. However, the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for a mixed purpose. The distinction between purpose and motive must always be borne in mind, for what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee for incurring the expenditure. Saying so, the Gujarat High Court negatived the claim of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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