TMI Blog1994 (11) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... dia on the security of these lands, for the purpose of his agricultural operations. The interest due was not paid, with the result the bank debited the amount of interest accruing for each quarter in the current account, capitalised it and treated it as part of the principal for the ensuing quarter, as per the terms of the agreement between the parties. An amount of Rs. 61,979.31 had thus been debited in the account as the interest payable during the year ending March 31, 1981, and capitalised, treating it as part of the principal for the ensuing period. The assessee claimed deduction of this amount as allowable expenditure under clauses (e) and (f) of section 5 of the Act. But the Agricultural Income-tax Officer refused to allow the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of a person shall be computed after making the following deductions, namely :--...... (e) any interest paid in the previous year on any amount borrowed and actually spent on any capital expenditure incurred for the benefit of the land from which the agricultural income is derived ; (f) where the land from which the agricultural income is derived is subject to a mortgage or other capital charge, any interest paid in the previous year in respect of such mortgage or charge ; " What these clauses postulate is interest paid on the amount borrowed and actually spent on any capital expenditure under clause (e) and on the mortgage, under clause (f). The question for consideration is whether debiting of the interest in the overdraft ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest ? According to the assessee, it is, because the amount becomes a loan realisable from him on capitalisation. But we do not find it a fortiori case, as the assessee claims it to be. There cannot be any controversy at all on this point in the latter category of cases postulated by us earlier, of the advance of a definite amount in lump, and the debiting of the defaulted amount of interest against the borrower. The matter is squarely covered against the assessee by the decision of the House of Lords in Paton v. IRC [1938] 21 TC 626 ; [1938] AC 341 where one Fenton borrowed pound 2,50,000 from a bank on the security of his property. He paid nothing in the account in reduction of the principal or interest and the bank debited his account e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause it is in fact paid, but because it has in fact not been paid. " The position is, therefore, unexceptionable that there is no payment of interest at all where interest is capitalised in the case of a lump sum advance. The same ratio must apply to those cases where the capitalisation of the interest renders the debt in excess of the limit of the facility afforded by way of overdraft/cash credit. In that event, there is no amount which the bank holds for his benefit and the capitalisation of the interest only enhances the liabilities, consequent on non-payment of the interest in time. The ratio in Paton's case [1938] AC 341 (HL) and In re Jauncey [1926] 1 Ch 471, applies squarely to this type of cases so that when the interest is cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e account of the facility afforded. We shall examine the assessee's case in the light of these principles. The assessee had produced before the Commissioner, and has also produced before us, photostat copies of his current accounts with the bank. We find therefrom that the assessee had fully drawn the amounts which had been allowed to him by way of credit facility and the debit of the interest was over and above the limit of the facility. He was not in the habit of making any payment by way of principal or interest (except once), with the result interest went on accumulating. The facility was afforded to him in 1973, and it is the capitalisation of the interest in 1980-81, that is sought to be treated as payment of interest liable to be ded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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