1. By these appeals the department challenges the consolidated order dated 30-7-1984 by which the Commissioner (Appeals) allowed deduction of interest on the amount of Rs. 1,31,000 at the rate of 12 per cent under Section 24(1 )(vi) of the Income-tax Act, 1961 ('the Act')- The appeals are opposed by the assessee.
2. The facts necessary for determination of these appeals are as follows according to the assessee's own representation in its letter dated 3-1-1983 : During the year ended Rathjathra 1956 the company purchased house property at 10 Sarat Chatterjee Avenue, Calcutta from Jute Exporters Ltd. at Rs. 2,45,000 and the said sum of Rs. 2,45,000 was paid to Jute Exporters Ltd. on 22-6-1955 out of borrowings of Rs. 1,00,000 made from General Produce Co. Ltd. on different dates, as per copy of account already submitted and of Rs. 1,50,000 from Model Mfg. Co.
Ltd. on 27-6-1955. Subsequently, on 29-9-1955 the company repaid the loan of Rs. 1,00,000 received from General Produce Co. Ltd. out of refund of loan of Rs. 1,00,000 received from Tulsidas Kanoria & Co.
to whom the company had advanced money on loan in earlier years out of borrowings and/or the capital and reserves of the company. Loan of Rs. 1,50,000 taken from Model Mfg. Co. Ltd. was also repaid during the above year out of funds received from the following sources : (i) Loan taken from Shri A.K. Kanoria 20,100 (ii) Sale proceeds of shares which were purchased earlier out of borrowed funds 83,500(iii) Net repayment received from Tulsidas Kanoria & Co. whom loans were given out of borrowings (75,000+45,000+10,000)-(50,0004-50,000) 30,000 (iv) Others 11,400 --------- 3. In the assessments for the assessment years 1968-69 to 1972-73 part of interest payable was allowed by the ITO under Section 24(1)(vi).
Subsequently, relying on the case of Shewkissen Bhatter v. CIT  74 ITR 331 (Cal.) the ITO reopened the assessments under Section 147(6) of the Act and did not allow deduction of interest under Section 24(1)(vi). The AAC upheld these orders of the ITO. On a further appeal, by its order dated 6-8-1977, the Tribunal remitted the matter back to the AAC 'for fresh investigation and a fresh decision' as it was of the opinion that 'the departmental authorities have not verified whether the fresh loan raised by the assessee was wholly or partly utilised for repayment of the original loan taken for the purpose of purchasing the said property'. The AAC in his turn restored the matter to the ITO for the said purpose. Thereafter, the IAC (Assessment) made detailed enquiries on the basis of which he came to the conclusion that the original loan for purchase of the house property was squared up by second loan which was also repaid. He also held that similar petty third and fourth loans were also repaid. As such, he held that no interest was allowable under Section 24(1)(vi) even according to the Board's Circular No. 28 of 1969 dated 20-8-1969 [see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn. p. 171]. Disallowance of interest under Section 24(1)(vi) was also made for the assessment years 1973-74 to 1981-82 on the basis of this finding. On appeal before the Commissioner (Appeals) it was claimed on behalf of the assessee that 'it is entitled to at least proportionate interest on borrowings used in the purchase of the property in question under Section 24(1)(vi) of the Act'. According to the Commissioner (Appeals) 'the test laid down in Section 24(1)(vi) is that the loan should have been taken to acquire the property, it does not say whether it is the first loan or second loan or subsequent loans ; what is material for this sub-section is that the loan should have been used in acquiring the property and that interest should have been paid on such loan. Both these conditions are satisfied in the present case despite the IAC's difficulty in not finding a point to point link up'. He was of the opinion that 'the appellant company had used part of its borrowings in the purchase of the property, and not merely that, such borrowings have continued to be outstanding during all the years which are under consideration' and, therefore, 'interest on such borrowings should qualify for deduction under Section 24(1)(vi) of the Income-tax Act in all these years'. He accepted the assessee's alternative suggestion that 'the company's own funds may be fixed at one figure only which can be taken as the maximum of such funds at any time in all these years from 1955 to 1981. And then after adjusting this figure from the total investment in the property the balance amount may be treated as derived from borrowings.
And interest on such amount calculated at 12 per cent which is the minimum that the company has paid on its borrowings in all these years may be determined and allowed deduction'. He held that the amount of Rs. 1,31,000 would represent borrowings used in the property and as such interest at the rate of 12 per cent on these borrowings of Rs. 1,31,000 amounting to Rs. 15,720 should be allowed each year as deduction under Section 24(1)(vi). Being aggrieved, the department preferred these appeals.
