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Matubhai C. Patel Vs. Commissioner of Income-tax, Gujarat - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 251 of 1975
Judge
Reported in[1982]133ITR303(Guj)
ActsIncome Tax Act, 1961 - Sections 5 and 57
AppellantMatubhai C. Patel
RespondentCommissioner of Income-tax, Gujarat
Appellant Advocate J.P. Shah, Adv.
Respondent Advocate N.U., Adv.
Excerpt:
direct taxation - deduction - sections 5 and 57 of income-tax act, 1961 - assessee inherited assets and liabilities from his father - assessee's father had bank liabilities in form of overdraft - interest on these overdrafts paid by assessee - claimed interest paid as deduction from income derived from assets inherited from father - income-tax officer disallowed claim - appeal - interest amount paid by assessee to meet outstanding obligation towards secured creditors did not represent his income at all - held, assessee entitled to deduct interest paid by him to bank. - - thus, these shares were charged with liability to make good the claim of the secured creditor, i. in the backdrop of the aforesaid well established facts, we now proceed to consider the question raised before us for.....majmudar, j. 1. in this reference, the income-tax appellate tribunal, ahmedabad bench 'b' has referred for out opinion a question of law under s. 256(1) of the i. t. act, 1961, at the instance of the assessee. the said question runs as under : 'whether, on the facts of the case, the tribunal was right in law in holding that the assessee was not entitled to deduction of the interest payments of rs. 20,435, rs. 54,632, rs. 50,025 and rs. 5,497 for the assessment years 1966-67 to 1969-70, respectively ?' 2. in order to appreciate the background of the controversy between the parties which has given rise to the aforesaid reference, it is necessary to have a look at certain relevant facts : the assessee's father expire somewhere in july, 1965. on his death, the assessee inherited assets worth.....
Judgment:

Majmudar, J.

1. In this reference, the Income-tax Appellate Tribunal, Ahmedabad Bench 'B' has referred for out opinion a question of law under s. 256(1) of the I. T. Act, 1961, at the instance of the assessee. The said question runs as under :

'Whether, on the facts of the case, the Tribunal was right in law in holding that the assessee was not entitled to deduction of the interest payments of Rs. 20,435, Rs. 54,632, Rs. 50,025 and Rs. 5,497 for the assessment years 1966-67 to 1969-70, respectively ?'

2. In order to appreciate the background of the controversy between the parties which has given rise to the aforesaid reference, it is necessary to have a look at certain relevant facts :

The assessee's father expire somewhere in July, 1965. On his death, the assessee inherited assets worth Rs. 12,38,000 and liabilities worth Rs. 2,47,000 in respect of the borrowing from the Bank of India by the assessee's father. The bank liabilities represented overdraft taken by the assessee's father for the purpose of paying his tax liabilities. The assessee's father in his lifetime had paid interest on the overdrafts for four years. Out of the assets which included shares and buildings, the shares had been pledged by the father of the assessee with the Bank of India as security for the overdrafts for the relevant assessment years 1966-67, 1967-68, 1968-69 and 1969-70. The ITO did not allow the claim of the assessee to deduction of interest payment of the Bank of India from the income from assets inherited by him on the death of his father. The assessee's case before the ITO was that when the revenue was assessing the dividends from such shares which he had inherited from his father and when it was also assessing the rental income of the assessee from the property inherited by him, as a necessary corollary the assessee should be allowed a deduction of interest payment made by him on such liabilities. The ITO took the view that the assessee was not able to prove that the interest payment was for the purpose of investment, income from which was chargeable to tax.

3. Being aggrieved by the said order of the ITO, the assessee went in appeal to the AAC. The AAC observed that the interest deduction which was claimed by the assessee pertained to the amount of interest which was paid to the Bank of India towards the overdrafts taken by his father in order to pay taxes and, such being the case, interest on such overdrafts was not a permissible deduction. The AAC observed that even if the assessee had himself borrowed loans in order to pay taxes, the interest on such borrowings would not be eligible for deduction from the assessable income.

