COMMISSIONER OF INCOME-TAX VS M. S. VENKATESWARAN
1998 P T D 2465
[222 I T R 163]
[Madras High Court (India)]
Before Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
versus
M. S. VENKATESWARAN
Tax Cases Nos.210 to 273 (References Nos.62 to 65 of 1981), decided on 19/01/1996.
Income-tax----
----Interest on borrowed capital---Condition precedent for deduction Borrowed capital must be used for purposes of business---Proprietary business of assessee's father continued by him---Capital contributed used by assessee----Department establishing that part of borrowed capital used by assessee's father for personal purposes---No presumption that capital brought in by assessee would cover borrowed capital diverted for non-business purposes---Part of interest on borrowed capital liable to be disallowed-- Indian Income Tax Act,1961, S.36(1)(iii).
Interest paid on borrowed capital will be allowed as a deduction only if the capital was borrowed and used for the purposes of business. If it is used for a purpose other than business then interest to the extent to which the capital was so used will not be allowed as a permissible deduction under the provisions of section 36(1)(iii) of the Act.
The assessee an individual, carried on business in executing sanitary contracts. The Income-tax Officer disallowed interest payment of Rs.10,069 for each of the assessment years 1972-73, 1973-74, 1974-75 and 1975-76 on the ground that the said interest related to borrowed funds utilised by the assessee for his personal purposes. The Appellate Assistant Commissioner set aside the disallowances. On further appeal, the attention of the Tribunal was drawn to the order of the Commissioner of Income-tax passed under section 264 for the assessment year 1971-72, in which it was found that the business originally belonged to the assessee's father, S, who died on July 10, 1970, that the opening debit balance as on April 1,1970, in his account was Rs.50,427, that during the period he had, out of borrowings, paid a sum of Rs.33,384 as income-tax and that the borrowings of Rs.83,911 were utilised for personal purposes and at 12 percent per annum the interest attributable to such borrowings amounted to Rs.10,069. The Tribunal came to the conclusion that there was no justification for disallowing any portion of the interest payment claimed by the assessee as relating to non-business purposes. On a reference:
Held; that the facts on record would clearly show that the father of the assessee had definitely diverted a portion of the borrowed capital for his own purposes and not for business purposes. In such a case, there could not be a presumption that a part of the capital would have been diverted for non -business purposes, not from the borrowed capital but from the capital contributed by the assessee. Hence, the assessee was not entitled to deduction under section 36(1)(iii) with regard to the interest paid on borrowed capital, which was utilised by the assessee's father for non-business purposes.
CIT v. H.H: Maharani Shri Vijaykuverba Saheb of Morvi (1975) 100 ITR 67 (Bom.); CIT (Addl.) v. Swamambigai Motor Service (1977) Tax 47(3) 162 (Mad.); Kishinchand Chellaram v. CIT (1978) 114 ITR 654 (Bom.); Milapchand R. Shah v. CIT (1965) 58 ITR 525 (Mad.); Mir Muhammad Ali v. CIT (1960) 38 ITR 413 (Mad.); O. RM. 'OM. SP. Firm v. CIT (1964)) 52 ITR 907 (Mad.) and Roopchand Chabildass & Sons v. CIT (1967) 63 ITR 166 (Mad.) ref.
C.V. Rajan for the Commissioner.
Nemo for the Assessee
JUDGMENT
THANIKKACHALAM, J.---In compliance with the order of this Court, dated November 21, 1979,` passed in T.C.P. Nos.273 of 1976, the Tribunal referred the following common question, for the assessment years 1972-73 to 1975-76, for the opinion of this Court, under section 256(2) of the Income Tax Act, 1961:
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that there was no justification for disallowing any portion of the interest payment claimed by the assessee as relating to non-business purposes?"
In making the assessment of the assessee, who is an individual, carrying on business in executing sanitary contracts, the Income-tax Officer disallowed interest payment of Rs.10,069 for the assessment year 1972-73 on the ground that the said interest relating to the borrowed funds utilised by the assessee for his personal purposes should be disallowed as in the last year. For the assessment year 1973-74, he disallowed a similar sum of Rs.10,069 on the ground that the assessee had claimed interest payment to the tune of Rs.40,256, that the balance-sheet showed a sum of Rs.2,16,070 on the assets side of the balance-sheet under the head "Old proprietor's account", that this was nothing but the drawings made by the father of the proprietor in the earlier years and that last year the same disallowance was made. For the assessment year 1974-75, following the earlier years' order, the Income-tax Officer disallowed a similar sum of Rs.10.069. So also, for the assessment year 1975-76 a similar disallowance was made.
On appeal, the Appellate Assistant Commissioner found force in the submission of the assessee that interest on the amount borrowed for payment of income-tax by the deceased father of the assessee would be an admissible deduction, that the balance diverted capital was only Rs.50,527 as against which the assessee had Rs.8,675 as his own capital anal Rs.45,000 on which he paid no interest and that thus the net diverted capital would be more than off-set by the capital on which no interest was payable. The Appellate Assistant Commissioner held that the net diverted capital inherited by the assessee from his deceased father was adequately covered by the assessee's own capital plus capital which was interest-free. The Appellate Assistant Commissioner, therefore, set aside the disallowance of interest payment for all the years in appeal.
