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Third Income-tax Officer Vs. Nawab Iqbal Mohd. Khan of Palanpur - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1989)31ITD396(Mum.)
AppellantThird Income-tax Officer
RespondentNawab Iqbal Mohd. Khan of Palanpur
Excerpt:
1. this case has had a chequered history. the original order passed by the tribunal on 31-10-1983 in the departmental appeals for the assessment years 1974-75 to 1977-78 has been re-considered and modified on three different occasions consequent to the miscellaneous petitions filed by the assessee and the department. the final order of the tribunal was passed on 6-10-1988 on the miscellaneous application filed by the assessee on 12-4-1988. the tribunal has recalled the order originally passed on 31-10-1)983. the matter was re-heard when detailed submissions were made by shri ramaswamy on behalf of the department and by shri y.p. trivedi, the learned counsel for the assessee.2. all these four appeals are by the department and they relate to the assessment years 1974-75 to 1977-78. the.....
Judgment:
1. This case has had a chequered history. The original order passed by the Tribunal on 31-10-1983 in the departmental appeals for the assessment years 1974-75 to 1977-78 has been re-considered and modified on three different occasions consequent to the miscellaneous petitions filed by the assessee and the department. The final order of the Tribunal was passed on 6-10-1988 on the miscellaneous application filed by the assessee on 12-4-1988. The Tribunal has recalled the order originally passed on 31-10-1)983. The matter was re-heard when detailed submissions were made by Shri Ramaswamy on behalf of the department and by Shri Y.P. Trivedi, the learned counsel for the assessee.

2. All these four appeals are by the department and they relate to the assessment years 1974-75 to 1977-78. The assessee herein is an individual, who had income from interest on securities, from house property, interest, dividend and director's fees. He had borrowed moneys from Banks and from his wife. Her Highness Maqbul Jehan Begum.

The issue before the Tribunal concerned the admissibility of interest paid by the assessee. The interest paid by the assessee to Bank during the years under appeal was as follows : The Tribunal, in their original order dated 31-10-1983, held that the interest paid to Banks was an allowable deduction. It further held that the assessee was not entitled to deduction of more than Rs. 12,237 for the years 1974-75 to 1976-77. As regards interest payments made by the assessee to his wife, Her Highness Maqbul Jehan Begum, the Tribunal, after considering the various submissions made, held that the interest on the loans taken from the assessee's wife was not eligible for deduction.

3. Against this order of the Tribunal, the assessee filed a misc.

application on 31-1-1985. In the said misc. application, the assessee pointed out that the observations of the Tribunal in para 1 to the effect that they were not told that there was already a commitment to purchase shares and that the commitment was not shown to exist were not correct inasmuch as the assessee had shown to the Tribunal articles of agreement dated 7-10-1973 which clearly indicated that that there was a commitment to purchase shares of M/s Shalimar Biscuit Co. Ltd. The Tribunal passed order on the misc. application on 11-7-1986. In paragraphs 6 and 7 of their order, the Tribunal observed as under : 6. We have gone through the agreement referred to above. We find that the preamble of the agreement brings out clearly the obligation of the assessee to keep Rs. 4.24 lakhs with the company towards the equity share capital of the company. It is only on the deposit continuing with the company that the insurance company had agreed to relieve him of the obligations under the counter-guarantee. Thus, the finding that there was no obligation to purchase the shares of the limited company was a mistaken finding given without considering the materials placed before the Tribunal.

7. In the light of this finding we have to consider whether the final conclusion that the interest is not allowable requires any change. Now once the amount has been deposited for purchase of shares, then the amount is utilised for earning income yielding assets. It is not material that it should yield income during the accounting year. That is now well settled by the decision of the Supreme Court in the case of CIT v. Rajendraprasad Modi [1978] 115 ITR 519. Therefore/the interest payable on the loan of Rs. 3 lacs taken from the assessee's wife will be allowable as a deduction. To this extent, the original order of the Tribunal would stand modified. The miscellaneous application stands allowed.

