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Commissioner of Income-tax Vs. D.M. Ghia - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 418 of 1987
Judge
Reported in[1999]238ITR736(Bom)
ActsIncome Tax Act, 1961 - Sections 80V; Taxation Laws (Amendment) Act, 1975; ;Finance Act, 1985
AppellantCommissioner of Income-tax
RespondentD.M. Ghia
Appellant AdvocateR.V. Desai and ;B.M. Chatterjee, Advs.
Respondent AdvocateV.B. Patel, Adv.
Excerpt:
.....and that would further buttress the above view. [jagannath singh v dr. ajay upadyay & anr 2006 cri lj 4274; 2006 (5) air bom r held per incuriam]. - his personal account in the firm had been treated somewhat like a current account. the debit balance in the account had been there right from the beginning and there were withdrawals as well as deposits in the said account......and the payment of taxes. no deduction under this section can be claimed on account of interest paid on borrowed money on the ground that part of it was used by the assessee for payment of taxes. in the instant case, there is no borrowing for the purpose of payment of taxes. the debit balance in the account had been there right from the beginning and there were withdrawals as well as deposits in the said account. there is no direct nexus between the withdrawals and the payment of tax. even if the withdrawals are held to be borrowings and it is held that the interest paid on the borrowings made in the past for payment of taxes is also a permissible deduction, in the instant case, there is nothing to show that the borrowings were for payment of taxes under the act. the controversy in.....
Judgment:

Dr. B.P. Saraf, J.

1. By this reference under Section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion at the instance of the Revenue : 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to the deduction under Section 80V of the Income-tax Act, 1961, of Rs. 58,000 forthe assessment year 1976-77, Rs. 44,500 for the assessment year 1977-78 and Rs. 55,445 for the assessment year 1978-79 ?'

2. The assessee is an individual. He was a partner of the firm, M. C. Ghia and Co. His personal account in the firm had been treated somewhat like a current account. His income was credited in that account, similarly, his drawing, payment of taxes, etc., were debited in that account. The partnership deed did not stipulate that the partners would be debited with interest. Nevertheless, interest was charged on the debit balances. The interest debited in the account of the assessee was Rs. 1,47,257 for the assessment year 1976-77, Rs. 1,04,552 for the assessment year 1977-78 and Rs. 1,16,686 for the assessment year 1978-79. There was brought forward debit balance in the above account every year. Part of the brought forward debit balance was stated to be the withdrawals made on account of the payment of personal income-tax of the assessee. The assessee claimed deduction of interest attributable to the amount of tax paid by him in the past from the money withdrawn by him as a partner of the firm and debited in the above account. For the assessment year 1976-77, the Income-tax Officer allowed a sum of Rs. 2,085 calculated at the rate of 9 per cent. on the borrowings made by the assessee for the payment of taxes after April 1, 1976. For the assessment year 1977-78, he found that nothing was withdrawn from the firm for payment of taxes. Nothing was, therefore, allowed as deduction under Section 80V of the Income-tax Act, 1961 ('the Act'). For the assessment year 1978-79, he found the position to be the same as in 1977-78. There were no specific withdrawals for payment of taxes and the drawings of the year were less than the debits. The assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) examined the accounts of the assessee and found that the account in question was a sort of current account and it could not be said that debit balances therein were borrowings made by the assessee from the firm for the payment of taxes. The Commissioner of Income-tax (Appeals) also noticed that the assessee was having substantial income in all these years and there was nothing to show that the tax payments were made from the withdrawals. He also agreed with the Income-tax Officer that the allowance under Section 80V of the Act would be limited only to such interest on the borrowing made for payment of taxes after April 1, 1976, when this relevant section came into operation. The assessee appealed to the Income-tax Appellate Tribunal ('the Tribunal'). The Tribunal did not agree with the opinion of the Commissioner of Income-tax (Appeals) that the interest on borrowings made for payment of taxes after coming into force of Section 80V of the Act only was allowable as a deduction under that section. In other words, according to the Tribunal, Section 80V of the Act was applicable even to interest paid on borrowings made prior to the coming into force of Section 80V of the Act for payment oftaxes under the Act. The Tribunal also held that the amount withdrawn by the assessee from the firm amounted to borrowing and interest thereon was allowable as a deduction under Section 80V of the Act. The Tribunal, however, held that as 50 per cent. of the interest paid by the assessee to the firm was received back by him by way of share in the profits in the firm, the assessee was entitled to deduction under Section 80V of the Act only of 50 per cent. of the interest paid on the amount withdrawn by him. Hence, this reference.

