(1.)THE question which is involved in this reference is whether the applicant -assessee is entitled to claim deduction as regards the payment of interest to the extent of Rs. 10,279 against the 'income from others sources' under clause (iii) of section 57 of the Income -tax Act. 1961, which is hereinafter referred to as 'the Act'. The facts of the case show that the applicant -assessee derives income from other sources in the shape of interest and dividends. The assessment with which we are concerned in this reference is for the year 1966 -67. During the course of the assessment, it was found that the applicant assessee had borrowed loan from the Estate of Harivallabhadas Kalidas. During the accounting period the amount of this loan was of Rs. 5,00,055. Interest paid on this amount during the accounting period was 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 to 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 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 by this decision, the applicant -assessee approached the Appellant Tribunal. But even the Appellate Tribunal confirmed the department's view and held that the loans in question were taken for the purpose of meeting the obligations of personal character inasmuch as the loans were utilised for the purpose of paying income -tax, wealth -tax and annuity deposit liabilities According to the Tribunal, therefore, the interest paid on these loans had nothing to do with the earning of income from the other sources. One more contention before the Tribunal was that at any rate the loan amount of Rs. 26,000 and odd was taken on interest for the purpose of making annuity deposit which could earn interest to the assessee and, therefore, at least, so far as the interest paid on this loan amount is concerned, the same should be deducted under section 57(iii) of the Act. Even this contention of the assessee was rejected by the Tribunal on the ground that the deposit by way of annuity was, at the relevant time, her statutory obligation and earning of interest thereon was merely incidental and, therefore, even the interest paid on the loan amount taken for making this deposit would not be covered by clause (iii) of section 57.
(2.)BEING aggrieved by this decision of the Tribunal the assessee has preferred this reference in which the Tribunal has referred the following question to us for our opinion :
'Whether, on the facts and in the circumstances of he case, payment of interest to the extent of Rs. 10,279 was not an admissible deduction under section 57(iii) of the Income -tax Act ?'
Our answer to this question is that this payment was not an admissible deduction for the reasons which follow :
The contention which is raised on behalf of the assessee by the learned Advocate -General is that during the accounting period, the assessee had to meet with income -tax liability in the amount of Rs. 2,05,063 and wealth -tax liability in the amount of Rs. 57,127. Over and above these two amounts the assessee had also to make the annuity deposit of Rs. 55,310. Thus, the total liability which the assessee was expected to discharge during the accounting period was of Rs. 3,17,500. The learned Advocate -General has Drawn our attention in this connection to annexures 'A' and 'B'. Annexure 'A' shows the income and expenditure account of the assessee for the year ending December 31, 1965, and annexures '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 annexures 'B', which is the balance -sheet, the above referred 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 shareholding. 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 the income alive, and could also a void the payment of capital gains tax. It was thus pointed out that the assessee has been correctly guided by commercial expediency and has laid out the expenditure in the form of interest on borrowings for the purpose of earning income within the meaning of clause (iii) of section 57.
(3.)IT was also pointed out on behalf of the assessee that the ratio of the decision in Bhuriben's case is no longer hood in view of the decisions given by the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income -tax to and Indian Aluminum Co. Ltd. v. Commissioner of Income -tax.