4. The department filed a misc. application against the order passed by the Tribunal on the misc. application filed by the assessee in M.A. No.71(Bom)/85. In the misc. application filed by the department, it was brought to the notice of the Tribunal that the assessee had not purchased shares of the company and that the amount was merely kept as a deposit with the company. If the interest was to be allowed under Section 57(iii), there must be a purchase of shares with borrowed funds. If the shares were not purchased at all and if the money was kept only as a deposit, the interest could not be allowed. Therefore, according to the department, the conclusion of the Tribunal that the interest was an admissible deduction Under Section 57 (iii) even when there was no purchase of shares by making use of borrowed funds was an erroneous conclusion which required to be modified. The Tribunal passed their order in M.A. No. 147(Bom)/87 on 2-2-1988. In this order, the Tribunal observed that all the facts were before the Tribunal when they first heard the matter and no material was left out of consideration.

The reason why the assessee borrowed moneys and kept them as deposit with the company was for getting a release from the counter-guarantee he had given to the insurance company. This fact was before the Tribunal when it first heard the matter. No material was left out of consideration by the Tribunal and, therefore, the order of the Tribunal admitting the misc. petition of the assessee was in effect an order of review. This order was, therefore, rectified by the Tribunal and the original order was restored. There was yet another misc. application by the assessee against this order filed on 12-4-1988. In this misc.

application, it was pointed out that the assessee had gathered an impression that the department's misc. application dated 25-6-1987 would be dismissed but the reference application of the department would be allowed. The assessee did not argue his case since he gathered an impression that there was no need to do so. After considering this misc. application, the Tribunal in their order in M.A. No. 76(Bom)/88, 6-10-88 allowed the second misc. application of the assessee. They recalled the order of the Tribunal in I.T.A. Nos. 5304 to 5307 (Bom)/82 and on assessee's misc. application in M.A. No. 71 (Bom.)/88 and on revenue's misc. application bearing No. 147(Bom)/87. They also recalled the order of the Tribunal in R.A. Nos. 1229 to 1232(Bom)/86 and directed that the revenue's appeals in I.T.A. Nos. 5304 to 5307(Bom)/82 be re-fixed for decision. These appeals have now been heard. Before dealing with the various issues raised, certain basic facts need be stated.

5. The assessee had been a director in a number of companies for many years. He had been receiving director's fees from many companies in which he was a director. One of the companies in which he was a director was a company called M/s Shalimar Biscuits (P) Ltd.. The assessee stood a guarantor for this company for the loans taken by that company from the banks. These loans were guaranteed by Dena Insurance Co. Ltd. The said insurance company gave the guarantee on the counter-guarantee given by the directors of the company among whom was the assessee. It would appear that Shalimar Biscuits (P) Ltd. had paid guarantee commission to the assessee in the assessment year 1969-70.

Thereafter, the financial condition of this company had deteriorated and the company did not pay any guarantee commission to the assessee.

The assessee had advanced from time to time a total sum of Rs. 4,24,000 to Shalimar Biscuits (P) Ltd. towards the subscription of equity share capital of the company. However, as the financial condition of that company deteriorated, he tried to get himself released from the counter-guarantee given by him to the Dena Insurance Co. Ltd. on behalf of M/s Shalimar Biscuits (P.) Ltd. The insurance company agreed to relieve him of the burden of counter-guarantee if he agreed not to withdraw Rs. 4.24 lakhs given by him as an advance to Shalimar Biscuits (F) Ltd. It would appear that for advancing this amount of Rs. 4,24,000 to Shalimar Biscuits (P) Ltd., the assessee had borrowed a sum of Rs. 3 lakhs from his wife Her Highness Maqbul Jehan Begum on 3-4-1973. On the amount so borrowed, the assessee was required to pay interest to his wife. The assessee was also required to pay interest to others including banks for the moneys borrowed by him for purchase of shares, advancing moneys on interest and repayment of loans. The interest so paid to other including banks and to Her Highness Maqbul Jehan Begum for the years under appeal was as under:-1974-75 18,413 26,181 44,5941975-76 16,372 51,719 68,0911976-77 13,880 60,279 74,1591977-78 5,056 27,649 32,705 5.1 The I.T.O. disallowed interest of Rs. 44,594 in the assessment year 1974-75 on the ground that the loans were borrowed and interest thereon paid not for earning income and the same was in no way connected with the source of income of the assessee. According to the ITO, the interest paid could not be allowed as it was paid by the assessee in his individual capacity as a guarantor of the loans borrowed by M /s Shalimar Biscuits (P) Ltd. The ITO also observed that the interest could not be allowed because the statement of income filed by the assessee did not show any income by way of director's fees received from M/s Shalimar Biscuits (P) Ltd. For the same reasons, the ITO disallowed interest of Rs. 68,091, Rs. 74,159 and Rs. 32,705 for the assessment years 1975-76,1976-77 & 1977-78 respectively.

