P. D. DESAI J. - The Income-tax Appellate Tribunal has referred the following question of law for our opinion :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Appellate Assistant Commissioner was not justified in allowing any amount of interest paid to L.I.C. as allowable deduction against interest from the Government securities in the two assessment years, (a) 1968-69 and (b) 1969-70'
As the question indicates, the assessment years involved are assessment years 1968-69 and 1969-70, the relevant previous years being the years ended June 30, 1967, and June 30, 1968, respectively. The assessee is a co-operative housing finance society engaged in the business of financing co-operative housing societies. The assessee derived income from its business of advancing loans to co-operative housing societies and it also derived income by way of interest from Govt. securities held by it. In the course of its assessment to income-tax, for the relevant assessment years, the assessee claimed that since it was carrying on the business of providing credit facilities to its members, the whole of the profits and gains of business attributable to its activity of providing such credit was liable to be deducted in computing its total income under s. 80P(2)(a)(i) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'). The ITO allowed the deduction as claimed in respect of all income save and except income in the shape of interest derived from Govt. securities held by the assessee, which, in his view, was bot comprehended within the allowable deduction under s. 80P(2)(a)(i). The assessee had alternatively claimed that in any event, it was entitled to claim a deduction under s 19(ii) of the Act in respect of the interest payable on monies borrowed by it from the LIC for the purpose of investment in Govt. Securities held by the assessee. The ITO found that there was no evidence to show that the amount borrowed from the LIC was invested in the acqusition of the Govt. securities which fetched the interest income. Under the circumstances, he also disallowed the claim for deduction based on the provision of s. 19(ii). The assessee carried the matter in appeal before the AAC. The AAC was of the view that the balance-sheet, a copy whereof was produced before him on behalf of the assessee, showed that the assessee had borrowed a loan of more than Rs. 15 crores from the LIC and paid interest to the said porporation to the extent of more that Rs. 80 lakhs and that since the amount so borrowed was partly invested in Govt. securities and partly in other activities, the assessee was entitled to partial relief under s. 19(ii). The AAC worked out the proporationate interest payable to the LIC on the borrowing made for the purpose of investment in Govt. securities at 76% of the total interest paid and allowed a proportionate deduction against the interest income. On further appeal by the revenue, the Income-tax Appellate Tribunal held that no specific link was established between the borrowings from the LIC and the investments made in Govt. securities and that, as such, the AAC was in error in allowing proportionate deduction. At the instance of the assessee, however, the Tribunal has stated a case in respect of the question set out above.
Two submission were made on behalf of the assessee for our consideration; first, that the entire income including income in the shape of interest on Govt. securities derived by the assessee was entitled to deduction under s. 80P(2)(a)(i) since the assessee was a co-operative society engaged in providing credit facilities and, secondly, that in any case, the interest paid by the assessee to the LIC on the loan borrowed from it ought to have been allowed as a deduction under s. 19(ii) in view of the fact that the borrowing was made for the purpose of investment in such Govt. securities.
So far as the first submission is concerned, we must say that it is not open to the assessee to advance, and, for us, to consider, the same in view of the fact that it cannot be said to arise out of the order of the Tribunal. The facts set out above would show that whereas the ITO had totally rejected the claim for deduction - whether it was a deduction claimed under s. 19(ii) or s. 80P(2)(a) (i) - the AAC allowed only a porprotionate deduction under s. 19(ii). The claim, if any, for total deduction under s. 80P(2)(a)(i) must therefore, be said to have been impliedly, if not expressly, rejected by the AAC. The assessee rested content with the decision of the AAC and it preferred no appeal before the Tribunal. In other words, the claim founded on the provisions of s. 80P(2)(a)(i) met its Waterloo before the AAC and it was thereafter not kept alive by preferment of an appeal. Apart from the assessee having not preferred as appeal against such decision, implied or express, of the AAC, no attempt was made on behalf of the assessee before the Tribunal to support the order of the AAC granting relief under s. 19(ii) on an alternative footing, namely, that having regard to the provisions of s. 80P(2)(a)(i), the proportionate deduction allowed should not be at least the disturbed. The result, therefore, is that the controversy between the revenue and the assesee founded on the claim based on the provision of s. 80P(2)(a)(i) was not reflected in the proceedings before the Tribunal. Under such circumstances, we do not think it is open to the assessee to raise the said question for our consideration nor do we think, it is open to us to entertain such a ples in this limited jurisdiction. The submission on behalf of the assessee that it was under a bone fide belief that the controversy is covered by the question referred to us is founded on a total misapprehension and even if there was any such erroneous belief, that cannot provide a ground to widen the scope of the controversy before this court.
So far as the claim for deduction founded on the provision of s. 19(ii) is concerned, we must hold that the Tribunal is right in law in taking the view that it did. Section 19(ii), in so far it is material, Provides that income chargeable under the head 'Interest on securities' shall be computed after making deduction in respect of 'any interest payable on moneys borrowed for the purpose of investment in the securities by the assessee'. It is apparent that a link or nexus must be established between the monies borrowed for the purpose of investment in the securities and interest payable in respect of such borrowing. In other words, it must be shown that the monies were borrowed for the purpose of investment in securities and that the interest paid in respect of which deduction is claimed, is retatable to such borrowing. The Tribunal has found, as a matter of fact, that no such link or nexus is established. This is a pure finding of fact. Such finding of fact has not been specifically challenged on any of the parmissible grounds. Under the circumstance, the conclusion is inevitable that the view of the Tribunal in regard to disallowance of deduction under s. 19(ii) is correct in law.
In view of the foregoing discussion, the question referred to us is answered in the affirmative, that is to say, in favour of the revenue and against the assessee. The assessee shall pay the costs of this reference to the Commissioner.