Interest paid on loan borrowed to meet personal liability is not deductible expenditure

 

Commissioner Of Income-Tax vs Om Parkash Behl on 10 September, 1979

Equivalent citations: 1981 132 ITR 342 P H

Author: B Dhillon

Bench: B Dhillon, J Gupta

JUDGMENT B.S. Dhillon, J.

1. This judgment will dispose of Income-tax References Nos. 73 to 75 of 1974 and No. 62 of 1975. Since the facts are common and a common question of law is involved in these references made under Section 256(1)of the I.T. Act, 1961 (hereinafter referred to as “the Act”), the same are being disposed of by this common judgment.
2. The assessee, Shri Om Prakash Bahi, is a partner in the firm, M/s. Shiv Lal Kanaiya Lal, Delhi. He also carried on his personal business in the name of M/s. Ideal Woollen and Silk Mills, Amritsar. His personal account in the books of the firm, M/s. Shiv Lal Kanaiya Lal, as on 1st April, 1966, showed a debit balance of Rs. 1,16,852. According to the assessee, the other partners of the firm insisted that the assessee should clear the debt and make his contribution to the firm. M/s. Yog Textile Mills, Amritsar, was a sister concern of M/s. Shiv Lal Kanaiya Lal, being a proprietary concern of the assessee’s brother and this concern had a credit balance with M/s. Shiv Lal Kanaiya Lal. The assessee got an amount of Rs. 1,13,500 transferred from the account of M/s. Yog Textile Mills to his personal account in the books of M/s. Shiv Lal Ranaiya Lal in order to clear a major portion of the debt due to the above firm. According to the assessee, this represented an arrangement made by the assessee with his brother for a loan on interest and M/s. Yog Textile Mills charged the assessee interest of Rs. 17,537 for the period from 1st April, 1966, to 31st March,, 1967, relevant to the assessment year 1967-68, Rs. 15,724 for the period from 1st April, 1967, to 31st March, 1968, relevant to the assessment year 1968-69, and Rs. 18,091 for the period from 1st April, 1968, to 31st March, 1969, relevant to the assessment year 1969-70, and Rs. 13,337 for the period from 1st April, 1969, to 31st March, 1970, relevant to the assessment year 1970-71. This claim was disallowed by the ITO on the ground that the amount on which the interest had been claimed was not obtained by the assessee for the purposes of his business but was only obtained by means of book adjustments from M/s. Yog Textile Mills in order to make the payment to M/s. Shiv Lal Kanaiya Lal, Delhi. It was also held by the ITO that as the withdrawals from M/s. Shiv Lal Kanaiya Lal were made by the assessee for meeting his personal expenses and payment of income-tax, etc., it could not be said that the loan obtained from M/s. Yog Textile Mills was utilised by the assessee for business purposes. The ITO, therefore, disallowed the above claims.
3. In the appeal filed by the assessee, the AAC upheld the disallowance for all the four years, firstly, on the ground that the; immediate cause for the liability taken over from M/s. Yog Textile Mills was to reimburse the firm in respect of the personal borrowings and since the loan had not been taken for investment of capital in the firm, but had been taken for the repayment of a personal debt, the expenses claimed were not covered by the provisions of Section 67(3)of the Act, and, hence, was inadmissible against the share income of the assessee from the firm, M/s. Shiv Lal Kanaiya Lal. It was also held by the AAC that it was not allowable against the personal business of the assessee in the name of M/s. Ideal Woollen and Silk Mills because the loan did not represent capital borrowed for the purposes of his personal business as the amount had not been introduced in the personal business and hence the provisions of Section 36(1)(iii)of the Act were not applicable in the facts of the present cases.
4. In the appeal filed before the Income-tax Appellate Tribunal by the assessee, the assessee claimed that his case was not covered by the provisions of Section 36(1)(iii)or Section 67(3)of the Act, but the claim was covered by the provisions of Section 37 of the Act. The Tribunal accepted the appeal and observed as follows in I.T. Refs. Nos. 73 to 75 of 1974. Similar observations were also made in I.T.R. No. 62 of 1975 :

