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Judgment
These nine appeals involving a common point of dispute are disposed of together for the sake of convenience.
The assessee is an individual and derives income by way of salary, dividend and interest. The assessment years are 1971-72 to 1978 and the relevant previous years are the corresponding financial years.
The common point of dispute pertains to the assessees claim for deduction of interest payment to his sisters and the bank out of the dividend income claimed by him.
The amount involved are as under :
Asstt. Year
Sisters
Banks
Rs.
Rs.
1971-72
6,960
70
1972-73
6,960
70
1973-74
5,480
775
1974-75
3,688
22
1975-76
"
3,254
1976-77
"
3,795
1977-78
"
3,400
1978-79
"
2,888
1981-82
"
8,538
The assessee received certain properties under the will if his father dated 2-2-1962. The assessees did on 16-12-1966. In order to better appreciate the rival stands of the parties, it would be necessary to reproduce below the relevant portion of the will :
"Property owned, and possessed by me and in respect of which this will is made is as follows :-
Property described in para 2(A) and (b) of the memorandum of partition prepared on 3-12-1956 and in consequence of the same, allotted to me, exclusively and herein described in Schedule (i).
Share of various Joint Stock Companies deposited with the Bank of India Ltd. Bombay (Head Office). Fort, of the approximate value of Rs. 60,000 (sixty thousand), standing name and/or in the name of the Bank of India Ltd., Bombay against my overdraft account, with the said Bank.
Cash amounts standing to my credit as detailed below :
(A) An amount of Rs. 500 approximately standing to my credit in the overdaft account referred to in clause (2) above or such amount as may be standing to my credit in the said amount, at the time of my demise.
(B) An amount of Rs. 28,000 (Rupees twenty-eight thousand) approximately standing to my credit in fixed deposit with the aforesaid Bank of India Ltd.
(C) An amount of Rs. 60,000 (sixty thousand) approximately standing to my credit in the current account with the Vishnu Cotton Mills Ltd. (as at present named).
(A) Insurance Policies, on or life of detailed below :
(a) Life Policy No. C. 21045, with Asian Insurance Co. Ltd. for an amount of Rs. 5,000 fully paid (to be payable on death). The same is being assigned.
(b) Life Policy No. 9344 (double endowment) of the aforesaid Assurance Company, of Rs. 3,000 fully paid (to be payable on death). The same is being assigned.
(A) A motor car, in good running condition (BRU 4748) Hill Man make 1953 Model, standing in my name of the present value of about Rs. 6,000.
(B) Silver ware and sundry gold ornaments of the approximate value of Rs. 5,000.
(C) Sundry household articles, furnitures etc. of the approximate value of Rs. 2,000.
Government securities, of approximate value of Rs. 79,000 standing in the name of my mother Vajubai alias Balwantrai Desai and deposited with the Surat District Co-operative Bank Ltd. of which she is presently the holder and is entitled to get interest, thereon and about which a decree has been pressed in the Civil Court of Surat, fixing the share of myself and my two sons Chandrakant and Virendrakumar as 1/5th, a available after the demise of the said Vajubai alias Vajiaben. In this myself and my two sons Chandrakant and Virendrakumar have 1/5 share only, after the demise of the sad vajubai alias Vajiaben."
"8. Now my property described above in page 1 to 7 is devised by me as under :-
Out of all my property described in above-provisions shall be first made as stated below :-
(a) Rs. 40,000 (Rupees forty thousand) shall be paid to my eldest son Chandrakant M. Desai.
(b) Rs. 30,000 (Rupees thirty thousand) shall be paid to me eldest daughter, Sau, Shakunthala Ramanlal Desai and to her children, after her dearth or to whomsoever she pleased to give during her life time.
(c) Rs. 15,000 (Rupees fifteen thousand) shall be paid to my second daughter. Sau, Ramila Bhalchadra Desai and her children after death or to whomsoever she pleases to give during her life time.
(d) Rs. 15,000 shall be given to my young daughter, Sau. Kusum Sumantrai Desai. In her case, however, if she predeceased my without any issue, this amount or whatever remains out of this amount, after her death shall revert to my two sons Chandrakant and Virendrakumar above referred to. During her life time she will have full power of disposition, either by gift or by will.
Rs. 1,00,000 Total Rupees One lakh only.
These allotments in (a) to (d) are subject to the provision that in the prevent of the assets (detailed in paras 1 to 5) available for distribution proving insufficient to meet these allotments in full, these (allotments) will be reduced Pro-Tanto in the same proportion.
(c) The reminder, if any, out of the properties described in paras 1 to 5 above, after making allotments as detailed in paras (a) of (d) of para 8 above, shall go my two sons.