3. Mr. R.V. Desai, learned counsel for the Revenue, submitted before us that under Section 80V of the Act, the assessee is entitled to deduction of interest only on monies borrowed by him for payment of taxes after the coming into force of Section 80V. It was contended that as the object of Section 80V of the Act was to encourage the assessee to pay taxes under the Act even by borrowing money, it would apply only to interest paid by the assessee on money borrowed for payment of taxes after the coming into force of Section 80V. He also submitted that deduction under Section 80V of the Act is allowable only if the amount is borrowed specifically for payment of taxes under the Income-tax Act. According to him, in the instant case, there is no nexus between the borrowing and the payment of taxes. He, therefore, submitted that interest paid on monies borrowed by the assessee in this case cannot be allowed as a deduction under Section 80V of the Act in the absence of a specific finding that the borrowing was for the purpose of payment of taxes under the Act. He further submitted that this section provides for deduction of interest only on monies borrowed for the payment of any tax due from the assessee under the Act and not on borrowed money utilised for the payment of tax. Reliance was placed in support of this contention on the decision of this court in Hindustan Cocoa Products Ltd. v. CIT : [1999]236ITR140(Bom) . Ms. V.B. Patel, learned counsel for the assessee, on the other hand, submitted that the benefit of this section is also available in respect of interest paid on monies borrowed even prior to the coming into force of Section 80V of the Act. She also submitted that it is not necessary that there should be a direct nexus between the borrowing and the payment of taxes. According to her, it is sufficient for the assessee to show that the amount borrowed by the assessee or any part thereof was used by him for payment of tax due from him under the Act.

4. We have considered the rival submissions. Section 80V was inserted in the Act by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, and was deleted by the Finance Act, 1985, with effect from April 1, 1986. This section provides for deduction of interest paid on monies borrowed by the assessee for payment of any taxes due from him under the Act. The object of the section is to encourage the assessees to pay the tax due from them promptly even by borrowing. Section 80V, as it stood at the material time, reads :

'80V. Deduction of interest on moneys borrowed to pay taxes.--In computing the total income of an assessee, there shall be allowed by way of deduction any interest paid by him in the previous year on any money borrowed for the payment of any tax due from him under this Act.'

5. The benefit of Section 80V would, therefore, be available only if the borrowings are made for the purpose of payment of taxes. That being so, this section would be applicable only to interest paid on monies borrowed after the coming into force of this section for payment of taxes. Moreover, to avail of the benefit of this section, the borrowings should be specifically for the purpose of payment of tax under the Act. In other words, there should be a direct nexus between the borrowings and the payment of taxes. No deduction under this section can be claimed on account of interest paid on borrowed money on the ground that part of it was used by the assessee for payment of taxes. In the instant case, there is no borrowing for the purpose of payment of taxes. The debit balance in the account had been there right from the beginning and there were withdrawals as well as deposits in the said account. There is no direct nexus between the withdrawals and the payment of tax. Even if the withdrawals are held to be borrowings and it is held that the interest paid on the borrowings made in the past for payment of taxes is also a permissible deduction, in the instant case, there is nothing to show that the borrowings were for payment of taxes under the Act. The controversy in this case is squarely covered by the decision of this court in Hindustan Cocoa Products Ltd. v. CIT : [1999]236ITR140(Bom) . Following the same, the question referred to us, is answered in the negative, i.e., in favour of the Revenue and against the assessee.

6. This reference stands disposed of accordingly with no order as to costs.


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