4. The AAC's orders were challenged before the Income-tax Appellate Tribunal where the assessee contended that what the assessee inherited were encumbered properties and, therefore, there could be no justification for disallowing the interest payment on the liabilities inherited as a deduction from the assessable income because what was assessable must be the real and not the fictional income. It was also submitted that what was true of the wealth or the estate must also be true of the income and it cannot even be suggested by the revenue that the liabilities inherited by the assessee were not deductible from the wealth or the estate.

5. The assessee submitted before the Tribunal that his father had expired on July 7, 1965. On his death, the assessee inherited gross book value assets worth Rs. 12.38 lakhs and liabilities worth Rs. 2.47 lakhs in respect of the borrowings from the Bank of India by the assessee's father. The bank liabilities represented overdrafts taken by the assessee's father for the purposes of paying his tax liabilities. The assessee's father in his lifetime had paid interest on the overdrafts for four years. Out of the assets which included shares and buildings, the shares had been pledged with the Bank of India as security for the overdrafts. The assessee contended that when the revenue was assessing the dividends from such shares and the rental income from properties inherited, as a necessary corollary the assessee should be allowed a deduction of the interest payment on such liabilities.

6. The Tribunal repelled the aforesaid contention of the assessee and held that the decision of this court in the case of CIT v. Mrs. Indumati Ratanlal : [1968]70ITR353(Guj) directly applied to the facts of the case. The Tribunal also placed reliance on the decision of this court in the case of Padmavati Jaykrishna v. CIT : [1975]101ITR153(Guj) . The Tribunal held that the assessee was not entitled to a deduction of interest payments of Rs. 20,435, Rs. 54,632, Rs. 50,025 and Rs. 5,497 for the assessment years 1966-67, 1967-68, 1968-69 and 1969-70, respectively, as claimed by the assessee.

7. As stated above, the assessee thereafter moved the Tribunal for referring the question of law which has arisen from the Tribunal's common order in I. T. As. Nos. 506 to 509 (Ahd) of 1973-74 and thereupon the Tribunal has referred a common question for our decision under s. 256(1) of the I. T. Act. We have already extracted the said question in the earlier part of this judgment.

8. Mr. J. P. Shah, the learned advocate appearing for the assessee, contended that what the assessee inherited from his father were encumbered properties and, therefore, there could be no justification for disallowing the interest payment on the liabilities inherited from the assessable income because what is assessable must be the real and not the fictional income. Mr. Shah submitted that on the principle of real income received by the assessee it ought to have been held that the interest amount paid by the assessee during the relevant assessment years to the Bank of India did not represent his own income, but represented amounts which were diverted for payment for meeting the claims of a secured creditor, namely, the Bank of India, on account of the overriding title inhering in favour of the said creditor. Consequently, the amounts of interest which were paid during the relevant years by the assessee by way of interest on overdrafts to the Bank of India were required to be deducted from the gross receipt for computing the real income accruing to the assessee during the relevant assessment years. Mr. Shah alternatively submitted that even assuming that these amounts of interest do form part and parcel of the income of the assessee accruing to him during each of the concerned assessment years, even then the said amounts were deductible under s. 57(iii) as a permissible deduction on the ground that they represented expenditure laid our or expended wholly and exclusively for the purpose of earning the dividend income from the shares which were pledged with the Bank of India by the deceased father of the assessee for securing the overdraft facility which was granted by the Bank of India during the relevant years.

9. Mr. Raval, the learned advocate appearing for the revenue, on the other hand contended that the lower authorities had taken the correct view of the legal position when they turned down the disputed claim of the assessee.

10. In order to appreciate the real nature of the controversy between the parties it is necessary to keep in view certain proved and admitted facts which emerge from the record of this case.