6. The A.A.C. to whom the assessee went in appeal, allowed the claim of the assessee. He observed that such interest claim was allowed by the department upto the assessment year 1972-73. Even for the assessment year 1973-74, when the I.T.O. did not allow the interest inadvertently, the assessee had made an application for rectification which was pending before the ITO. Therefore, the observation of the ITO that the entire interest relates to the moneys borrowed for securing the release of counter-guarantee from M/s Dena Insurance Co. Ltd. was erroneous.

The A.A.C. following a decision of the Bombay High Court in the case of CIT v. H.H. Maharani Shri Vijaykuverba Saheb of Morvi [1975] 100ITR 67 and of the Supreme Court in the case of Seth R. Dalmia V. CIT [1977] 110 ITR 644 allowed the appeals of the assessee. The department has come in appeal against this order of the AAC.7. When the appeals were first heard by E Bench of the Tribunal, the Tribunal broadly classified the interest payments into two : those made to the banks and those made to the wife. The Tribunal held that the claim for deduction of interest paid to the banks was allowable although it restricted the quantum of such interest to Rs. 12,237. In the various misc. applications that have been filed against the first order of the Tribunal, no objection has been taken either by the assessee or by the department to this part of the finding of the Tribunal. The various orders passed by the Tribunal on the misc.

applications filed by the assessee and the department broadly relate to the decision of the Tribunal regarding the admissibility of interest payment by the assessee to his wife. We would, therefore, hold that the Tribunal's observations in so far as they relate to admissibility of interest paid by the assessee to banks need not be disturbed. We would, therefore, give the same finding that was given by the Tribunal in respect of interest payments to banks by the assessee and hold that the interest paid by the assessee to the banks is admissible. We would further hold that the amount of such interest would be Rs. 12,237 for the first three years and Rs. 5,056 for the assessment year 1977-78.

8. We have, therefore, to consider the admissibility of the claim of interest paid by the assessee to his wife during these years. Shri Ramaswamy, the learned Sr. Departmental Representative, referred to the deposit of Rs. 4,24,000 made by the assessee with M/s Shalimar Biscuits (Pvt.) Ltd. He stated that one could visualize three reasons for which such deposit was ostensibly made. These deposits could have been made for safeguarding the assets of the assessee with the company or for purchasing the shares of the company or for securing payment of guarantee commission from the company. None of these objects was proved from the facts of the case. The assessee was not protecting any source of income which was already existing. Therefore, it could not be said that while making this deposit the assessee was safeguarding any assets held by him. Shri Ramaswamy further argued that the assessee was not bringing into existence any new source of income as it was an admitted fact that the company had not issued any shares and the assessee had not purchased any shares from the company consequent to making these deposits. The assessee had not received any income by way of guarantee commission from the company nor income from director's fees from the company. The moneys borrowed by the assessee from his wife and utilised in making deposits with the company did not result in earning of income and, therefore, the interest paid on moneys so borrowed was not expenditure incurred wholly and exclusively for the purpose of earning any income. Shri Ramaswamy pointed out-that the A.A.C. was wrong in applying cases which were mostly determined under Section 37 of the Act. The scope of Section 57(iii), under which such expenditure could be claimed, was very restricted. The onus of proving a direct nexus between the expenditure incurred and the income earned was squarely on the assessee and such onus had not been discharged.

