1. This reference arises out of the income-tax assessment of M. M. Thapar of Calcutta, the assessee, in the assessment years 1965-66 to 1969-70, the previous years being the financial years from 1964-65 onwards. The facts found and/or admitted are, inter alia, that the assessee had during the said assessment years earned taxable income, but, for payment of tax, he borrowed money. In the assessments, he claimed deductions of the interest paid on such borrowings.
2. The Income-tax Officer rejected the assessee's claim. On further appeal, the Appellate Assistant Commissioner took the view that the purpose of the borrowing, on which interest was paid, was payment of taxes and not investment and, therefore, the assessee was not entitled to any deduction., It was also urged before the Appellate Assistant Commissioner that a part of such interest paid was attributable to loans raised for payment of annuity deposit by the assessee and such interest should be allowed as an expenditure under Section 57 of the Income-tax Act, 1961. The Appellate Assistant Commissioner held that an annuity deposit did not possess the characteristics of income assessable under the head ' Other sources' and, therefore, no deduction was permissible on account of interest paid on money borrowed for the purpose of making such deposits.
3. Being aggrieved, the assessee preferred a further appeal before the Income-tax Appellate Tribunal. The Tribunal, following a decision of this court in the case of Mannalal Ratanlal v. Commissioner of Income-tax : 58ITR84(Cal) , held that the assessee was not entitled to any deduction in respect of interest paid on money borrowed for payment of tax. As to the claim for deduction of interest on borrowings to pay annuity deposit the Tribunal did not accept the same as an allowable deduction under Section 12(2) of the Indian Income-tax Act, 1922, holding that the interest paid had no connection with the interest earned from annuity deposits. The appeals of the assessee were dismissed.
4. Being aggrieved the assessee has initiated the present reference under Section 256(1) of the Income-tax Act, 1961, and the following questions have been referred :
'1. Whether, on the facts and in the circumstances of the case, -the Appellate Tribunal was right in holding that the interest paid to Northern India Share Dealers Private Ltd. on borrowings utilised for payment ofincome-tax was not an allowable deduction in computing the total income of the assessee ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest paid to Northern India Share Dealers Private Ltd. on borrowings utilised for payment of annuity deposit was not an allowable deduction in computing the total income of the assessee ?'
5. Dr. Debi Pal, learned counsel for the assessee, placed before us a Circular No. C.B.R. D.O. C.No. 4(86)-I.T./49 dated the 4th February, 1950, where it has been directed that where deduction for interest on loans was claimed against business profits, the fact that the borrowed money was immediately utilised for payment of tax would not necessarily negative the claim.
6. Drawing inspiration from this circular, Dr. Pal contended that whatever be the decision of this court in the case of Mannalal Ratanldl : 58ITR84(Cal) , the revenue ought to have allowed the deduction claimed on the basis of the same. It appears to us, however, that this circular has no application in the facts and circumstances of the instant case. The subject of the circular is Section 18A-demands met by loans. In this case, the clear case of the assessee is that the borrowings were made specifically for payment of income-tax and not for any other business purpose.
7. The matter, in our opinion, is concluded by the decision in Mannalal Ratanlal : 58ITR84(Cal) , where it was held by a Division Bench of this court that the interest paid on any sum borrowed for payment of income-tax was not deductible from the assessee's net income. Dr. Pal in fairness has brought to our notice a subsequent decision of this court in Waldies Ltd. v. Commissioner of Income-lax : 110ITR577(Cal) , where it was reiterated that before the introduction of Section 80V in the Income-tax Act, 1961, interest paid on overdrafts for payment of taxes was not allowable as a deduction in computing the business income of the assessee.