11. The assessee's father who was the original assessee died on July 7, 1965. On his death, the assessee inherited various assets amounting to Rs. 12.38 lakhs from his father. The assets in their turn also brought liabilities to the assessee worth Rs. 2.47 lakhs. The assessee's father in order to meet the income-tax dues had in his lifetime borrowed certain amount from the Bank of India. The Bank of India granted overdraft facilities to the assessee's father. This borrowing from the Bank of India by the assessee's father amounted to Rs. 2.47 lakhs. In order to secure the overdraft account, the assessee's father had pledged with the Bank of India various shares which he was owning at the relevant time. When the assessee inherited these properties from his father he had also to meet with the liability which had accrued due on the inherited assets. The assessee was, therefore, obliged to pay interest to the Bank of India on the overdraft which his father had taken from the Bank of India. The dividend income which the assessee derived from the shares was sought to be brought to tax. At that stage, the assessee contended that during the concerned assessment years he had also paid interest to the Bank of India on the overdraft account. These amounts of interest which he had paid to the Bank of India were required to be deducted from the gross receipts in order to compute the real income earned by the assessee during the assessment years for the purpose of income-tax. This claim of the assessee has been turned down by the lower authorities. The short question which has been posed for our consideration is as to whether the assessee is entitled to get a deduction of interest payment made by him to the Bank of India from the income from the assets inherited by him on the death of his father so far as the relevant assessment years are concerned.

12. It may be stated at the outset that the revenue had at no stage before the lower authorities taken up a contention that the respective amounts of interest, deduction of which the assessee had claimed for the concerned assessment years, had never been paid by him to the Bank of India. The only contention raised by the revenue was that the assessee was not entitled to get this deduction from the gross receipts. It is true that Mr. Raval for the revenue tried to raise a contention about the real possibility of such large amounts of interest having been paid by the assessee during the relevant assessment years to the Bank of india. As the said contention was not urged before the lower authorities, and as, such a contention does not squarely fall within the scope of the only question of law referred for our opinion, we have not permitted Mr. Raval to raise that contention for the first time before us. We shall, therefore, proceed on the basis that the assessee during the relevant assessment years had paid various amounts of interest to the Bank of India for discharging the liability accruing due to the Bank Of India on account of the overdraft facilities which the Bank of India had extended to the assessee's father. It is also necessary to keep in view the further fact that all the concerned shares which the assessee had inherited from his father were pledged with the Bank of India by his father in his lifetime when he got the aforesaid overdraft facility from the Bank of India. Thus, these shares were charged with liability to make good the claim of the secured creditor, i.e., the Bank of India, so far as the overdraft account was concerned. In the backdrop of the aforesaid well established facts, we now proceed to consider the question raised before us for a decision.

13. So far as the first contention of Mr. Shah is concerned it postulates that the revenue is entitled to bring to tax only that part of the income of the assessee which can be taken to be his own income. Mr. Shah's contention is that to the extent to which the assessee had to make a payment of interest to meet the liability arising out of the borrowings, of his deceased father, from a secured creditor like the Bank of India, the amount of interest which the assessee was required to pay during each of the assessment years represented a part of the revenue receipts which strictly did not form part of the assessee's own income. Assessee's real income of the relevant assessment years cannot include the amount of interest paid by the assessee to the secured creditor to meet the liability incurred by his deceased father. In short, the submission of Mr. Shah was that when he inherited assets from his father he also inherited the liability attaching to his assets and while assessing the real income of the assessee, the liability,which the assessee had to discharge on account of the encumbered assets which he had inherited from his father, was required to be deducted in order to arrive at the correct figure of the real income earned by the assessee during the relevant period. In order to support the aforesaid contention, Mr. Shah heavily relied upon the recent decision of this court in Udayan Chinubhai v. CIT : [1978]111ITR584(Guj) . In the aforesaid decision, this court had to consider the question as to whether the assessee who paid interest to unsecured creditors with a view to meet the debts incurred by the assessee's father was entitled to deduct the interest from the gross receipts of the assessee for arriving at the figure of real income earned for the purpose of being brought to tax under the I. T. Act, 1961. This court upheld the aforesaid contention of the assessee. In this connection, the following pertinent observations were made by this court (headnote) :

'Income taxable under the Income-tax Act is the real income of the assessee. In determining real income the question is not of any physical receipt of income but of the concept of the receipt in law. Ordinarily, when a partition takes place in a Hindu undivided family provision has to be made for the discharge of pre-partition debts of the father. If, for some reason, provision for discharging the liabilities has not been made or could not be made, the persons who get the properties on partition keep the properties in their hands subject to the liability to satisfy the demands of the creditors. In this sense they can be said to hold the property for the benefit of the creditors to the extent necessary to satisfy the just demands of the creditors in terms of section 94 of the Indian Trusts Act, 1882.'