4. The departmental representative very vigorously argued that the Commissioner (Appeals) was incorrect in holding that the provisions of Section 24(1 )(vi) apply to all loans subsequent to the second loan as stated in the Board's circular, that it was not necessary to connect the subsequent loans with the original loan for purchase of the property, and that Rs. 1,31,000 represents borrowings on which the assessee is entitled to deduction of interest.
5. The authorised representative for the assessee opposed these contentions and contended that Section 24(1)(vi) does not restrict it to the original or second loan but extends to all subsequent loans to pay the loan for eventual repayment of the original loan. He contended that the order of the Commissioner (Appeals) was correct and should not be interfered with. He was, however, unable to answer the specific query how the loan of Rs. 20,100 taken from Shri A.K. Kanoria (referred to in the assessee's letter dated 3-1-1983) was repaid. He, however, stated that this might have been repaid either by fresh loan or sale of shares. So, there cannot be any doubt, there is no material on record to show that any loan was incurred by the assessee to pay the second loan of Rs. 20,100 connected with purchase of the house property and that such or any subsequent loan to repay the said loan is outstanding.
The Commissioner (Appeals) seems to have been of the opinion that the assessee will be entitled to the benefit of Section 24(1)(vi), (i) if the property was purchased with borrowed capital, and (ii) a loan not connected with such borrowed capital is outstanding against the assessee at any future time. The authorised representative for the assessee was unable to point out any authority in support of such finding of the Commissioner (Appeals). We do not think that any loan unconnected mediately or immediately to the original borrowed capital is covered by Section 24(1)(vi). In our opinion any loan unconnected with such borrowed capital is not entitled to deduction of interest.
6. We are also not impressed by the arguments of the authorised representative for the assessee that the language of the section permits deduction of interest on any subsequent loan. The relevant provision of Section 24(1 )(vi) runs as follows : (vi) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.
7. The words 'such capital' definitely refer to the borrowed capital and as such the section confines the benefit to the borrowed capital, i.e., original loan only. The language is not capable of being extended to second or any subsequent loan. The authorised representative for the assessee referred to the following observation in Kanga and Palkhivala's Law and Practice of Income-tax, Seventh edn., Vol. 1 at page 335 : 'interest on a fresh loan utilised in repaying the original loan taken for the above specific purpose would be equally deductible' and contended that this supports his contention that the relief is available on loans subsequent to the second loan. We are unable to agree with him. The words " 'fresh loan' utilised in repaying the original loan" clearly go to signify that the authors refer to the second loan to which the provision of the section was extended by the Board's circular. In our opinion, this observation by the authors does not refer to the loan subsequent to the second loan. The relevant portion of the Board's circular is as follows : 2. A question has been raised whether in a case where a fresh loan has been raised to repay the original loan taken for the above purpose, the interest payable in respect of the second loan would also be admissible as a deduction under Section 24(1)(vi) [of the Income-tax Act].
3. The matter has been considered by the Board and it has been decided that if the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the Income-tax Officer, the interest paid on the second loan would also be allowed as a deduction under Section 24(1)(vi).
8. It is clear that the Board restricted its clarification to the second loan raised to repay the original loan and not to any subsequent loan. We have already stated that the language of the section does not extend even to second loan to repay the original loan. As such, this extension of the relief to the second loan by the Board is a breach of the section itself and as such must be very strictly construed. But as the Board's circular is in favour of the assessee, effect should be given to it in spite of it not being strictly in accordance with the section. But it cannot be extended to subsequent loan as contended by the authorised representative for the assessee. As such, we are of the opinion that the Commissioner (Appeals) was incorrect in holding that 'the test laid down in Section 24(1)(vi) of the Act is that the loan should have been taken to acquire the property, it does not say whether it is the first loan or second loan or subsequent loan'. As such, his conclusion that the interest on the borrowings should qualify for deduction under Section 24(1)(vi) for all the assessment years cannot be sustained. On a careful consideration of the materials on record, facts and circumstances of the case, we are of the opinion that the assessee was not entitled to deduction of interest on the amount claimed by it or allowed by the Commissioner (Appeals).
9. In view of our above finding, it is not necessary whether interest was to be allowed at the rate of 12 per cent on the amount of Rs. 1,31,000. But had it been necessary we would not have confirmed the amount as determined by the Commissioner (Appeals). As such, we set aside the order of the Commissioner (Appeals) and restore that of the ITO for all the assessment years.