9911796707
TMI Blog1989 (9) TMI 147X X X X Extracts X X X X X X X X Extracts X X X X ..... perty, interest, dividend and director's fees. He had borrowed moneys from Banks and from his wife. Her Highness Maqbul Jehan Begum. The issue before the Tribunal concerned the admissibility of interest paid by the assessee. The interest paid by the assessee to Bank during the years under appeal was as follows : Asst. Year : Amount 1974-75 : Rs. 18,413 1975-76 : Rs. 16,372 1976-77 : Rs. 13,880 1977-78 : Rs. 5,056 The Tribunal, in their original order dated 31-10-1983, held that the interest paid to Banks was an allowable deduction. It further held that the assessee was not entitled to deduction of more than Rs.12,237 for the years 1974-75 to 1976-77. As regards interest payments made by the assessee to his wife, Her Highness Maqbul Jehan Begum, the Tribunal, after considering the various submissions made, held that the interest on the loans taken from the assessee's wife was not eligible for deduction. 3. Against this order of the Tribunal, the assessee filed a misc. application on 31-1-1985. In the said misc. application, the assessee pointed out that the observations of the Tribunal in para 1 to the effect that they were not told that there was already a commitment to purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admissible deduction u/s 57(iii) even when there was no purchase of shares by making use of borrowed funds was an erroneous conclusion which required to be modified. The Tribunal passed their order in MA. No.147(Bom)/87 on 2-2-1988. In this order, the Tribunal observed that all the facts were before the Tribunal when they first heard the matter and no material was left out of consideration. The reason why the assessee borrowed moneys and kept them as deposit with the company was for getting a release from the counter-guarantee he had given to the insurance company. This fact was before the Tribunal when it first heard the matter. No material was left out of consideration by the Tribunal and, therefore, the order of the Tribunal admitting the misc. petition of the assessee was in effect an order of review. This order was, therefore, rectified by the Tribunal and the original order was restored. There was yet another misc. application by the assessee against this order filed on 12-4-1988. In this misc. application, it was pointed out that the assessee had gathered an impression that the department's misc. application dated 25-6-1987 would be dismissed but the reference application o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was required to pay interest to his wife. The assessee was also required to pay interest to others including banks for the moneys borrowed by him for purchase of shares, advancing moneys on interest and repayment of loans. The interest so paid to other including banks and to Her Highness Maqbul Jehan Begum for the years under appeal was as under : Asst. year Others Her Highness Total (Including Banks) Maqbul Jehan (Assessee's Wife) 1974-75 18,413 26,181 44,594 1975-76 16,372 51,719 68,091 1976-77 13,880 60,279 74,159 1977-78 5,056 27,649 32,705 5.1 The I.T.O. disallowed interest of Rs.44,594 in the assessment year 1974-75 on the ground that the loans were borrowed and interest thereon paid not for earning income and the same was in no way connected with the source of income of the assessee. According to the ITO, the interest paid could not be allowed as it was paid by the assessee in his individual capacity as a guarantor of the loans borrowed by M/s Shalimar Biscuits (P) Ltd. The ITO also observed that the interest could not be allowed because the statement of income filed by the assessee did not show any income by way of director's fees received from M/s Shalimar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the admissibility of the claim of interest paid by the assessee to his wife during these years. Shri Ramaswamy, the learned Sr. Departmental Representative, referred to the deposit of Rs.4,24,000 made by the assessee with M/s Shalimar Biscuits (P) Ltd. He stated that one could visualise three reasons for which such deposit was ostensibly made. These deposits could have been made for safeguarding the assets of the assessee with the company or for purchasing the shares of the company or for securing payment of guarantee commission from the company. None of these objects was proved from the facts of the case. The assessee was not protecting any source of income which was already existing. Therefore, it could not be said that while making this deposit the assessee was safeguarding any assets held by him. Shri Ramaswamy further argued that the assessee was not bringing into existence any new source of income as it was an admitted fact that the company had not issued any shares and the assessee had not purchased any shares from the company consequent to making these deposits. The assessee had not received any income by way of guarantee commission from the company nor income from directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he expected to get from the various companies in which he was a director. 