1961-VIL-83-AP-DT

Equivalent Citation: [1963] 47 ITR 469 (AP)

ANDHRA PRADESH HIGH COURT

CASE REFERRED NO. 19 OF 1960

Dated: 16.11.1961

COMMISSIONER OF INCOME-TAX

Vs

GOPIKRISHNA MURALIDHAR

For the Petitioner : C. Kondiah

Bench

CHANDRA REDDY, CJ. AND VENKATESAM, J

JUDGMENT

Chandra Reddy, CJ.-

This reference raises the following question, which is a very simple one:

"Whether, in the particular facts of the case, the amount of Rs 13,500 is properly disallowable from and out of the assessee's claim for interest payment in respect of its borrowals in the year of account ?"

The assessee is a Hindu undivided family carrying on business on an extensive scale with a capital of nearly Rs 20,00,000 (twenty lakhs). During the year ended 9th November, 1950, the assessee made large borrowals for purposes of his business and paid interest amounting to Rs 93,611 on these borrowals. In the course of that year, the assessee withdrew from the business from time to time Rs 1,77,984 for his personal expenses. The Income-tax Officer disallowed a sum of Rs 13,500 representing the interest upon Rs 1,77,984, since he thought that the borrowals amounting to Rs 1,77,984 were made in the name of the business for his personal purposes. According to him, money was withdrawn from the books of account to meet the personal expenditure of the assessee and, as this sum of money was not actually used for the business, the interest paid thereon could not be allowed as permissible deduction.

On appeal, the Appellate Assistant Commissioner reached the conclusion that the assessee could claim this deduction as it was the interest paid on capital borrowed for the purpose of business. This is what the Commissioner says :

"Out of Rs 93,611, interest paid on capital borrowed, Rs 13,500, was disallowed as interest on amounts withdrawn specifically to meet personal expenses. The appellant had withdrawn during the accounting year Rs 1,77,984 as personal expenses. The appellant claimed that the personal drawing would go only to deplete his capital and whatever amounts were borrowed were for business purposes. Unless the Income-tax Officer is able to prove that the particular amount was borrowed through the business for personal expenses, it cannot be said that the amounts borrowed from time to time were not for business but part of it could be for personal expenses. It would, therefore, be upheld that the interest so paid on capital borrowed was for purposes of the business".

Aggrieved by this order, the department carried the matter in appeal to the Income-tax Appellate Tribunal. The Tribunal dismissed the appeal holding that, since the assessee had invested substantial capital in the business, it had every right to withdraw sums of money even out of its borrowings.

However, on the request of the Commissioner, the Tribunal referred the question set out above under section 66(1) of the Indian Income-tax Act.

It is urged on behalf of the department by Sri Kondiah that the interest paid on any borrowing made for the personal use of the family would not enable the family to claim deduction out of the income of the business of the family as it could not be described that the capital was borrowed for the purpose of business within the ambit of section 10(2)(iii) of the Income-tax Act, which recites :

"Such profits or gains shall be computed after making the following allowances, namely:

 (iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid".

The learned counsel maintains that since the capital borrowed was utilised by the family for personal use, no relief could be claimed under that clause.

We do not think that we can give effect to this argument. Indisputably, these amounts were borrowed only for the purpose of the business of the family. The assessee drew out from time to time various sums of money aggregating to Rs 1,77,984 from the business. It is not a case where any particular sum purporting to be borrowed on behalf of the business was spent for household expenses. This is a case where the loans were taken for carrying on the business but the family used to withdraw some amounts from the business whenever occasions arose. The family was surely entitled to withdraw from the capital supplied by it with the result of the capital being depleted. There is, therefore, no substance in the submission that the fact, that part of the amount borrowed was later on used for personal expenses, would deprive the assessee of the benefits of clause (iii) of sub-section (2) of section 10.

The judgment of the Bombay High Court in Bhuriben Lallubhai v. Commissioner of Income-tax [1956] 29 ITR 543 is in point. In that case, the assessee who borrowed various sums of money for the purpose of meeting the household expenses, such as purchasing jewellery, etc., claimed to deduct these sums from the interest earned by her from her fixed deposit and her claim was based on section 12(2) of the Indian Income-tax Act. Chagla C.J. and Desai J. agreed with the contention of the department that since the expenditure in question was unconnected with the income she had earned on her fixed deposit, she could not have recourse to section 12(2). It is only when a connection is established between the expenditure and the earning of the income that an assessee would be entitled to relief under section 12(2). That ruling does not render any assistance to the department. In our opinion, no exception could be taken to the view taken by the Appellate Assistant Commissioner concurred in by the Tribunal.

In the result, our answer to the reference is against the department. There will be no order as to costs.