Aggrieved, the Department came up in appeal before the Tribunal. The attention of the Tribunal was drawn to the order of the Commissioner of Income-tax passed under section 264 for the assessment year 1971-72, in which it was found that the father, Shri M.V. Subramaniam, died on July 10, 1970, that the opening debit balance as on April 1, 1970, in his account was Rs.50,527, that during the period he had out of borrowings paid a sum of Rs.33,384 as income-tax and that the borrowings of Rs.83,911 was utilised for the personal purposes of the proprietary business and at 12 percent per annum the interest attributable to such borrowings amounted to Rs.10,069 for the whole year and the same should, therefore, be disallowed. According to the Department, the Appellate Assistant Commissioner was not correct in following the decision of the Bombay High Court in CIT v. H.H. Maharani Shri Vijakuverba Saheb of Morvi (1975) 100 ITR 67. The Department relied upon the following decisions reported in Milapchand R. Shah v. CIT (1965) 58 ITR 525 (Mad.); Roopchand Chabiladass & Sons v. CIT (1967) 63 ITR 166 (Mad.) and O. RM. OM. SP. Firm v. CIT (1964) 52 ITR 907 (Mad.).
On behalf of the assessee, it was pointed out that from the balance -sheet as on March 31, 1972, it would be seen that the assessee had capital account of Rs.1,58,675 and also advance against contracts of Rs.1,53,392,68 which totalled to more than Rs.3 lakhs, as against this, the debit in respect of the father's account was only Rs.22,20,590.96 (?) and that, therefore, there was no justification for disallowing any portion of the interest. Reliance was placed upon the ruling of the Madras High Court in the case of Addl. CIT v. Swaranambigai Motor Service (1977) Tax 47(3) 162. According to the assessee the onus of proof that the borrowed funds had been utilised for non -business purposes of the assessee was on the Department and in this case the diversion for non-business purposes was not done by the assessee but by his father and that there was no material to show that the assessee had diverted any part of the borrowed funds for non-business purposes and that, therefore, there was no justification for disallowing any part of the interest. Considering the balance-sheet as on March 31, 1972, wherein, on the assets side, the assessee's capital was shown a Rs.1,58,675 and the advance against contracts was shown at Rs.1,53,392.68 and the total of the above two aggregated to. more than Rs.3 lakhs and on the debit side the old proprietors account, in respect of which the case of diversion for non -business purposes is made, amounts to only Rs.22,20,590.96(?). The Tribunal came to the conclusion that there is no justification for disallowing any portion of the interest payment claimed by the assessee as relating to non-business purposes. Accordingly, the Tribunal accepted the view taken by the Appellate Assistant Commissioner in all years under consideration.
Learned standing counsel for the Department submitted before us that the Tribunal was not correct in allowing the interest paid on borrowed capital which was utilised for non-business purposes. It was submitted that the Department established that the father of the assessee diverted the borrowed capital for the purpose of non-business activities. Therefore, the Department established that a portion of the borrowed capital was utilised for non-business purposes. Therefore, according to learned standing counsel, the Tribunal was not correct in allowing the interest payment on borrowed capital which was diverted for personals use. Learned standing counsel further submitted that in the present case presumption cannot be drawn that the capital used for personal purposes would have been drawn from the capital contributed by the assessee and not from the capital borrowed. In order to support these contentions, reliance was placed upon the decisions reported in Mir Muhammad Ali v. CIT (1960) 38 ITR 413 (Mad.), wherein it was held that it is for the assessee to prove that each of loans on which he paid interest in the years in question was utilised for his business and that burden the assessee did not discharge. There is really no material on record to sustain any possible contention that the estimates ultimately upheld by the Tribunal were unreasonable. So also reliance was placed upon the decision reported in Kishinchand Chellaram v. CIT (1978) 114 ITR 654 (Bom.) wherein the Bombay High Court held that under section 10(2)(iii), interest paid on borrowed capital will be allowed as a deduction only if the capital was borrowed and used for the purposes of business and that it is used for a purpose other than that of business, then interest to extent to which the capital was so used, will not be allowed as a permissible deduction under the abovesaid provision.
We have heard learned standing counsel for the Department and perused the record carefully. The fact remains that the assessee's father died on July 10, 1970. The first assessment year after the father's death was the assessment for the accounting year relevant to the year ending March 31, 1972. In the balance-sheet as on March 31, 1972, on the credit side, the assessee's capital account was shown at Rs.1,58,675 and the advance against contracts was shown at Rs.1,53,392.68. The total comes to Rs.3 lakhs. On the debit side, the old proprietor's account in respect of which the case of diversion or non-business purposes is made, amounts to Rs.22,20,590.96(?). According to the Department, they have clearly established that a portion of the borrowed capital was utilised by the father of the assessee for non -business purposes and, therefore, the interest paid thereon cannot be allowed as a deduction under section 36(l)(iii). According to the Tribunal, when an assessee had invested his own capital in his business and also borrowed moneys for the purpose of his business, any subsequent withdrawal for his personal use would be presumed to be out of his capital and would not entitle the Department to disallow a part of the interest paid. But the Department pointed out that this is subject to the proof given by the Department that a particular portion of the borrowed capital was utilised by the assessee for non-business purposes. According to the Department, it was clearly established that the father of the assessee had utilised a portion of the borrowed capital for non-business purposes, in such a case it was submitted that interest cannot be allowed on such borrowing capital, which was utilised for non-business purposes. In the order, the Tribunal failed to consider the submission made by the Department that they have established that a portion of the borrowed capital was utilised by the father of the assessee for non-business purposes. The facts on record would clearly go to show that the father of the assessee had definitely diverted a portion of the borrowed capital for his own purposes and not for business purposes. In such a case, it cannot be said that there can be a presumption that a part of the capital would have been diverted for non-business purposes not from the borrowed capital but from the capital contributed by the assessee. In the absence of such an element in the facts arising in the present case, we are unable to subscribe to the view of the Tribunal that the assessee is entitled to deduction under section 36(1)(iii) with regard to the interest paid on borrowed capital, which was utilised by the assessee's father for non-business purposes. In that view of the matter, we answer the question referred to us in the negative and in favour of the Department. There will be no order as to costs.
M.B.A./1527/FCOrder accordingly.