SATISH CHANDRA J. - 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 ?'
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, through 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 utilised for the purposes of investment which did not yield income. This position was brought about by substantial liquidation of the overdrafts of the two banks be 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 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 assessees case and directed that the sum of Rs. 20,880 be allowed as deductible expense.
The provious history of the assessee is to be found in a decision of this court in Madhav Pd. Jatia v. Commissioner of Income-tax : 87ITR298(All) . From that judgment, it appears that during the assessmnet year 1957-58, the assessee donated a sum of Rs. 10 lakhs for the setting up of an engineering collect 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 of 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 on 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 : 87ITR298(All) disallowed payment of interest by the assessee to the Central Bank of India on these borrowings which were utilized for the purposes of making donation to the engineering college.
Before this court the case of the assessee was that there was an obligation to pay Rs. 10 lakhs to the engineering college and that for the time being she paid Rs. 5,50,000 that it was open to the assessee to pay it from the business assets or to reserve the business assests for the purposes of earning of income and instead borrow the amount from the banks. This contention was repelled by the court by holding that there was nothing to show that the assessee would necessarily have had to employ the business assests for making payment of that amount. In the next place, it is where money is borrowed for the purposes of the business that the interest payable thereon becomes an admissible deduction. Here, admittedly, the amount was borrowed from the bank for making payment to the engineering college. It was not a payment directed to a business purpose. The mere circumstances that otherwise the assessee would have to resort to the liquidation of its income yielding assests done not stamp the interest paid on such borrowing with the character of business expenditure. It was also held that the court was not satisfied that the payment of Rs. 5,50,000 was made on the ground of commercial expediency. No commercial expediency was involved in making payment to the engineering college. The borrowings was not made for the purpose of the business, either directly or indirectly. On these findings, this court upheld the disallowance of interest paid on the borrowings of Rs. 5,50,000.
It is obvious that the facts have changed. The borrowing which represented the payment of the donation to the engineering college has now disappeared. The Tribunal has found that the assessee had sold shares in order to wipe out the overdraft representing the aforesaid borrowings. Now the position is that the assessee does not owe to the bank any sum which it had paid initially to the engineering college. That debt having been wiped off, no part of the interest paid by the assessee to the bank, can be disallowed for the reasons mentioned by this court in its earlier judgment [Madhav Pd. Jatia v. Commissioner of Income-tax - : 87ITR298(All) ]. The assessee carries on manifold business activities and, for the purposes of its business, it borrows money from the bank. In the normal course, the interest paid on such borrowings will be revenue expenditure. The Tribunal was, in our opinion justified in taking the view that the factual position having changed, the earlier orders of the Tribunal or the judgment of the High Court, were not applicable or material.
In the result, we answer the question in the negative in favour of the assessee and against the department. The assessee will be entitled to costs which are assessed at Rs. 200 (rupees two hundred) Only.