14. On the facts before this court in Udayan Chinubhai's case : [1978]111ITR584(Guj) , it was found that certain properties which formed part of a Baronetcy Trust were the subject of a partial partition between the father on the one hand and the mother and sons on the other. As the properties were comprised in a Baronetcy Trust they could not be touched in any respect. A consent decree was passed and an arbitrator's award some of the debts of the family were allotted to the mother and sons. The concerned assesses had to pay interest to various unsecured creditors during the assessment years starting from 1951-52 and ending with 1961-62. The contention of the assessee was that these interest amounts paid by the assessee on the liability which had been allotted to them on partition should be allowed as a deduction in computing the total income of each of these four assesses, in that case. The income consisted of income from immovable property, business income and income from other sources. Some of the debts which had been allotted by the arbitrator to Lady Tanumati and her three sons were secured against immovable properties and the ITO allowed interest relating to these secured debts while computing the property income. The ITO, however, did not allow the balance of the interest. Thus, the various amounts of interest paid to unsecured creditors by the assesses were disallowed by the ITO during each of the concerned assessment years. The question before this court was whether the said view of the ITO, as confirmed by the higher authorities, was sustainable, and whether the interest amounts paid by the assesses during the relevant assessment years to unsecured creditors were forming part of the real income of the assessee's mother and her sons, Udayan Chinubhai, Achyut Chinubhai and Kirtidev Chinubhai. Two contentions were raised by the assesses before this court in Udayan Chinubhai's case : [1978]111ITR584(Guj) . The first contention was that these various interest amounts paid by the assesses to the unsecured creditors should be held to be allowable as a permissible deduction under s. 57(iii) of the I. T. Act. Alternatively, it was submitted, while computing the real income of the concerned assesses during the relevant assessment years as not having formed a part and parcel of the real income of the assesses as they represented various sums which were diverted from the income of the assesses for meeting the claims of creditors having overriding title in that case. This court negatived the first contention on behalf of the assesses and held that the provisions of s. 57(iii) of the Act of 1961 equivalent to s. 12 (2) of the Act of 1922 could not apply to the facts of the case. But the alternative contention on behalf of the assesses was upheld by this court placing reliance on various judgments of the Privy Council and the Supreme Court starting from the decision in Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 . This court also placed reliance on the decision of the Supreme Court in CIT v. Sitaldas Tirathdas : [1961]41ITR367(SC) . In Sitaldas' case, it was laid down by the Supreme Court as under (p. 374) :

'In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where, by the obligation, income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not be second.'

