Pathak, J. - (1.) THE assessee, Smt. Indermani Jatia, was the widow of Seth Gan'ga Sagar Jatia of Khurja. She carried on money-lending business and other businesses, and derived income from investment in shares, properties and businesses. THE capital assets and income in respect of the different, sources of income were incorporated in common sets of books.
(2.) AT the beginning of the accounting year, relevant to the assessment year 1957-58, the capital account showed a net credit balance of Rs. 26,31,496. During the year, it is said, she donated a sum of Rs. 10 lakhs for the setting up of an engineering college at Khurja to be named after her husband. The amount was debited to the capital account and corresponding credit was given to the account of the institution. AT the close of the accounting year, after debiting the aforesaid sum of Rs. 10 lakhs the capital account showed a net credit of Rs. 15,06,920. The amount actually paid by the assessee during the year of account to the institution was only Rs. 5,50,000. The balance of Rs. 4,50,000 was treated as a debt due to the institution and accordingly the assessee was debited with interest thereon. The assessee had an overdraft account with the Central Bank of India, Aligarh. At the beginning of the accounting year, the amount outstanding on the overdraft was Rs. 2,76,965. Further overdrafts were raised during the year so that at the end of the year the liability of the assessee to the bank stood at Rs. 9,55,460. Among further debits to that account during the year was the aforesaid sum of Rs. 5,50,000 paid to the engineering college on January 7, 1956. In assessment proceedings for the assessment years 1957-58, 1958-59 and 1959-60 the assessee claimed deduction of the interest paid by her to the bank in respect of the aforesaid overdraft account. The assessee contended that she had preferred to draw on the overdraft account of the bank for the purpose of paying the institution and that if she had not done so she would have had to dispose of her shares for the purpose of making such payment. The case was that in order to save the income-earning assets the loan was taken and, therefore, the interest paid should be allowed. The Income-tax Officer rejected the claim, taking the view that the amount paid to the engineering college was not related to any business project. For the assessment year 1957-58 he disallowed Rs. 20,107 representing the interest paid to the bank on Rs. 5,50,000. Similarly, a sum of Rs. 25,470 and of Rs. 18,445, was disallowed as interest for the assessment years 1958-59 and 1959-60.
(3.) THE assessee appealed to the Appellate Assistant Commissioner and the appeals were dismissed. In second appeal before the Income-tax Appellate Tribunal the assessee urged that on October 21, 1955, she had promised a donation of Rs. 10 lakhs to the engineering college and that out of this a sum of Rs. 5,50,000 was deposited in the joint account of the assessee and the District Magistrate, Bulandshahr, on January 7, 1956. THE remaining sum of Rs. 4,50,000 was left as a loan with the assessee and the interest accruing on this sum of Rs. 4,50,000 from the date of the initial donation, namely, October 21, 1955, at 6% per annum was to be finally deposited in the account of the engineering college. It was also contended that the amount was kept in trust. THE assessee claimed that she was entitled to deduction on account of the interest paid on the overdraft account with the bank in respect of Rs. 5,50,000 and also to the interest accruing on the sum of Rs. 4,50,000 in favour of the engineering college. THE former claim was made in respect of all the assessment years 1957-58 to 1959-60 while the later was made in respect of the assessment years 1958-59 and 1959-60. THE Tribunal confirmed the disallowance of the interest claimed in respect of the sum of Rs. 5,50,000, holding that the sum of Rs. 5,50,000 was not paid for a business purpose but as a donation and, therefore, the claim could not be laid under Section 10(2)(iii) of the Indian Income-tax Act, 1922. In respect of the interest accruing on the sum of Rs. 4,50,000 in favour of the engineering college, the Tribunal held that no donation of that sum had been made by the assessee, that it was at best a promise by the assessee to the District Magistrate to pay that amount for the purpose of charity and the mere entry in the assessee's own account books crediting the trust, which had not yet come into existence, could not amount to a gift or trust for charitable purposes. Thus, the interest credited to the account of the engineering college was also disallowed. Meanwhile, Smt. Indermani Jatia died and her legal heir, Madhav Prasad Jatia, was substituted. The assessee requested the Tribunal to refer the question concerning the deduction of interest on Rs. 4,50,000 for the assessment years 1958-59 and 1959-60 and accordingly the Tribunal has referred the following question: " Whether, in the facts and circumstances of the case, the interest credited by the assessee to the account of Ganga Sagar Jatia Engineering College on the sum of Rs. 4,50,000 and accretion thereto was an admissible deduction for each of the years under reference ?", that is reference No. 342 of 1964. ;