TMI Blog1973 (12) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest amount of Rs. 26,986 should be allowed as permissible deduction under clause (iii) of section 57 of the Act which says that while computing the chargeable income under the head " income from other sources " any expenditure, not being in the nature of capital expenditure, laid out or expended wholly or exclusively for the purpose of making or earning such income, should be deducted. The Income-tax Officer, who carried out the assessment worked out, on proportionate basis with reference to withdrawals, and the balance available, the interest amount of Rs. 10,279 which alone could be considered for the purpose of deduction in question. The dispute, therefore, is confined only to this amount. It is found that this interest was paid by the assessee on the loans which were raised for the purpose of meeting her tax liabilities such as income-tax and wealth-tax as well as for the purpose of making annuity deposit. But this deduction was not allowed by the Income-tax Officer as, in his opinion, the case did not fall within clause (iii ) of section 57 in view of the decision given by the High Court of Bombay in Bai Bhuriben Lallubhai v. Commissioner of Income-tax. Being aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annexures " A " and " B ". Annexure " A " shows the income and expenditure account of the assessee for the year ending 31st December, 1965, and annexure " B " is the balance-sheet for that period. The income and expenditure account shows income only from dividends amounting to Rs. 1,98,016. After deducting the expenditure, the balance which was left at the end of the year was Rs. 1,25,159. It was contended that in annexure " B ", which is the balance-sheet, the above referred balance of income over expenditure is taken into account. But even so, it was not possible for the assessee to meet her tax liability of Rs. 17,500 without taking the loans. It was pointed out that had the assessee preferred not to take loans to meet her tax liabilities, the only other course open to her was to liquidate her share-holdings. Had she preferred that course, she would have lost one of her sources of income and would have been liable to pay capital gains tax on the block of shares which she preferred to dispose of. On the other hand, the first course of discharging her tax liability by borrowing loans at suitable rate of interest could save her share investment, thus keeping the source of her inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f earning or making income, the deduction contemplated by clause (iii) of section 57 cannot be earned. Therefore, the pertinent question which arises to be considered is whether the interest paid by the assessee on the loans borrowed by her is expenditure incurred by her solely for the purpose of earning dividends ? The immediate purpose of the assessee in borrowing loans was to discharge her tax liabilities because had there been no such liabilities she would not have borrowed any loan. But at the time of considering whether she should pay up the tax by borrowing loans or by liquidating her shareholdings she was motivated to exercise her option in such a manner that the course of action adopted by her was the least disadvantageous to her. Therefore, her option to borrow loans was guided by a motive to earn income and not by a purpose to earn the same. It is here that the distinction between motive and purpose assumes importance. " Purpose " means a design of effecting something. Can it therefore be said that the assessee borrowed loans with a design to earn dividends ? In fact, she was already earning dividends, and but for the tax liabilities loans might not have been bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th under section 10(2)(xv) and under section 12(2) of the Act of 1922. The departmental authorities negatived this claim, but the Tribunal allowed the expenditure as a permissible deduction under section 12(2). This court held that deduction permissible under section 12(2) is expenditure incurred solely for the purpose of making or earning the income which is subjected to tax and, therefore, in order to decide whether an expenditure is a permissible deduction under section 12(2), we have to examine the nature of the expenditure. The court further observed that the purpose for which the expenditure is incurred must be in order to earn income and here we must not confuse purpose with motive, because what section 12(2) emphasizes is the purpose for which the expenditure is incurred and the word "purpose" does not mean motive for the transaction. Relying upon the Bombay decision in Bhuriben's cases the court further held that the motive which may have operated on the minds of the assessees in making that expenditure was quite irrelevant. During the course of the arguments in that case, the assessee put reliance upon the Supreme Court decision in Eastern Investments Ltd. which was a cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12(2). What the third proposition, therefore, provides is that the expenditure need not be obligatory nor incurred with a view directly and immediately to result in the earning of the income but it would be sufficient if the expenditure is incurred voluntarily on the ground of commercial expediency in order indirectly to facilitate the earning of the income. There must be a connection, direct or indirect, between the expenditure incurred and the income earned........" Ultimately this court has held that the matter must be viewed in the light of the principles of commercial trading and commercial expediency and if the expenditure is incurred on consideration of commercial expediency in order directly or indirectly to facilitate the earning of the income, it would be expenditure for the purpose of earning income within the meaning of section 12(2). Now, even if this test is applied, the question which would still remain to be considered is whether the assessee has been able to show that the borrowings in question were made only with a view to make earning of dividends as stated by her. In Commissioner of Income-tax v. Indumati Ratanlal, this court has considered a question whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arn dividend on the shares or to earn income from the immovable property or if there were any other income-producing asset of the assessee, to earn income from such asset ? The question clearly exposes the fallacy of the argument and shows that there is no connection, direct or indirect, between the borrowing of the moneys and the earning of the income. If the arguments of the assessee were pressed to its logical conclusion, the result would be that whenever moneys are borrowed for payment of any liability, it would always be possible to say, save in the rare case where moneys sufficient to meet the liability are lying idle with the assessee without earning any interest, that if the moneys had not been borrowed, some income producing asset of the assessee, which would include even cash lying on interest, would have had to be sold or realised, and that would have meant loss of income and, therefore, interest paid on borrowed moneys is for the purpose of earning such income and is deductible against it. " From these observations, therefore, it is clear that the distinction which the Bombay High Court made in Bhuriben's case between motive and purpose is well recognized by this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act of 1961. The contention of the learned Advocate-General was that this decision of the Supreme Court impliedly overrules the ratio of the decision of the Bombay High Court in Bhuriben's case because the High Court of Bombay in effect, has given that decision on the distinction between the personal capacity and the earning capacity of the concerned assessee. In our opinion, it is not correct to say that the High Court of Bombay has given in Bhuriben's case its decision on any distinction between the different capacities of the assessee. The ratio of the decision in Bhuriben's case is that the expenditure made to discharge a personal obligation does not supply any purpose for earning income even though there is motive to save a particular source of income. It is, therefore not possible to say that the decision in Bhuriben's case is, in any manner, affected by the Supreme Court decision in Indian Alumimium Co. Ltd. On the contrary, we find two other Supreme Court decisions which show that such type of expenditure cannot be allowed to be deducted under clause (iii) of section 57 of the Act so long as a nexus between them and the income sought to be taxed is not established. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is whether it can be said that the expenditure in question was incurred " wholly and exclusively " for the purpose of earning income from investment. It cannot be denied that the immediate purpose for taking loan on interest was to pay income-tax, etc. But since, in the opinion of the assessee, she did not find it commercially expedient to pay taxes by liquidating her share capital, it may also be said that another purpose for which she took the loans on interest was to save one of the sources of her income. But this would only show that the purpose was a dual one. If that be so, it cannot be said that the expenditure was incurred " wholly and exclusively " for the purpose of making the earning in question. One of the important requirements of clause (iii) of section 57 is that the purpose in question should be " wholly and exclusively " to earn income. Therefore, if this purpose is coupled with some other extraneous purpose, then it is not possible to say that the deduction as contemplated by clause (iii) of section 57 is earned by the assessee. The learned Advocate-General then contended that, so far as the loan amount which is raised for annuity deposit is concerned, the same i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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