15. This court also placed reliance on Chap. IX of the Indian Trusts Act, 1882, and held that ordinarily a provisions has to be made for the creditors to discharge the liabilities of the HUF and for the pre-partition debts of the father at the time when a partition takes place, but, if for some reason or other, a provision for discharging the liabilities has not been made or could not be made, the persons who get the properties on partition keep the properties in their hands subject to the liability to satisfy the just demands of the creditors. In this sense, the sons and the mother, the assesses in that case, held the property for the benefit of the creditors and they were holding the assets which they received on partition for the benefit of the creditors to the extent necessary to satisfy the just demands of the creditors. It was, therefore, held that it was a case of an overriding right in favour of the creditors to have their liabilities paid from the assets which came to the hands of the assessee by virtue of the consent decree and the awards of the arbitrator in that case. It was further observed that it was by virtue of an overriding title in favour of the creditors that the total income which the assesses received did not represent their 'real income.' By virtue of the overriding title in favour of the creditors, the income of the family had to be diverted to pay off the interest amounts on the outstanding liabilities and the case would fall within the principle in Bejoy Singh Dudhuria's case [1933] 1 ITR 135 rather than under the principle in P. C. Mullick's case [1938] 6 ITR 206 . This court adopted the phraseology employed by the Supreme Court in Sitaldas Tirathdas' case : [1961]41ITR367(SC) and observed that it must be held that the amounts sought to be deducted in truth never reached the assesses as their income. By the very nature of the obligation which the assessee undertook under the scheme of the consent decree and the awards, the income, in the shape of interest payable on the outstanding liabilities of the HUF assigned to them, could never be said to be a part of their income. Because of the obligation on the assesses, the income was diverted before it reached them and, hence, the amount of interest was deductible in the case of each of the assesses before the court. It could not be said to be a disposition of income by the assesses. The property was received by the assesses subject to the liability for payment of the demands of the creditors whose debts were assigned to them and though moneys were not actually borrowed for clearing the charge by discharging the liability, interest had to be paid to the creditors until the liabilities could be discharged and that interest must be held to be an allowable expenditure. Placing reliance on the decision of the Privy Council in Bejoy Singh Dudhuria's case [1933] 1 ITR 135 , it was held that the concept is of 'real income' and not any specific deduction covered by any of the Provisions of the Indian I. T. Act, 1922, or any provision of the I. T. Act, 1961. The only question is as to what is the 'real income' which reaches the hands of the assessee. Is it a case of diversion of part of the total receipts by an overriding title before the income reached the assesses' hands or is it a diversion of a part of the income after it reached the hands of the assesse This court further observed that, as pointed out in Venugopala Verma Rajah's case : [1972]84ITR466(SC) , the question is not of any physical receipt but what we have to consider is the legal concept of receipt in law and looked at in this sense, it must be held that the real income of the assesses consisted of only total receipts less the interest payable on the outstanding liabilities assigned to them under the terms of the consent decree and the award.

16. The aforesaid decision of this court squarely answers the question raised for our consideration against the revenue and in favour of the assessee. It is pertinent to note that in Udayan Chinubhai's case : [1978]111ITR584(Guj) , this court was concerned with the interest paid to unsecured creditors for discharging the liabilities which they had acquired from the father on partition from the original owner of the assessee. So far as the facts of the present case are concerned, they stand on a firmer footing in asmuch as the assessee had made payment of interest to a secured creditor like the Bank of India to discharge his legal obligation for meeting the liabilities which he had inherited from his father on his demise and the assets which the assessee inherited from his father included shares and buildings, and the shares were already pledged with the bank of India by his father in his lifetime. These shares were of course pledged with the Bank of India by his father to meet the claim of the secured creditor, the Bank of India, arising out of the overdraft account. It is, therefore, claimed that as and when the assessee effected payment of interest in favour of the Bank of India to meet his outstanding liability which he had inherited from his father, he can be said to have diverted part of his gross revenue receipts to meet the liability arising in favour of the secured creditor on account of the overriding title. These receipts never came to the assessee s part and parcel of his real income. These amounts which were sought to be deducted by the assessee for the concerned assessment years never reached him as his income by the very nature of the obligation which the assessee had undertaken, to pay interest to the secured creditor. On account of the outstanding liability inherited from his father, the interest amounts paid by him to discharge this liability to the secured creditor can never be said to be part and parcel of the assessee's income. These amounts represented revenue receipts which were diverted before they reached the assessee and they never culminated into any real income so far as the assessee was concerned. Thus, the facts of the present case are squarely converted by the ratio of the decision of this court in Udayan Chinubhai's case : [1978]111ITR584(Guj) . Not only that, but also they presented a stronger case for the assessee as compared to the one which was found in Udayan Chinubhai's case.

