Saluja Farms vs Commissioner Of Income-Tax
2001 Latest Caselaw 1645 Del

JUDGMENT

Arijit Pasayat, C.J.

1. All these three reference applications involve an identical question of law and, therefore, are being disposed of by this common order.

2. Pursuant to the directions given by this court under Section 256(2) of the Income-tax Act, 1961 (in short the "the Act"), the following question has been referred for the opinion of this court by the Income-tax Appellate Tribunal, Delhi Bench "A" (for short the "Tribunal") :

"Whether, on the facts and circumstances of the case, interest paid by the association of persons on the loan obtained from the bank for meeting demands of withdrawals of funds by the association of person-members out of their huge credit balances was an admissible deduction from the interest income of the association of persons, assessable under Section 56 for the assessment year 1973-74 ?"

3. The assessment years involved are 1973-74, 1974-75 and 1975-76.

4. The question that was considered by the authorities was whether there was scope for disallowance of certain amounts out of the interest claimed by the assesses as deduction. If was the stand of the assessed that the members of the assessed-association of persons had contributed considerable amount for the purpose of running agricultural farms and earning dividend and interest income. The members withdrew a part of the amount deposited by them with the assessed- association of persons and the assessed-association of persons had to borrow money from the bank to enable its members to withdraw a part

of the amount standing to their credit in the books of the association of persons. The Assessing Officer held that the borrowings were not utilised for earning the taxable income and the interest paid by the assessed could not be allowed as a deduction. The matter was carried in appeal before the Appellate Assistant Commissioner (in short "the AAC"), who reversed the findings. The matter was carried in appeal by the Revenue before the Tribunal. After considering the rival stands, the Tribunal came to hold as follows :

"The facts are not in dispute. The interest in dispute has admittedly been paid on borrowings raised for the purposes of enabling the members of the associations of persons to withdraw their funds and not for making investments for earning as such. The sole point that arises for consideration is, whether the interest in such a case is allowable under Section 57. The Departmental Representative, it may be stated, had relied on the Madras High Court's decisions in the cases of Milapchand R. Shah v. CIT [1965] 58 ITR 525 and Roopchand Chabildass and Sons v. CIT [1967] 63 ITR 166 and the Supreme Court decision in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200, in support of the disallowances. The Madras High Court decisions are primarily relating to the question of allowances or disallowances of interest under Section 10(2)(iii) of the Indian Income-tax Act, 1922. The Supreme Court decision also, it may be stated, considers the provisions of Section 10(2)(iii). However, it makes it clear that the expression 'for the purpose of business' occurring in Section 10(2)(iii) is wider than the expression 'for the purpose of earning income, profits or gains' occurring in Section 12(2) of the Indian Income-tax Act, 1922. Considered from this point of view, it may be difficult to hold that the interest paid on borrowings to enable the members of the association of persons to withdraw their funds as distinct from making investment to earn income is allowable. We do not think there is any scope for speculation as to what would have happened if the assessed had disposed of its income earning investments to allow its members to withdraw the funds. No doubt in that case there would not have been any income but that would not mean that the interest paid thereon can be said to be for the purpose of earning the income. To our mind, the Supreme Court decision (supra) is on all fours against the assessed. Therefore, we hold that the Appellate Assistant Commissioner was not justified in deleting the disallowance of Rs. 7,728, Rs. 1,068 and Rs. 344 out of the interest in the three years under appeal."

5. A prayer for reference in terms of Section 256(1) of the Act was turned down. However, as noted above, on being moved under Section 256(2) of the Act, a direction was given for referring the question aforesaid along with the statement of case.

6. There is no appearance on behalf of the assessed in spite of notice. However, we have heard learned counsel for the Revenue. According to learned counsel for the Revenue, the findings recorded are essentially factual and

there being no link with the earning of income, the Income-tax Officer was justified in disallowing the claim of interest.

7. In view of what has been noted by the Tribunal and as quoted above, we agree with the submission of learned counsel for the Revenue that the conclusions of the Tribunal are essentially factual, giving rise to no question of law. Therefore, we decline to answer the question. All the three reference applications are accordingly returned unanswered.