9. Shri Y.P. Trivedi on behalf of the assessee argued that the amount of Rs. 3 lakhs was borrowed for enabling the assessee to make an advance of Rs. 4,24,000 to the company and the advance was intended for purchase of shares. Shri Trivedi further argued that the money had been used to counter-guarantee the loans of the Shalimar Biscuits (P.) Ltd. The assessee had received guarantee commission and director's fees and the interest paid on the borrowings was therefore directly related to this source of income. Shri Trivedi further argued that after the financial position of the company deteriorated, the assessee had to be relieved of the counter-guarantee. As a guarantor, the assessee faced the prospect of losing all his income earning assets if the Dena Insurance Co. decided to act on the guarantee given by the assessee and made him pay for the losses of the company. By agreeing to deposit a sum of Rs. 4,24,000 with the company, the assessee was in a position to get out of his obligations as a guarantor. Thus, effectively, the assessee had utilised these funds for preserving income earning assets and, therefore, the interest paid thereon was allowable. Shri Trivedi thereafter argued that the assessee was a director of several companies by virtue of his financial status. When he stood guarantee to Shalimar Biscuits (P) Ltd., his financial position became precarious with the worsening of the financial position of the company. It was, therefore, necessary for him to get himself relieved from the obligations of a guarantor. This enabled him to maintain his position as a director with various companies and in that sense there was nexus between the expenditure on interest and the earnings that he expected to get from the various companies in which he was a director.

10. In support of the above arguments, Shri Trivedi first drew Our attention to a copy of the bank account on the assessee's wife Her Highness Maqbul Jehan Begum with Dena Bank to show that there was a direct nexus between the withdrawals of Rs. 3 lakhs from the account and the deposit with Shalimar Biscuits (P.) Ltd. Shri Trivedi referred us to the details of the moneys borrowed from the assessee from his wife from 15-12-1972 to 12-4-1973. Such moneys received in cash and by cheque amounted, in all, to Rs. 3,74,000. Shri Trivedi then referred to a copy of the agreement dated 7-10-1973 between Devkaran Nanjee Insurance Co. Ltd. (described as "insurers" in the agreement) and others which included Shalimar Biscuits (P.) Ltd. (described as "borrowers" in the agreement) and the assessee herein. There is a reference in this agreement to the guarantee policies issued by the insurers on behalf of Shalimar Biscuits (P.) Ltd. In terms of this agreement, the parties thereto agreed to release the Nawab of Palanpur from his obligation as a counter-indemnifier of the insurance company without in any manner affecting the liability of the Shalimar Biscuits (P.) Ltd. Shri Trivedi drew our pointed attention to para 1 of the agreement and argued that this paragraph clearly stated that the total amount of Rs. 4,24,000 was paid by Nawab of Palanpur to the borrowers towards the equity share capital of the company. This paragraph also provided that the total contribution of Rs. 4,24,000 by the said Nawab of Palanpur to the borrowers towards the equity share capital shall discharge him of his obligations as a counter-indemnifier to the insurers. This agreement, Shri Trivedi argued, brought out clearly the obligation of the assessee to keep Rs. 4,24,000 with the company towards the equity share capital. The fact that shares were, in fact, not issued did not make any difference to the intention of the assessee in making the deposit. It was only by virtue of this deposit which was made by the assessee with the company and by virtue of the assurance of the assessee of not withdrawing this deposit that the insurance company agreed to relieve the assessee from his obligations as a guarantor of the company. Shri Trivedi thereafter referred to a suit filed in the High Court of Judicature at Bombay by Dena Bank against Shalimar Biscuits (P.) Ltd. (Suit No. 462 of 1975) in which the assessee, Nawab of Palanpur was impleaded as Defendant No. 6. Shri Trivedi has filed a copy of the plaint in respect of this suit. Paragraph 12 of the plaint, to which reference was made by Shri Trivedi, reads as follows : - 12. Defendants Nos. 2 to 6, by a deed of Guarantee dated 31st October, 1967, guaranteed to the said Bank that the said Company will duly repay to the said Bank, the moneys due at the foot of the said Account No. 1 and the said equitable mortgage and the said hypothecation and in default of the said company so repaying, defendants Nos. 2 to 6 personally guaranteed to repay the amounts so due to the said Bank. A copy of the said Deed of Guarantee is annexed hereto and marked Exhibit 'F'.

