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Commissioner of Income-tax, Karnataka-ii, Bangalore Vs. Subraya M. Pai - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberIncome-tax Reference Case No. 170 of 1981
Judge
Reported in[1984]150ITR251(KAR); [1984]150ITR251(Karn)
ActsIncome Tax Act, 1961 - Sections 57
AppellantCommissioner of Income-tax, Karnataka-ii, Bangalore
RespondentSubraya M. Pai
Appellant AdvocateH. Raghavendra Rao, Adv.
Respondent AdvocateS.P. Bhat, Adv.
Excerpt:
.....section 69. - the expenditure incurred in relation to the investment as well as the expenditure laid out for the purpose of earning the dividend shall be allowable as deduction in the hands of the assessee......from property, dividends, interest on securities and income from business. the assessee had a fixed deposit for a period of 60 months in the corporation bank. the interest payable on the fixed deposit was 10%. during the relevant previous year for the assessment year 1977-78, the assessee withdrew the deposit before maturity. on account of premature withdrawal, the assessee had to forgo the interest to the extent of rs. 3,450. in other words, the assessee had to refund the said interest to the bank. the amount withdrawn from the bank was invested in shares. the shares yielded dividend which the assessee included as income for the asessment year 1977-78. 2. the assessee in the above assessment year claimed the sum of rs. 34,50 as an allowable deduction under s. 57(iii) of the i.t......
Judgment:

Jagannatha Shetty, J.

1. This is reference under s. 256(1) of the I.T. Act, 1961. The question referred runs as follows :

'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the sum of Rs. 3,450 be allowed as a deduction under section 57(iii) of the I.T. Act, 1961 ?'

The facts are :

The assessee derives income from property, dividends, interest on securities and income from business. The assessee had a fixed deposit for a period of 60 months in the Corporation Bank. The interest payable on the fixed deposit was 10%. During the relevant previous year for the assessment year 1977-78, the assessee withdrew the deposit before maturity. On account of premature withdrawal, the assessee had to forgo the interest to the extent of Rs. 3,450. In other words, the assessee had to refund the said interest to the bank. The amount withdrawn from the bank was invested in shares. The shares yielded dividend which the assessee included as income for the asessment year 1977-78.

2. The assessee in the above assessment year claimed the sum of Rs. 34,50 as an allowable deduction under s. 57(iii) of the I.T. Act from the income from other sources. The ITO did not allow that deduction on the ground that the refund of interest to the bank by the assess was only an application of the income earned during the assessment year.

3. Upon appeal the AAC accepted he contention of the assessee and allowed the deduction claimed. He held that the assess had to prematurely terminate the fixed deposit with the object of earning income, i.e. with the object of investing the same in shares. The assessee accordingly purchased shares which yielded dividend. The expenditure incurred in relation to the investment as well as the expenditure laid out for the purpose of earning the dividend shall be allowable as deduction in the hands of the assessee.... So ran the reasoning the AAC.

4. Against the order of the AAC, the Revenue appealed to the Appellate Tribunal. The primary question urged before the Tribunal was that the was no nexus between dividend income and payment or refund of interest to the bank. Incidentally, it was urged that the refund of the interest cannot be allowed as deduction under s. 57(iii). Both the contentions were rejected by the Appellate Tribunal. The Tribunal held that there was a clear nexus between the withdrawal of fixed deposit and the purchase of shares. The assessee could invest in shares only after withdrawing the fixed deposit. While so withdrawing, he had to part with the amount of Rs. 3,450 to the bank. It was virtually a borrowal of money on payment of interest... So held the Appellate Tribunal.

5. The question now is, whether the interest repaid to the bank is an allowable expenditure under s. 57(iii) of the I.T. Act Section 57(iii) reads :

'57 Deductions. - The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely :- .....

(III) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income :

Provided that nothing contained in clause (i) or clause (iii) shall apply be computing the income by way of dividends in the case of an assessee, being a foreign company.'

6. The assessee herein withdrew the fixed deposit for the purpose of purchasing shares. He had to forgo to the bank a portion of the interest which he would have otherwise got on maturity of the fixed deposit. The action of the assessee is similar to the act of borrowing of money for the purpose of investment in shares. The assessee, instead of borrowing money for the purpose of investment in shares has availed of his fixed deposit by premature termination. By reason of premature termination, he had to return Rs. 3,450 to the bank. This liability has got a direct nexus to the earning of the dividend income. This is, therefore, not a simple case of refund of interest which was claimed as deduction, The claim was based on the fact that the assessee had to withdraw the fixed deposit for utilising the same for the purpose of purchasing shares. The interest paid to the bank, therefore, is an expenditure laid out or expended wholly and exclusively for the purpose of earning the dividend income, The assessee, in our opinion, is entitled to the relief under s. 57(iii). The Tribunal has correctly reached the conclusion.

7. A similar case came up for consideration before this court in CIT v. Sri Ananth G Pai in IRTC No. 171 OF 1981, disposed on January 12, 1984 : [1984]150ITR249(KAR) . The question referred therein was also answered in favour of the assessee allowing the deduction claimed under s. 57(iii) of the I.T. Act, 1961.

8. In the result, we answer the question in the affirmative and against the Revenue.


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