Satish Chandra, J. - (1.) THE Tribunal has referred the following question of law in relation to the assessment year 1963-64: "Whether, on the facts and in the circumstances of the case, the interest of Rs. 20,880 paid on overdraft during the assessment year 1963-64, was legally taxable ?"
(2.) THE assessee had claimed deduction of Rs. 45,898 towards payment of interest on borrowings. THE Income-tax Officer made a proportionate disallowance amounting to Rs. 20,880 because the assessee had, in fact, not charged interest from various persons to whom it had lent money, though the advances to some of those persons were from borrowings from the banks. He, therefore, made allocation on a proportionate basis. The assessee went up in appeal. The Appellate Assistant Commissioner upheld the disallowance but on a different ground. He relied upon the previous history of the case under which a donation made by the assessee to the Ganga Sagar Jatia Engineering College was a transaction on which interest had been disallowed in the previous years. He, therefore, confirmed the order of the Income-tax Officer. The assessee went up in appeal to the Tribunal. The Tribunal held that the decisions of the Tribunal as well as the High Court for the previous years will be of no assistance because the position had, in fact, changed during the year in question. The balance-sheet of the assessee showed that it is capital of the assessee that has been utilized for the purpose of investment which did not yield income. This position was brought about by substantial liquidation of the overdrafts of the two banks by selling the shares held by the assessee. The Tribunal observed that the fact that the assessee has substantially reduced his overdrafts by sale of shares has not been controverted. In fact, this stand is vindicated by the balance-sheet itself. It then found that in fact the entire overdraft with reference to which the interest was being disallowed in the past has completely been liquidated. On this view, it accepted the assessee's case and directed that the sum of Rs. 20,880 be allowed as deductible expense.
(3.) THE previous history of the assessee is to be found in a decision of this court in Madhav Pd. Jatia v. Commissioner of Income-tax [1973] 87 ITR 298 (All). From that judgment, it appears that during the assessment year 1957-58, the assessee donated a sum of Rs. 10 lakhs for the getting 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. 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. The Tribunal as well as the High Court ([1973] 87 ITR 298, 304 (All)) disallowed payment of interest by the assessee to the Central Bank of India on these borrowings which were utilized for the purpose of making donation to the engineering college.;