Shri Trivedi pointed out that this paragraph established that the director had given a personal liability to the bank in respect of the debts of the company (Shalimar Biscuits (R) Ltd.)- Shri Trivedi then referred us to para 48(c) of the plaint in which the following claim was made against the assessee : - In the premises the Plaintiffs submit that Defendant No. 6 thus is now liable to pay to the Plaintiffs an aggregate sum of Rs. 37,49,514.81 as per particulars hereto annexed and marked Exhibit 'Z-2' with further interest as mentioned therein.

He also referred to para 49 of the plaint which indicated the individual liability of the assessee in this regard. This paragraph reads as under :- 49. By a letter dated 11th August, 1971 Defendants Nos. 2 to 6 admitted confirmed and acknowledged their respective individual liability for the outstanding sum of Rs. 15,64,567.17 at the foot of the aforesaid Account No. III as on the 30th of June 1971 and further admitted confirmed and acknowledged their respective individual liability under the aforesaid Demand Promissory Note being Exh. 1C (part) and letters of continuity dated 11th June 1968 and 10th March 1970 respectively executed by them jointly and severally and further admitted confirmed and acknowledged their liability under the aforesaid joint and several guarantee dated 10th day of March, 1970 being Exh. 'N' to the plaint.

Shri Trivedi then pointed out that the Bank had prayed for ascertainment and declaration of the amount due by the defendant to the Bank. The plaintiff, inter alia, prayed vide prayer (1) (page 27 of the paper book I) that Defendant No. 6 be ordered and decreed to pay to the Plaintiffs a sum of Rs. 37,49,574.81 out of the agreed sum of Rs. 61,22,855.75. This indicated the extent of the assessee's liability as a counter-guarantor. Shri Trivedi argued that the assessee faced the prospect of a substantial financial loss which would have resulted in complete obliteration of his income earning assets if the bank were to win the suit. The bank had made a substantial claim against the assessee by virtue of his being one of the guarantors of the company. It was in order to get himself released from his liability as a guarantor that the assessee had to agree to deposit a sum of Rs. 4,24,000 and further agree not to withdraw the amount from the Shalimar Biscuits (P.) Ltd. Shri Trivedi, therefore, argued that the interest paid on this loan was not only for purchase of shares but also for preserving the income earning assets of the company.

11. We, have considered the submissions made on either side. In our opinion, the assessee is entitled to succeed and the order of the first appellate authority has to be confirmed. Before stating our reasons, certain preliminary observations may be made out of all the four orders that have been passed by the Tribunal in this case for these years, we find that only the first two orders, namely, order dated 31-10-1983 and the order on the first misc. application dated 11-7-1986, contained observations on the merits of the case. The third order passed by the Tribunal on the misc. application filed by the department only contains observations to the effect that the order dated 11-7-1986 was a review of the first order and the last order only recalls all the earlier orders passed on the ground that two wrongs do not make a right.

Therefore, the observations made in the first two orders on the merits of the case indicate the mind of the Bench on this issue when those respective orders were passed. When the first order was passed, the Tribunal in para 14 of their order observed that it was not possible to say that there is a direct nexus between the expenditure incurred on taking this loan and the purpose of preserving the income yielding assets. The Tribunal also observed that unless the assessee makes out a case that the assessee's income yielding assets by way of shares in companies would stand in direct jeopardy, it cannot be accepted that the expenditure was for the preservation of the assets. In para 15 of their order, the Tribunal observed that the liability which is likely to arise on the failure of the company to meet the creditors would be a personal liability. It is to escape from this personal liability that the bank had agreed to keep borrowed funds with the company as a condition for being released from the counter-guarantee. Therefore, according to the Tribunal, the purpose of the loan was to meet a personal liability. However, when the assessee filed a misc.