8. Following the aforesaid decisions we answer question No. 1 in the affrmative and in favour of the revenue.
9. To appreciate the controversy in question No. 2, we have to consider the scheme of the provisions relating to annuity deposits. The scheme was originally introduced by the Finance Act, 1964, which incorporated Chapter XXII-A in the Income-tax Act, 1961. Under that Chapter, taxpayers of certain categories were required to make deposits known as annuity deposits for assessment years commencing from the assessment year 1964-65. The amount of such deposits was prescribed-on the basis of percentages from 5 to 12 1/2 of the adjusted total income of the assessee. This adjusted total income meant total income computed under the Income-tax Act without making allowance for annuity deposit. Option was given to taxpayers to make such deposit or not, but, once exercised, such option was irrevocable. The deposit, if paid, was admissible as a deduction in computing the assessee's total income charged to tax for that year. If the taxpayer opted not to make the deposit he had to pay an additional tax.
10. Under Sub-clause (viii) of Section 2(24) of the Income-tax Act, 1961:
' ' Income ' includes-
(viii) any annuity due, or commuted value of any annuity paid, under the provisions of Section 280D.'
11. Section 56 of the Income-tax Act, 1961, provides as follows:
'56. (1) ......
(2) In particular, and without prejudice to the generality of the provisions of Sub-section (1), the following incomes shall be chargeable to income-tax under the head ' Income from other sources ', namely:-...
(ia) income referred to in Sub-clause (viii) of Clause (24) of Section 2;......'
12. The Supreme Court in Hari Krishna Bhargav v. Union of India : 59ITR243(SC) has summarised the scheme as follows:
'Broadly stated, the scheme of Chapter XXII-A is that certain classes of taxpayers in the comparatively higher income groups are required to make out of their total income deposits at the specified rates on the adjusted total income with the Central Government. The amount so deposited is made returnable with interest in ten annual instalments. In computing the total income of the year in which it is made the deposit is an admissible deduction. But the instalment due in any year is liable to be adjusted in the total income of the year in which it is due. The taxpayer, however, has the option not to pay the deposit, and pay tax on his total income and fifty per cent, of the amount saved by not making the deposit.'
13. From the aforesaid statutory provisions it appears that annuity deposit, when refunded in instalments, is deemed to be and forms part of the total income of the assessee in the year in which it is received. The question is whether the assessee is entitled to the deductions under Section 57 of the Income-tax Act, 1961, in respect of such deposits. The relevant part of the section is as follows:
'57. Deductions---The income chargeable under the head ' Income from other sources ' shall be computed after making the following deductions, namely:--...
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose ofmaking or eating such income.'
14. From Sections 2(24) and 57 of the Act, it appears that when the annuitydeposit is received back by the assessee in instalments the same are to betaxed as income from other sources in the year of receipt, though originally the said income might have arisen to the assessee under any other head.
15. The fact remains that the amounts refunded in instalments of annuity deposit were not earned by the assessee in the year the instalments arc? received. The income is already earned earlier, i.e., in the year the deposit is initially made. For computation of income-tax the instalments will be taxable in the year they are paid back to the assessee. The expenditure incurred for the purpose of making such income by the assessee can only be expenditure incurred and necessarily taken into account (to determine the adjusted total income) in the year when the annuity deposit had been made and there is no scope for the assessee to incur any further expenditure to earn the same income. In other words, when the assessee receives back the instalment of the annuity deposit he does not earn the amount but the amount received is subject to income-tax in that year.
16. In our opinion, an annuity deposit, in any case, cannot be comparedwith or put in the same category as other items of income included underthe head 'Other sources'. Once the assessee exercises his option he isbound to continue to make the deposits in subsequent years. Failure to doso will make him liable to penalties by way of additional tax and alsofurther penalty under Section 280R if so provided in the scheme.The benefit available to the assessee in giving the annuity depositscheme is, primarily, payment of a lesser amount of tax in the year of thedeposit and not earning of the interest included in the instalments. Farthe aforesaid reasons, we answer question No. 2 in the affirmative and infavour of the revenue.
17. There will be no order as to costs.
C.K. Banerji, J.
18. I agree.