Commissioner of Income Tax vs Thomas Leslie Martin

Dipak Kumar Sen, J.—On an application of the Revenue u/s 66(2) of the Indian Income Tax Act, 1922, the Tribunal as directed has referred the following questions of law arising out of its order for the opinion of this court :

" Assessment year 1959-60 :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 8,617 on account of interest paid by the assessee on the overdrafts taken by him fell within the purview of Section 12(2) of the Indian Income Tax Act, 1922, and was, therefore, allowable as a deduction ?

Assessment year 1960-61 :

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 10,246 on account of interest paid by the assessee on the overdraft taken by him fell within the purview of Section 12(2) of the Indian Income Tax Act, 1922, and was, therefore, allowable as a deduction ?"

As noted above, the assessment years involved are 1959-60 and 1960-61, the accounting years ending on March 31, of the calendar years 1959 and 1960.

During the assessment before the Income Tax Officer, Thomas Leslie Martin, the assessee, claimed that interest paid by him on overdrafts obtained by him, be deducted from his income by way of dividends. The Income Tax Officer disallowed a part of the claim on the ground that the main reason for the overdraft was that the assessee was short of funds for making his tax payments.

On an appeal by the assessee, the Appellate Assistant Commissioner found that in each of the two years involved, the assessee had a convertible surplus, even after meeting his tax liabilities, out of his income from dividend and on that ground the appeal of the assessee was allowed.

The Revenue went up on further appeal before the Income Tax Appellate Tribunal. The Tribunal considered the facts and found that the assessee had an overdraft with the bank throughout the two years and at the end of each year, taking into account the net receipts of the assessee from all sources, the overdraft was not liquidated. The Tribunal found further that the overdrafts obtained by the assessee during the relevant accounting years were utilised for the purpose of meeting its tax liabilities.

The Tribunal, however, found that the overdrafts were obtained by the assessee to avoid "precipitated liquidation" of a large portion of the assessee''s investments and held that the said overdrafts were, therefore, taken for the purpose of preservation of his existing investments and, therefore, the interest paid on such overdraft came within Section 12(2) of the Indian Income Tax Act, 1922, and was, therefore, deductible from his income from dividend. In coming to the said conclusion, the Tribunal followed the decision of the Supreme Court in Eastern Investments Ltd. Vs. Commissioner of Income Tax, West Bengal, .

The controversies raised in the questions referred, in our view, are concluded by several judgments of this court, namely :

(a) MANNALAL RATANLAL Vs. COMMISSIONER OF Income Tax, CALCUTTA., ,

(b) Waldies Ltd. Vs. Commissioner of Income Tax, and

(c) M.M. Thapar Vs. Commissioner of Income Tax, .

In the said decisions, it was held, inter alia, that interest paid on any sum borrowed for payment of Income Tax was not deductible from the assessee''s income. In particular, in M.M. Thapar Vs. Commissioner of Income Tax, , it was found that the assessee had during the assessment years in question earned taxable income and payment of tax was from money borrowed. On a reference, it was held by this court that interest paid on borrowings utilised for payment of Income Tax was not allowable as deduction in computing the total income of the assessee.

In Eastern Investments Ltd. Vs. Commissioner of Income Tax, West Bengal, , the question of deduction of interest arising out of borrowing for payment of Income Tax dues was not before the Supreme Court. In the facts of that case, the assessee, a company, agreed to reduce its share capital by Rs. 50 lakhs with the permission of the court and took over from a shareholder debentures in lieu of shares of the face value of Rs. 50 lakhs. The interest paid on such debentures was allowed to be deducted from the income of the assessee. The facts, in that case, are different from the facts before us.

In the instant case, following the decisions of this court noted earlier, we answer the two questions referred in the negative and in favour of the Revenue.

There will be no order as to costs.

Monjula Bosk, J.

I agree.