Income-tax---

----Special deduction---National Savings Certificate---Condition precedent for claiming deduction under S.80-C---Investment must come from amount chargeable to tax---Investment from accumulated income of prior years---Not entitled to special deduction---Indian Income Tax Act, 1961, S.80-C.

The deduction under section 80-C of the Income Tax Act, 1961, can be claimed by an individual only if he has paid any sum in the previous year out of his income chargeable to tax. If the same has been paid out of an income which was not chargeable in the previous year, then the deduction claimed cannot be allowed.

Mr. Roy for the Commissioner.

JUDGMENT

On an application being filed by the Revenue under section 256(2) of the Income Tax Act, 1961, this Court directed the Tribunal to refer the following question of law for the opinion of the Court:

"Whether the 'Tribunal was justified in holding that the claim of deduction under section 80-C was allowable though there was no direct nexus of the investment with the income chargeable to tax shown by the assessee during the year in question?"

The short facts necessary for expressing the opinion on the question of law formulated by this Court are that an individual had purchased the National Savings Certificates of Rs.30,000 during the assessment year 1985-86 and claimed deduction on that score under section 80-C of the Income Tax Act. The aforesaid certificate had been purchased out of a fixed deposit of Rs.40,158 made earlier which matured on January 10, 1985. The Assessing Officer did not allow the deduction to the assessee under section 80-C on the ground that the amount from which the certificate has been purchased was not chargeable to tax and, therefore, the provisions of subsection (2) of section 80-C will not apply. The assessee being aggrieved by the order of the Assessing Officer carried the matter in appeal. The appellate authority disagreed with the conclusion of the Assessing Officer and came to the conclusion that the amount invested in the National Savings Certificates should have come from the income of the assessee and that it is not necessary that it should have come from the chargeable income of the previous year in which the relief was claimed and in view of the fact that the fixed deposit made earlier was out of the chargeable income of that year, the deduction claimed has to be allowed. Against the appellate order, the Revenue carried the matter in second appeal to the Tribunal. The Tribunal came to hold that there is nothing in the act which requires that the investment for the purpose of section 80-C must have direct nexus with the income earned by the assessee. As long as the investments do not exceed the income available to the assessee, the deduction under section 80-C should be allowed. The second appeal having thus been dismissed, the Revenue filed an application before the Tribunal and being unsuccessful therein, approached this Court under subsection (2) of section 256 and on direction issued by this Court, the Tribunal has submitted the statement of case.

Mr. Roy, learned counsel appearing for the Revenue, contended that an assessee who is an individual is entitled to claim deduction under section 80-C of the Income Tax Act only if the sum in respect of which the deduction is claimed was from the income in the previous year by the assessee out of the income chargeable to tax and, therefore there is a direct nexus between the amount paid and the income of the assessee from out of which the said amount was paid. Learned counsel appearing for the assessee, on the other hand, submitted that if any amount is paid in the previous year, from out of an income which at any point of time was chargeable to tax, then deduction is allowable under section 80-C of the Income Tax Act. Subsection (2)(a) of section 80-C is quoted below in extenso:

"(2) The sums referred to in subsection (1) shall be the following, namely:

(a) where the assessee is an individual, any sums paid in the previous year by the assessee out of his income chargeable to tax."

On examining the aforesaid section, the only conclusion that can be arrived at is that an individual if he has paid any sum in the previous years but of his income chargeable to tax, then only the deduction under section 80-C call be claimed. If the same has been paid out of an income which is not chargeable in the previous year, then the deduction claimed cannot be allowed. The Tribunal was wholly in error in coming to the conclusion that there is no nexus between the investment made for the purpose of section 80-C with the income earned by the assessee. In our considered opinion, until and unless it is, established that the sum paid in the previous year is out of a chargeable income of the assessee during the previous year, the deduction is not allowable. Accordingly, we answer the question posed by holding that the Tribunal was not justified in holding that the claim of deduction under section 80-C was available though there was no nexus of the investment with the income chargeable to tax shown by the assessee. The answer is in favour of the Revenue and against the assessee.

M.B.A./1064/Tax???????????????????????????????????????????????????????????????????????????????? Reference answered