application, the Tribunal in their order dated 11-7-1986 referred to the agreement dated 7-10-1973 between the assessee and the insurance company and observed in paragraphs 6 and 7 as under: - 6. We have gone through the agreement referred to above. We find that the preamble of the agreement brings out clearly the obligation of the assessee to keep Rs. 4.24 lakhs with the company towards the equity share capital of the company. It is only on the deposit continuing with the company that the insurance company had agreed to relieve him of the obligations under the counter-guarantee. Thus, the finding that there was no obligation to purchase the shares of the limited company was a mistaken finding given without considering the materials placed before the Tribunal.

7. In the light of this finding we have to consider whether the final conclusion that the interest is not allowable requires any change. Now once the amount has been deposited for purchase of shares, then the amount is utilised for earning income yielding assets. It is not material that it should yield income during the accounting year. That is now well settled by the decision of the Supreme Court in the case of Rajender prasad Modi (115ITR 519).

Therefore, the interest payable on the loan of Rs. 3 lacs taken from the assessee's wife will be allowable as a deduction. To this extent, the original order of the Tribunal would stand modified. The miscellaneous application stands allowed.

12. After a very careful consideration of the arguments advanced by the learned Departmental Representative, Shri Ramaswamy, and the learned counsel for the assessee, Shri Y.P. Trivedi, and after going through the records of the case and the papers filed before us, we would like to express our respectful agreement with the views expressed by the Tribunal and contained in paragraphs 6 and 7 of their order dated 11-7-1986 which are reproduced above. We will proceed to state our reasons for this conclusion as follows.

13. The assessee had shares with several companies. The list of such shares as on 31-3-1974 has been filed. He was also a director in several companies and he was receiving director's fees from 12 different companies from time to time since the assessment year 1967-68. He continued to receive director's fees till the assessment year 1977-78. He received director's fees from Shalimar Biscuits (P.) Ltd. from the assessment year 1967-68 to the assessment year 1971-72.

Thus, the assessee's main sources of income apart from income from property were from dividend on shares that he held with several companies as well as income from director's fees. As stated by Shri Trivedi, he stood as a counter-guarantee for Shalimar Biscuits (P.) Ltd. When he made a deposit of Rs. 4,24,000 with the Shalimar Biscuits (P.) Ltd., it was intended mainly as a payment towards the equity share capital after 1-12-1972. This was the declared intention of the assessee as can be seen from the agreement dated 7-10-1973 between Devkaran Insurance Co. Ltd. and the assessee. This agreement spells out the obligations of the assessee as counter-indemnifier of the insurance company. In terms of this agreement, the assessee was discharged of his obligation as counter-indemnifier to the insurance company for the guarantee policies issued by the insurance company at the instance of Shalimar Biscuits (P.) Ltd. on his agreeing to contribute a sum of Rs. 4,24,000 towards the equity share capital of the company. The agreement dated 7-10-1973 committed the assessee to purchase the shares of Shalimar Biscuits (P) Ltd. and, in any event, to keep that amount with that company without withdrawing it. This amount was never received back by the assessee. Further, it is seen that Dena Bank filed a suit against the company as well as its directors including the assessee.