As the assessee and his brother did not pay amount to their sisters Shakuntala, Ramila and Kusum as per the will of their father, dispute arose between them and sisters demanded the amounts due to them with accretions. On 26-10-1972 an Agreement was arrived at between the assessee, his brother and his sisters, the relevant portion of which reads as under :-
"(4) Under clause 8 of the said will he deceased inter alia bequeathed a sum of Rs. 40,000 (Rupees forty thousand) to the said Chandrakant, a sum of Rs. 30,000 (Rupees thirty thousand) to the said Shakuntala, Rs. 15,000 (Rupees fifteen thousand) to the said Ramila and Rs. 15,000 (Rupees fifteen thousand) to the said Kusum :
(5) The said Chandrakant and the said Virendra inspite of demands could not, because of preoccupation and personal difficulties, pay the amount payable to the said Kusum, the said Shakuntala and the said Ramila and the said Chandrakant or any portion thereof until middle of 1971 :
(6) The said Chandrakant and the Virendra have, however, therefore paid to the said Shakuntala the said Ramila of aggregating to Rs. 11,000 each between the period June 1971 in seven instalments :
(7) The said Chandrakant and the said Virendra have however, not paid any amount to the said Kusum and said Chandrakant;
(8) The said Chandrakant the Virendra as stated above could not pay the amount payable to the said Kusum, the Ramila and the Shakuntala and the said Chandrakant within reasonable period from the data of demise of their father, therefore, the said Kusum, the said Shakuntala and the said Ramila claimed the said amount with ascertains thereto from the said Chandrakant and the said Virendra :
(9) Dispute and difference arose between the parties hereto regarding the accretions on the amount payable by the said Chandrakant and said Virendra to the said Shakuntala, the said Ramila and the said Kusum :
(10) The parties have now arrived at an agreement regarding the amount payable by the Chandrkant and the said Virendra to the said Shakuntala, the said Ramila and the Kusum inclusive of the accretions thereto as follows :
(a) The said Chandrakant and the Virendra should pay to the said Shakuntala the aggregate sum of Rs. 50,000 our of which a sum of Rs. 11,000 has already been paid as hereinabove stated leaving an unpaid balance of Rs. 39,000 :
(b) The said Chandrakant and the said Virendra should pay to the said Ramila an aggregate sum of Rs. 25,000 out of which a sum of Rs. 11,000 has already been paid by the said Chandrakant and the said Virendra to the said Ramila as hereinabove stated - leaving an unpaid balance of Rs. 14,000.
(c) The said Chandrakant and the said Virendra should pay to the said Kusum an aggregate sum of Rs. 25,000.
(6) In the assessments originally framed u/s. 143(3) of the Act, the ITO had allowed the interest paid to the sisters/bank in respect of the assessment years 1971-72 to 1978-79. The Commissioner of Income Tax took action u/s. 263 of the Act, as he was of the view that the assessee was not entiled to deduction of interest from the dividend income carned by him. The said action of the CIT was challenged in the Tribunal and the Tribunal vide its order dated 28-12-1981 in ITA Nos. 2437 to 2444/Bom/1980 apheld the order of the CIT.
The present proceedings arose out of the action of the ITO giving effect to the said order of the CIT made u/s. 263 of Act. In framing the assessment u/s. 143(3) read with section 263 of the Act, the ITO disallowed the assessees claim for deduction of interest amounting to Rs. 7,030 in the following The main point in the assessment is that the assessees claimed deduction amounting to Rs. 7,030 being interest paid to sisters and the bank. The deduction claimed u/s. 57 of the Income Tax Act, 1961 as stated by the assessees representative. He also stated that the payments of interest to his sisters, the CO-legatees under the will of his father late Shri Motabhai Desai, was his legal obligation under the Indian Succession Act. To grant the claim of deduction as discussed above, it must be proved that the expenses claimed is laid out or expended wholly and exclusively for the purpose of making or earning such income under the provision of section 57 of the Income Tax Act, 1961. The assessee has failed to produce any evidence to show that the interest paid was laid out or expended wholly and exclusively for the purpose of making or earning such income. The assessee had earned dividend from the shares which he inherited from his late father Shri M. B. Desai as also in his own investment in shares. As far as the income returned under the head interest from private parties. The assessee has not produced any evidence as how much and when the amount was invested with the private parties. It is certain that, the interest paid as discussed above in not paid to the borrowers for investment. The assessee has in fact paid the interest to his sisters as well as to the bank on overdraft drawn to him his personal obligation. Thus cannot be said to be the expenses laid to or expended wholly and exclusively for the purpose, of making or earning the income which has been returned. I therefore disallow the assessee is claim of deduction of Rs. 7,030 interest paid."
Similary, the ITO had disallowed the assessees for deduction of interest in respect of the assessment years 1972-73 to 1978-79. In respect of the assessment years 1981-82, the ITO once again disallowed the assessees claim for interest payment of Rs. 8,538 with the remarks "The assessee has failed to produce evidence to show that the interest paid was laid out or expended wholly and exclusively for the purpose of making or earning such income."