17. In this context it is also profitable to refer to the decision of the Privy Council in Rajah Bejoy Singh Dudhuria's case [1933] 1 ITR 135. In the aforesaid case before the Privy Council, the assessee succeeded to the family ancestral estate on the death of his father. Subsequently, his stepmother brought a suit for maintenance against him in which a consent decree was passed directing the assessee to make a monthly payment of a fixed sum to his step-mother and declaring that the maintenance was to be a charge on the ancestral estate in the hands of the assessee. In computing his income, the assessee claimed that the amounts paid by him to his step-mother under the decree should be excluded. It was held by the Privy Council that the assessee's liability under the decree did not fall within any of the exemptions or allowances conceded in ss. 7 to 12 of the Indian I. T. Act, 1922, but the sum paid by the assessee to his step-mother were not 'income' of the assessee at all. The decree of the court by charging the appellant's whole resources with a specific payment to his step-mother had to that extent diverted his income form him and had directed it to his step-mother; to that extent what he received from her was not his income. It was not a case of the application by the appellant of part of his income in a particular way; it was rather the allocation of a sum out of his revenue before it became income in his hands. Lord Macmillan, delivering the opinion of their Lordships of the Privy Council, observed at p. 138.

'When the Act by section 3 subject to charge 'all income' of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the court by charging the appellant's whole resources with a specfic payment to his step-mother has to that extent diverted his income from him and has directed it to his step-mother; to that extent what he receives for her is not his income.'

18. In the present case also, whatever the interest amounts the assessee had to pay to the secured creditor, the Bank of India, to meet the outstanding obligation towards the secured creditor, did not represent his income at all. The said amounts represented part of his revenue receipts which were diverted from him and were directed to the secured creditor and to that extent what was received by the secured creditor was not the assessee's income at all. Applying the aforesaid principles enunciated by the Privy Council to the facts of the present case, it appears clear to us that the assessee was entitled to get a deduction of the various amounts of interest which the assessee had paid during the relevant assessment years to the secured creditor, the Bank of India, and to get them treated as not forming part of his real income during the relevant years. The first submission of Mr. Shah has, therefore, got to be upheld.

19. Once we hold that the various amounts of interest which the assessee had paid to the secured creditor, namely, the Bank of India, were for meeting the claims of the secured creditor emanating out of the overriding title in its favour, then, the logical conclusion which follows is that these amounts did not form part of the real income of the assessee at all and they were required to be deducted before the chargeable income of the assessee could be computed for the relevant assessment years. In that view of the matter, it is not strictly necessary for us to examine the alternative submission of Mr. Shah when he contended that even assuming that these various amounts of interest paid by the assessee to the Bank of India did form part and parcel of the assessee's real income, they were liable to be deducted as permissible deductions under section 57(iii) of the Act of 1961. Mr. Shah in that connection wanted to rely upon the decision of the Supreme Court in Seth R. Dalmia v. CIT : [1977]110ITR644(SC) . He also placed strong reliance on the decision of this court in CIT v. Mrs. Indumati Ratanlal : [1968]70ITR353(Guj) and specially on the observation in the aforesaid decision at p.365, where it was observed that it is now well settled by the decision of the Bombay High Court in CIT v. Sir Purshottamdas Thakurdas [1946] 14 ITR 305 and Ormerods (India) P. Ltd. v. CIT : [1959]36ITR329(Bom) , that the expenditure incurred for the purpose of maintaining the sources of income earned was liable to deduction while computing the real income. Mr. Shah urged that the interest amounts were paid by the assessee during the relevant assessment years to the Bank of India with a view to see that the pledged shares did not get disposed of by the banker. If the assessee had not paid the interest amounts, the bank would have disposed of these pledged shares. Mr. Shah, therefore, contended that these interest amounts squarely fall within the provisions of s. 57(iii) of the I. T. Act. As we have held that the interest amounts did not represent part of the real income of the assessee during the relevant assessment years and as we have upheld the first contention, we do not deem it necessary to express any opinion on the second alternative submission of Mr. Shah as to whether these amounts were permissible deductions under s. 57(iii) of the I. T. Act, though we feel that prima facie there is lot of substance in what Mr. Shah urged in support of the second submission. We do not, therefore, dilate on it any further.

20. As a result of the aforesaid discussion, our answer to the question referred to us in the negative, i.e., in favour of the assessee and against the revenue. The Commissioner shall pay the costs of this reference to the assessee.


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