“5. After hearing the learned representatives of the parties and going through the records we are of the opinion that the assessee is to succeed on this point. As already stated earlier, the learned counsel has pressed his claim under the provisions of Section 37(1) of the Income-tax Act, 1961. Thus, we have to examine as to whether or not the assessee’s claim is covered under the provisions of the above section. The assessee, apart from holding shares in the firms, M/s. Shiv Lal Kanaiya Lal, Delhi, and M/s. Indian Traders, was carrying on his personal business in the name of M/s. Ideal Woollen and Silk Mills, Amritsar. As mentioned earlier, his personal account in the books of the firm, M/s. Shiv Lal Kanaiya Lal, Delhi, as on April 1, 1966, showed a debit balance of Rs. 1,16,852. In order to pay off a major portion of the above debit balance, the assessee entered into an arrangement with M/s. Yog Textile, Mills, a proprietary concern of his brother, who transferred a sum of Rs. 1,13,500 appearing as credit balance in the books of the Delhi firm to the credit of the assessee’s personal account. Had the assessee not made this arrangement, he would have either paid the amount out of the capital standing in his personal business or might have resorted to borrowings from outside parties. The position of assessee’s own capital in his personal business on the last date of the accounting period, relevant to the assessment years in question, namely, as on March 31, 1967, March 31, 1968, and March 31, 1969, revealed the following position:

Rs.

  (a)  As on 31-3-1967        2,16,999

  (b)  As on 31-3-1968        2,83,001

  (c)  As on 31-3-1969        2,31,225

With the above capital in his personal   books of account the income

assessed for  each of the assessment years in question in respect of his

personal business was as under :

   Asst. Year              Income From Personal

                                business

                                   Rs.

  1967-68                        30,417

  1968-69                        46,831

  1969-70                        46,170

The total net wealth on which the assessee  was assessed to tax in

respect of each of the assessment years in question is as under :

   Asst. Year           Net wealth

                          Rs.

  1967-68              2,17,134

  1968-69              1,89,110

  1969-70              1,35,398

From the above figures, it appears to us that the assessee’s available capital was not large enough and if the sum of Rs. 1,13,500 has been paid to M/s. Shiv Lal Kanaiya Lal it would have depleted his own capital and affected his personal business. In the event, in order to run his own business, the assessee would have gone to the market for additional borrowings. What the assessee had done in the present case is that instead of borrowing from outsiders he made the necessary arrangements with the proprietary concern of his own brother and has arranged the requisite loan solely for the purpose of keeping his own capital intact. This arrangement, in our opinion, was done by the assessee in the interest of keeping his own business running with the requisite capital at his disposal. In these circumstances, the interest claimed by the assessee on the borrowing from M/s. Yog Textile Mills, was an expenditure laid out or expended wholly and exclusively for the purpose of the assessee’s business and this expenditure was incurred by the assessee in his capacity as a trader in the interest of running his own trade.”

5. On these facts, the following question of law has been referred to this court in I.T. Refs. Nos. 73 to 75 of 1974, for our opinion :

“Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 17,537 for the assessment year 1967-68, Rs. 15,704 for the assessment year 1968-69 and Rs. 10,091 for the assessment year 1969-70, by way of payment of interest to M/s. Yog Textile Mills, Amritsar, was an admissible deduction under Section 37(1) of the Income-tax Act, 1961 ?”

6. In I.T. Ref. No. 62 of 1975, the following question of law has been referred to this court for our opinion :

“Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 13,337 for the assessment year 1970-71, by way of payment of interest to M/s. Yog Textile Mills, Amritsar, was an admissible deduction under Section 37(1) of the Income-tax Act ?”