In appeal before the Appellate Asstt. Commissioner, the assessee once again urged that he was entiled to deduction of interest payment u/s. 57 of the Act. The AAC in his consolidated order upheld the action of the ITO in the following manner :-
"4. It is not clear how the appellant could claim interest payment against 1/2 share of dividend income which other brother of the appellant did not make any similar claim. It is also seen that the dividend from shares were dividend equally between the appellant and his brother. The appellant declaring interest income and dividend income under the head Income from other souces. Therefore the deduction can be claimed by the appellant only u/s. 57 of the IT Act. The ITO has mentioned in the order that the assessee has failed to produce any evidence that in interest was paid for the purpose of making or earning such income from other sources. The appellant has not raised any fresh ground which was not raised before the ITO. The ITO has met out all contentions raised by the assessee in his assessment orders and the ITOs orders fully covered with points raised by the assessee. I therefore find no reason to interfer with order of the iTO disallowing interest paid to his sisters and bank."
Being aggrieved by the order of the AAC, the assessee has up in appeal before the Tribunal. The learned Counsel for the assessed reiterated the submissions. Which were made before the IT authorities and strongly urged that they should have access connection he strongly relied on the decision of the Honble Bombay High Court in the case if COMMISSIONER OF Income Tax, BOMBAY CITY I Vs. H. H. MAHARANI SHRI VIJAYKUVERBA SAHEB OF MORVI AND OTHERS., according to the learned Counsel, on almost similar facts obtaining in that case the Honble Bombay High Court was pleased to uphold the order of the Tribunal allowing deduction of interest payment against the dividend income. He, therefore, urged that I should likewise direct the ITO to allow the assessees claim for deduction of interest payment and modify the assessment accordingly. The learned representative for the department, on the other hand, strongly supported the action of the IT authorities. Relying one the decision of the Honble Bombay High Court in the case of Smt. Zubedabai Vs. Commissioner of Income Tax, Vidarbha and Marathwada, , the further submitted that since there was no nexus direct or indirect between the earning of the dividend income and the interest payment, the IT authorities were fully justified in denying the assessee the claim for deduction of interest payment. He also pointed out that in the said decision the Honble High Court had considered their decision reported in COMMISSIONER OF Income Tax, BOMBAY CITY I Vs. H. H. MAHARANI SHRI VIJAYKUVERBA SAHEB OF MORVI AND OTHERS., and have distinguished the same on the facts and circumstances obtaining in the two cases. In H. H. Maharani Shri Vijykuverba Saheb of Morvis case (supra). The Honble High Court had unheld the decision of the Tribunal on the ground that "the borrowings were made by the trustees avowedly for the purpose of meeting the estate duty liability which attached to the property which was the subject-matter of the trust ...." However, in instant case there is no such statutory liability which would enable the assessee to establish the nexus. According to him, on true interpretation of the will as well as the agreement entered into between the assessee, his brother and sisters, it is quite clear that the "charge" is on the capital account and not on the income account. Further, he submitted that the assessee would not have been in the predicament in which he is place if he had carried out the terms of the will of his father in time. In other words, he wanted to impress upon me that the liability to pay interest was a personal liability of the assessee and it has nothing to do with the earning of the dividend income. He, therefore, urged that I should uphold the order of the AAC under appeal.
I have carefully considered the rival submissions of the parties and the material contained in the assessees. In my view, the decision in H. H. Maharani Shri Vijaukuverba Saheb of Morvi"s case (supra) would have no application to the facts and circumstances obtaining in the instant case. It is quite apparent that the assessee and his brother did not vary out the wish of their father contained in the will, inasmuch as, they had not paid the amounts to their sisters in time as desired by their late father. It is quite apparent that it is only after disbursement of the property as detained in Paras (a) to (b) of para 8 the will, the assessee and his brother were to share remainder in equal proprietor Instead of gibing the amounts stipulated in the will to their sisters, the assessee and his brother dragged on the situation till their sisters demanded not only the moneys stipulated in the will but also the accretion thereto. It is under these circumstance that an agreement was arrived at on 26-10-1972, whereby the assessee and his brother had agreed to pay something more than what their (sister) share in the property lift by the deceased. It is under these circumstances that the assessee and his brother were required to pay interest of Rs. 40,000 over the year. Surely, the interest so paid had no connection whatsoever for craning dividend income. I have carefully gone through the decision reported in COMMISSIONER OF Income Tax, BOMBAY CITY I Vs. H. H. MAHARANI SHRI VIJAYKUVERBA SAHEB OF MORVI AND OTHERS., and I entirely agree with the stand taken on behalf of the Revenue that it has no application to the facts and circumstances obtaining the instant case. In their subsequent decision Smt. Zubedabais case (supra), the Honble Bombay High Court has clearly noted that their decision in H. H. Maharani Shri Vijaykuverba Saheb of Morvis case (supra) has gone in favour of the assessee, as the estate duty liability was attached to the property which was the subject-matter of the trust. However, in the instant case it was the duty of the assessee and his brother to hand over the amounts to their sisters as per the will of their late father. As they had failed to do so they were required to pay interest which has no connection in earning of the dividend income. In this view of the matter. I have no hesitation in upholding the action of the IT authorities.
In the result, all the appeals are dismissed.