The claim against the assessee was to the extent of Rs. 37,49,514 with a further claim of interest of Rs. 20,00,327. If the Bank had succeeded in its suit, the assessee faced the prospect of losing all his assets in the form of shares, property, etc. Therefore, finally, the assessee could settle this matter out of Court on the basis of the agreement it had arrived at with the Dena Insurance Co. Ltd. on 7-10-1973. The assessee would have had to dispose of all its income earning assets if the Bank had succeeded in its suit. Therefore, the deposit with the Shalimar Biscuits (P) Ltd. which the assessee agreed to make and which he agreed not to withdraw has to be regarded as an attempt by the assessee to preserve the income earning assets available with him in the form of shares and in the form of his position as director with several companies. Therefore, this deposit which was initially meant as deposit for making investment in shares has also to be treated as a deposit which enabled the assessee to preserve his assets and in this sense the ratio of the decision of the Bombay High Court in the case of H.H. Maharani Vijyaykuverba Sahib of Morvi (supra) supports the case of Shri Trivedi. It may be mentioned here that Shalimar Biscuits (P) Ltd. had borrowed moneys from Dena Bank Ltd. It ran into financial difficulties and had eventually to be wound up. The assessee, who was one of the directors of this company and who had stood as counter-guarantee for the loans taken by the company from Bank had to face the consequences arising out the company's inability to meet its liabilities to the Bank. The assessee, therefore, agree to pay Rs. 4,24,000 to the Bank although his liability was very much more than this amount. The assessee agreed to get relieved from this liability so as to avoid the possibility of having to face a much larger claim from the Dena Bank.

14, The argument of the ITO, that the interest payment was made in an individual capacity as a guarantor of loans and that the same was in no way connected to the source of income of the assessee, is not supported by papers on record. The assessee was interested in continuing as a director in several other companies. Therefore, he had to preserve the deposit with the Shalimar Biscuits (P.) Ltd. for making the obligation of the guarantee given by him. If he had not discharged his liability, the other companies, in which he was a director would have lost confidence in his financial status. The release from the guarantee, which was secured by an arrangement between the assessee, Dena Insurance Co. Ltd. and other guarantors as per the release deed dated 7- 10-1973,enabled the assessee to get over the situation that could have been created if Dena Insurance Co. were to enforce the entire guarantee amount of over Rs. 15 lacs from the assessee. In that sense, by agreeing to continue the amount of Rs. 4,24,000 with Shalimar Biscuits (F) Ltd., the assessee succeeded in keeping intact his other income yielding assets. It is not necessary that these assets, in fact, should have earned any income in the accounting years. This is the ratio of the decision of the Supreme Court in the case of CIT v.Rajendra Prasad Moody [1978] 115ITR 519. The Supreme Court stated clearly that to bring a case within the ambit of Section 57(iii), it is not necessary that any income should, in fact, have been earned as a result of the expenditure. This section does not require that the purpose of making or earning income must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned.

We have already referred to the decision of the Bombay High Court in the case of H.H. Maharani Vijaykuverba Saheb of Morvi (supra). In that case, the Bombay High Court held that the deduction which is permissible under Sub-section (2) of Section 12 of the Indian Income-tax Act, 1922, is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax, and the dominant purpose of the expenditure incurred must be to earn income. The court further held that the connection between the expenditure and earning of the income need not be direct. Even an indirect connection could prove the nexus between the expenditure incurred and the income earned. This decision of the Bombay High Court was approved by the Supreme Court in the case of Seth R. Dalmia (supra). The principles laid down in these judgments would appear to support the case of the assessee. We do not agree, as argued by the learned Departmental Representative, that the A.A.C. applied cases determined Under Section 37. The cases relied upon by the AA.C., to some of which we have made reference, dealt with Section 12(2) of the Indian Income-tax Act, 1922, or Section 57(iii) of the Income-tax Act, 1961. In our opinion, on the facts discussed above, the nexus between the expenditure on interest on the loans borrowed by the assessee from his wife and the income intended to be earned by incurring such expenditure has been established. Firstly, this money was intended to be utilised for purchase of shares of Shalimar Biscuits (P.) Ltd. Even though this purpose was not, in fact, achieved, it cannot be doubted that the primary intention of the assessee was to get shares from this investment. The deposit of Rs. 4,24,000 intended for the purpose of investment in shares was continued with Shalimar Biscuits (P.) Ltd. so as to preserve the assets of the assessee in the form of shares in other companies and directorship of other companies. How this was done has been discussed at length in the preceding paragraphs. We are, therefore, satisfied that the expenditure on interest paid by the assessee to his wife for these and subsequent years was rightly allowed as an admissible deduction by the A.A.C. The order of the A.A.C. is confirmed and the departmental appeals dismissed.


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