7. As is clear from what has been stated above, the short question which falls for determination in these cases, is whether the amount of interest claimed by the assessee regarding all the four assessment years, is an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee or not. As is clear from the provisions of Section 37(1)of the Act, any expenditure which is in the nature of capital expenditure or personal expenses of the assessee, cannot be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. It is clear that the ITO recorded a finding of fact, which finding was also affirmed by the AAC, that the debt which the assessee owed to M/s. Shiv Lal Kanaiya Lal, was incurred for his personal expenses. The Tribunal neither reversed this finding of fact nor was it challenged before us by the learned counsel for the assessee. We are, therefore, to proceed on the basis that the debit balance of Rs. 1,16,852 due to M/s. Shiv Lal Kanaiya Lal as on 1st April, 1966, was in connection with the personal expenditure of the assessee. We are of the opinion that, with a view to find out as to whether the claim in question is permissible under the provisions of Section 37of the Act, we have to take the facts as they are. It is not open in law to investigate the motive of the assessee. We are concerned with the actual action on the part of the assessee and not the action which the assessee should have taken under the circumstances. It is not permissible in law, as the Tribunal has done, to bring in suppositions and then to find out whether the claim is allowable or not. The facts as they exist are to be faced and the process of suppositions and eliminations cannot be adopted. The facts as they emerge are clear that the assessee owed a debt which he incurred for personal expenditure and for the payment of income-tax from M/s. Shiv Lal Kanaiya Lal. His brother, who was the proprietor of the sister concern, M/s. Yog Textile Mills, had to his credit a certain amount with M/s. Shiv Lal Kanaiya Lal and for the purposes of paying off his personal expenditure the assessee got the book entry made so as to adjust the amount due to M/s. Yog Textile Mills towards the debt incurred by the assessee from M/s. Shiv Lal Kanaiya Lal. The assessee, as a consequence, had to ‘pay interest for the amount which was got adjusted to M/s. Yog Textile Mills. The Tribunal fell in error in falling a prey to the argument that if the assessee had paid all his debts from his business concern, he would have necessarily required a similar amount for running his business which he had then to borrow-from M/s. Yog Textile Mills and in that case he had to pay interest for that and thus the amount in question should be presumed to have been raised for running the business of the assessee. It is no doubt true that the Tribunal tried to investigate the assets of the business of the assessee and also the wealth of the assessee with a view to find out whether he was in a position to pay off his personal debt to M/s. Shiv Lal Kanaiya Lal, but that investigation and the finding based on that, will in no case entitle us to conclude that the claim made was wholly and exclusively for the purposes of business. The fact which is not in existence cannot be made a fact by suppositions and by looking into the motive of the assessee. If the assessee had raised a loan for paying off his debt to M/s. Shiv Lal Kanaiya Lal and for that he had paid interest, it is obvious that the interest could not be claimed as an allowance from the profits and gains of the business. The claim, which cannot be sustained directly, cannot be allowed to be sustained by adopting an indirect method of suppositions based on the investigation of the motive of the assessee. If, in fact, the assessee had paid some amount from his business to pay off his personal debts to M/s. Shiv Lal Kanaiya Lal and subsequently, as a matter of fact, he needed some amount for running his business and if in that case, he had incurred a loan as a matter of fact, for running his business, it is probable that the assessee could make a claim for the deduction of the amount of interest from the profits and gains of his business, but not in the facts and circumstances of the present case. This view of ours finds support from a judgment of the Bombay High Court in Bai Bhuriben Lallubhai v. CIT [1956] 29 ITR 543, which decision was approved by their Lordships of the Supreme Court in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200. While approving the decision, their Lordships observed as under (p. 207, 208 of 118 ITR):

“It is true that the High Court did refer to the decision of the Bombay High Court in Bai Bhuriben’s case [1956] 29 ITR 543; but that decision was referred to only for the purpose of emphasising one aspect which was propounded by that court, namely, that the motive with which an assessee could be said to have made the borrowing would be irrelevant and that simply because the assessee in that case had chosen to borrow money to buy jewellery it did not follow that she had established the purpose required to be proved under Section 12(2) that she borrowed the money in order to maintain or preserve the fixed deposits or help her to earn interest.”

8. The Allahabad High Court in Madhav Pd. Jatia v. CIT[1973] 87 ITR 298, arrived at a similar conclusion. In that case, the assessee had donated a sum of rupees ten lakhs for the setting up of an engineering college. The assessee raised a loan from a bank for Rs. 5,50,000 for making a part payment of the donation. She claimed allowance on the interest paid to the bank, which allowance was disallowed. An argument was raised before the Allahabad High Court that the assessee in order to save the income-earning assets took a loan and, therefore, the interest paid should be allowed. This contention was repelled and the judgment of the Allahabad High Court was upheld by their Lordships of the Supreme Court in Madhav Prasad Jatia’s case [1979] 118 ITR 200.
9. The contention of Shri Sibal, learned counsel for the respondent, that the Tribunal arrived at a finding of fact that the expenses in question were wholly and exclusively for the purposes of business of the assessee and this court should not interfere with the same, is without any merit. As already observed, the Tribunal did not record a finding that the debt owed by the assessee to M/s. Shiv Lal Kanaiya Lal was not in the nature of his personal expenditure, but the Tribunal fell in legal error when it started investigating the motive of the assessee and ignored the actual fact on the basis of which the decision, whether the claim can be allowed or not, was to be taken. In the process of reasoning, the Tribunal brought in irrelevant and inadmissible factors, such as the motive of the assessee, which, in law, could not be taken into consideration. We are, therefore, of the opinion that the finding recorded by the Tribunal is vitiated.
10. For the reasons recorded above, we hold that the claims made were not admissible under Section 37(1)of the Act, and the Tribunal fell in error in allowing the said deductions. The questions referred to us are answered in favour of the revenue and against the assessee. However, there will be no order as to costs.