TMI Blog1984 (12) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... ound that 1,350 shares out of these shares, of the value of Rs. 4,94,000, had been partitioned by the assessee by the end of March 1975. The ITO, therefore, concluded that the interest relating to the said 1,350 shares, which worked out to Rs. 59,820 (at 12 per cent of Rs. 4,94,000) could not be allowed as a deduction in this year. The ITO rejected the assessee's claim for deduction of interest to this extent and allowed only the balance of Rs. 1,556 in computing the assessee's total income. 3. The assessee appealed against this disallowance of Rs. 59,280, and contended that he was entitled to the deduction of the interest paid on the borrowings, once it was proved that the borrowings were invested for purposes of earning an income. He argued that it was not necessary to see whether the investments had actually yielded any income in any particular year., He, therefore, pleaded that the claim of the assessee to get deduction of the interest was not defeated only because the shares acquired out of the borrowed funds were not held by the assessee during the year of account. The assessee relied on the two decisions in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) and Kevalchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome for this year, even though these shares are no longer held by the assessee now. 2. On the facts and in the circumstances of the case and in law, the learned AAC erred in deleting the additions of Rs. 59,280 made by the ITO on account of the interest claimed by the assessee as a deduction. " 7. In his cross-objection, the assessee has raised the following ground : " The learned Appellate Assistant Commissioner erred in not deciding the question that the interest attributable to the borrowing made for the purposes of investment and which was disallowed being Rs. 59,280, as determined by the ITO, was excessive and ought to have in any case been much less. " 8. We have heard the learned counsels on both sides and carefully considered their arguments in the light of the materials placed before us and the authorities cited by them. 9. Shri Roy Alphonso submitted that for a deduction to be allowed under section 57(iii) of the Income-tax Act, 1961 ('the Act'), there must be a source or rather a specific source of income, since the section uses the words 'such income'. He argued that the expenditure should correlate specifically to the particular item of income chargeable unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case, the dominant purpose of the borrowing was to invest in shares at the time of making the borrowing, which would entitle the assessee to allowance of interest under section 57(iii). He further argued that there was a distinction between accruing of expenditure and incurring of expenditure and submitted that the assessee incurs the liability to pay interest on borrowing as soon as the borrowing is effected. He submitted that the continuance of the asset in the subsequent years, i.e., after the year of borrowing was necessary and that the asset did continue with the assessee-HUF in a depleted form, i.e., in the form of 8 shares. Shri Chokshi, therefore, submitted that the source of income, viz., the shares, still continued to exist even after partial partition and that, therefore, the assessee would be entitled to deduction of interest claimed by him. The argument of the learned counsel is that dividends from the shares of Crown Spg. Mfg. Co. Ltd. and other shares, constitute one source of income under the head 'Income from other sources' and that, therefore, the assessee's claim for deduction of interest on borrowing under section 57(iii) was rightly allowed by the AAC. He f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the assets of the assessee. For the assessment years 1960-61 and 1961-62, the assessee claimed deduction of the interest amount as also the legal expenses incurred in defending the right to the block of shares. The Allahabad High Court held that the block of 19,250 shares was treated by the assessee as a distinct group and formed a single source of income of the assessee, that as these shares were not held by the assessee during the relevant previous years, the interest was not expenditure incurred for earning dividend from it, that it was not deductible and that the legal expenses in defending the right to the shares were not also deductible. Their Lordships held that under section 12(2) of the 1922 Act, corresponding to section 57(iii) of the 1961 Act, the allowance is in respect of the expenditure incurred for the purpose of making or earning income and, hence, it must be incurred while there is a possibility of income being earned and that necessarily postulates the existence of the source of such income at the time when the expenditure is incurred. Their Lordships also held that a source of income may be described as the spring or fount from which a clearly defined cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to deduct under section 12(2) the interest earned by her from fixed deposit, the interest on money borrowed by her for the purpose of meeting the household expenses, purchase of jewellery and meeting advance payment of tax. In our view, the ratio of this decision is also to be followed in the present case. 14. In Madhav Prasad Jatia v. CIT [1979] 118 ITR 200, their Lordships of the Supreme Court held that the expression 'for the purpose of business' occurring in section 10(2)(iii) as also in section 10(2)(xv) of the 1922 Act was wider in scope than the expression 'for the purpose of earning income, profits or gains' occurring in section 12(2) and, therefore, the scope for allowing a deduction under section 10(2)(iii) or section 10(2)(xv) was much wider than the one available under section 12(2). In the said case, the Supreme Court affirmed the decision of the Allahabad High Court, disallowing the assessee's claim for deduction of interest on the borrowing of Rs. 5.5 lakhs made by the assessee for the purpose of making a donation to an educational institution. The assessee's claim that she had preferred to draw on the overdraft account for the purpose of paying to the college in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Bombay High Court in Mills Store Co.'s case, cited by the assessee's learned counsel, was a case under section 10(2)(iii) and is, therefore, of no relevance for the point in dispute in the present appeal and the cross-objection, It is, therefore, not necessary to refer to this decision in detail. 17. When we examine the facts of the present case in the light of the ratio of the four decisions discussed above, we find that 1,350 shares out of 1358 shares of Crown Spg. Mfg. Co. Ltd. which were acquired by the assessee-HUF, out of the borrowing of Rs. 4,97,000, have been taken out of the joint family common stock and divided by metes and bounds by allotment of specific shares to the three coparceners in the partial partition effected on 17-3-1975. Only 8 shares are left with the assessee-HUF and the remaining 1350 shares have been specifically allotted with their distinctive numbers to the three coparceners. This is clear from the indenture of partial partition dated 17-3-1975, the balance sheet of the assessee-HUF as on 31-3-1975 and the order of the ITO accepting the partial partition as on 17-3-1975 and holding that these 1350 shares and other assets divided among t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,000 invested in the 1350 Crown shares, which have gone out of the common HUF hotchpot in the partial partition is not an allowable deduction in the hands of the assessee-HUF, as such interest was neither laid out nor expended by the assessee-family in the year ended 31-3-1976, for the purpose of making or earning any income, much less any dividend income from the 1350 Crown shares. 18. The argument of the learned counsel that such interest would be allowed under section 57(iii), as the assessee-HUF was holding shares of other companies which yielded dividend income under the head 'Income from other sources' and that all these shares should be considered as a single source of income for this purpose, cannot be accepted for the simple reason that it is an indisputable fact that none of these shares has been acquired out of the borrowing of Rs. 4,94,000. Therefore, the interest relating to this amount of Rs. 4,94,000 can by no stretch of argument or imagination be held to have been laid out or expended for the purpose of making or earning the dividend income from the other companies' shares held by the assessee-HUF. The reasoning and conclusion of the AAC in paragraph No. 7 of his ..... X X X X Extracts X X X X X X X X Extracts X X X X
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