10. In support of the above arguments, Shri Trivedi first drew our attention to a copy of the bank account on the assessee's wife Her Highness Maqbul Jehan Begum with Dena Bank to show that there was a direct nexus between the withdrawals of Rs. 3 lakhs from the account and the deposit with Shalimar Biscuits (P.) Ltd Shri Trivedi referred us to the details of the moneys borrowed from the assessee from his wife from 15-12-1972 to 12-4-1973. Such moneys received in cash and by cheque amounted, in all, to Rs.3,74,000. Shri Trivedi then referred to a copy of the agreement dated 7-10-1973 between Devkaran Nanjee Insurance Co. Ltd. (described as "insurers" in the agreement) and others which included Shalimar Biscuits (P) Ltd. (described as "borrowers" in the agreement) and the assessee herein. There is a reference in this agreement to the guarantee policies issued by the insurers on behalf of Shalimar Biscuits (P.) Ltd. In terms of this agreement, the parties thereto agreed to release the Nawab of Palanpur from his obligation as a counter-indemnifier of the insurance company without in any manner affecting the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregate sum of Rs. 37,49,514.81 as per particulars hereto annexed and marked Exhibit 'Z-2' with further interest as mentioned therein." He also referred to para 49 of the plaint which indicated the individual liability of the assessee in this regard. This paragraph reads as under :-- "49. By a letter dated 11th August, 1971 Defendants Nos. 2 to 6 admitted confirmed and acknowledged their respective individual liability for the outstanding sum of Rs.15,64,567.17 at the foot of the aforesaid Account No. III as on the 30th of June 1971 and further admitted confirmed and acknowledged their respective individual liability under the aforesaid Demand Promissory Note being Exh. 'K' (part) and letters of continuity dated 11th June 1968 and 10th March 1970 respectively executed by them jointly and severally and further admitted confirmed and acknowledged their liability under the aforesaid joint and several guarantee dated 10th day of March, 1970 being Exh. 'N' to the plaint." Shri Trivedi then pointed out that the Bank had prayed for ascertainment and declaration of the amount due by the defendant to the Bank. The plaintiff, inter alia, prayed vide prayer (1) (page 27 of the paper book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure was for the preservation of the assets. In para 15 of their order, the Tribunal observed that the liability which is likely to arise on the failure of the company to meet the creditors would be a personal liability. It is to escape from this personal liability that the bank had agreed to keep borrowed funds with the company as a condition for being released from the counter-guarantee. Therefore, according to the Tribunal, the purpose of the loan was to meet a personal liability. However, when the assessee filed a misc. application, the Tribunal in their order dated 11-7-1986 referred to the agreement dated 7-10-1973 between the assessee and the insurance company and observed in paragraphs 6 and 7 as under :-- "6. We have gone through the agreement referred to above. We find that the preamble of the agreement brings out clearly the obligation of the assessee to keep Rs.4.24 lakhs with the company towards the equity share capital of the company. It is only on the deposit continuing with the company that the insurance company had agreed to relieve him of the obligations under the counter-guarantee. Thus, the finding that there was no obligation to purchase the shares of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s out the obligations of the assessee as counter-indemnifier of the insurance company. In terms of this agreement, the assessee was discharged of his obligation as counter-indemnifier to the insurance company for the guarantee policies issued by the insurance company at the instance of Shalimar Biscuits (P.) Ltd. on his agreeing to contribute a sum of Rs.4,24,000 towards the equity share capital of the company. The agreement dated 7-10-1973 committed the assessee to purchase the shares of Shalimar Biscuits (P) Ltd. and, in any event, to keep that amount with that company without withdrawing it. This amount was never received back by the assessee. Further, it is seen that Dena Bank filed a suit against the company as well as its directors including the assessee. The claim against the assessee was to the extent of Rs.37,49,514 with a further claim of interest of Rs.20,00,327. If the Bank had succeeded in its suit, the assessee faced the prospect of losing all his assets in the form of shares, property, etc. Therefore, finally, the assessee could settle this matter out of Court on the basis of the agreement it had arrived at with the Dena Insurance Co. Ltd. on 7-10-1973. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat sense, by agreeing to continue the amount of Rs. 4,24,000 with Shalimar Biscuits (E) Ltd., the assessee succeeded in keeping intact his other income yielding assets. It is not necessary that these assets, in fact, should have earned any income in the accounting years. This is the ratio of the decision of the Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519. The Supreme Court stated clearly that to bring a case within the ambit of sec. 57(iii), it is not necessary that any income should, in fact, have been earned as a result of the expenditure. This section does not require that the purpose of making or earning income must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. We have already referred to the decision of the Bombay High Court in the case of H.H. Maharani Vijaykuverba Saheb of Morvi. In that case, the Bombay High Court held that the deduction which is permissible under sub-section (2) of sec.12 of the Indian Income-tax Act, 1922, is an expenditure incurred solely for the purpose of making or earning the income which has been subjected ..... X X X X Extracts X X X X X X X X Extracts X X X X
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