RANI J SARALA DEVI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Tribunal, Hyderabad Bench, as required by this Court, under s. 66(2) of the IT Act, stated the case and referred the following question for determination :

(2.) THE assessment years under reference are 1953 -54, 1954 -55 and 1955 - 56, the relevant accounting period being the years ending 30th Sept., 1952, 30th Sept., 1953, and 30th Sept., 1954, respectively. The assessee is an individual deriving income from investments in Government securities, companies Ltd. and immoveable properties. She has no money -lending business and is not a money -lender by profession or vocation. She was shareholder and a director in a (P) Ltd. company known as Bharat Development Corporation (P.) Ltd., Katpadi, in which some of her relations were also share -holders. The said corporation required financial aid. She, for that purpose, borrowed a sum of Rs. 1,25,000 from the Mysore Bank on interest at the rate of 3 1/4per cent per annum up to 30th Nov., 1951, and at 4per cent per annum from and after 1st Dec., 1951, and advanced the same to the said corporation at a higher rate of interest of 5per cent per annum. As she maintained accounts on the method of accrued basis in the asst. year 1952 -53, she furnished the return disclosing, inter alia, the income of Rs. 4,948 as interest received from the corporation and as against that, she deducted Rs. 3,646 as interest paid to the Mysore Bank on the amount she had borrowed to advance to the corporation. The ITO brought that amount to tax in that year. But the truth was that no interest for that or for subsequent years was actually received at any time by the assessee from that concern. On the other hand, the assessee herself waived the interest due on that account from the concern first till 12th Dec., 1951, and then up to 31st Dec., 1956, in response to the directors' resolution dt. 27th Nov., 1953, and a subsequent resolution. Her assent was communicated by the letters dt. 27th Dec., 1953, and 25th Nov., 1957. During this period, she had, of course, to pay interest to the Mysore Bank. In fact, in regard to the asst. yr. 1953 -54, she paid Rs. 4,886 and for the subsequent years she had paid at the rate of Rs. 5,000 per year.

(3.) THE assessee's case before the ITO was that the borrowing from Mysore Bank was for the purpose of earning income or profit by advancing the same as a loan to the corporation at a higher rate and that therefore the sums paid were allowable deductions. This contention was negatived by the ITO on the ground that the loan was not a business transaction, that the amounts in question were not expenses incurred to earn income which was the subject - matter of the present assessment and that besides the waiver of interest was voluntary. A further contention raised by her related to a sum of Rs. 4,948 which was treated as her income in the assessment year 1952 - 53. She claimed this amount in the asst. year 1955 -56 as a loss. The ITO refused to allow this claim also for, according to him, it was a loss not because it was irrecoverable but because she herself had waived the same. In vain did the assessee carry the matter to the AAC and then to the Tribunal. The Tribunal held that the advances were made by the assessee to help the said corporation in which she and her relations were vitally interested and the transition could not be held to be a business transaction. It was held that the interest on the amount borrowed is not a permissible deduction as an expenditure solely made for earning income. As regards the interest for the year 1952 -53, the Tribunal observed that it was taxed because the assessee had declared the same under "other sources" and it was undoubtedly income and since there is no income during the year of account under the head "other sources" the assessee could not claim any deduction on account of such income. His contention being thus negatived, the matter is now before us on reference.