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1986 DIGILAW 239 (KAR)

Sunandamma v. Commissioner of Income-tax

1986-06-06

MOHAMMAD SHARIF, N.D.VENKATESH

body1986
JUDGMENT K. Jagannatha Shetty, Actg. C.J.—This is a reference under section 256(1) of the Income Tax Act, 1961 ("Act" for short). The following questions have been referred by the Income Tax Appellate Tribunal, Bangalore Bench : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest amount of Rs. 2,000 payable on the estate duty cannot be deducted out of the property income ? 2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of interest of Rs. 3,960 from her income either under the head 'Business' or under the head 'Other sources' ?" 2. The assessee is an individual and a co-widow of late Sri K. Gururajachar. Gururajachar died on February 9, 1969, leaving behind the assessee and the other widow, Smt. Bhoomiamma, with extensive business and large properties. However, the assessee and the other widow could not pay estate duty payable in respect of the estate of Sri Gururajachar. They obtained annual instalments for payments of the same subject to payment of interest. For the assessment year 1972-73, the interest payable was Rs. 2,000 being the assessee's share only. Before the Income Tax Officer, the assessee made a claim for deduction of that amount under section 24(1)(iv) of the Act. The Income tax Officer disallowed the claim on the ground that it was not an annual charge coming within the purview of that section. 3. The assessee then appealed to the Appellate Assistant Commissioner who also upheld the disallowance made by the Income Tax Officer. 4. The assessee thereafter appealed to the Tribunal. The Tribunal also agreed with the view taken by the Income Tax Officer stating that the amount of interest claimed is not an annual charge or annual liability on the property and, therefore, the deduction claimed could not be allowed under section 24(1)(iv). 5. The assessee claimed another deduction. That was in regard to the interest of Rs. 3,960 which arose in this way. 6. The late husband of the assessee was a partner of Hotel Tourist. He died on February 9, 1969. Upon his death, the balance-sheet of the firm was drawn up. The balance-sheet showed total assets of Rs. 1,64,465 (excluding debit balance in the accounts of the deceased of Rs. 60,717) including about Rs. 3,960 which arose in this way. 6. The late husband of the assessee was a partner of Hotel Tourist. He died on February 9, 1969. Upon his death, the balance-sheet of the firm was drawn up. The balance-sheet showed total assets of Rs. 1,64,465 (excluding debit balance in the accounts of the deceased of Rs. 60,717) including about Rs. 89,000 shown as debit balance in the name of Smt. Bhoomiamma, the other wife of late Sri Gururajachar. The total liabilities, excluding the capital account of the late Gururajachar but including the capital as well as the accumulated profits in the accounts of the other three partners of the firm, viz., P. Vadiraja Rao, B. Ratnakara Rao and P. N. V. Upadhyaya, were Rs. 1,45,182. On the death of Shri Gururajachar, what was done was the transfer of all the above assets and liabilities in equal portions to the widows of the deceased, viz., the assessee and Smt. Bhoomiamma. Immediately, thereafter, a fresh partnership was formed with these two widows as partners with a capital of Rs. 20,000 each, the other partner being Vadiraja Rao and three nieces of the assessee. In the new firm's books, the capital account of each of the two ladies was shown at Rs. 20,000 each, that of Vadiraja Rao at Rs. 10,000 and the three nieces at Rs. 5,000 each. The liabilities of the old firm to Vadiraja Rao and two others were taken over by the two ladies and it is on these liabilities which are shown as loans taken by these two ladies that interest at 9 per cent. had been charged and paid. 7. The amount of interest paid thereon was Rs. 3,960 and that has been claimed against the income from the lease rent from Neo Mysore Cafe building. That was claimed as a deduction under section 57(ii) and (iii) of the Act. Both the Income Tax Officer and the Appellate Assistant Commissioner disallowed the claim. The Tribunal has also agreed for the following reasons : "What is allowable under section 57(iii) is expenditure laid out or expended wholly and exclusively for the purpose of making or earning income. That was claimed as a deduction under section 57(ii) and (iii) of the Act. Both the Income Tax Officer and the Appellate Assistant Commissioner disallowed the claim. The Tribunal has also agreed for the following reasons : "What is allowable under section 57(iii) is expenditure laid out or expended wholly and exclusively for the purpose of making or earning income. Not only has the interest payable to the three persons mentioned above nothing to do with making or earning income of the lease rent from Neo Mysore Cafe building so that it cannot be said that it is expenditure for the purpose of making or earning income but also no nexus whatever has been established between the income from leasing of Neo Mysore Cafe building and the interest payable to the three persons." 8. It is seen from the above finding that the Tribunal has categorically stated that the claim cannot be allowed under section 57(iii) as the interest payable to the three persons has nothing to do with the making or earning of the income or leasing of Neo Mysore Cafe building. It may also be noted that the Tribunal has stated that the assessee had shares in other buildings as well as in other businesses and it cannot be said that it was only by the lease of Neo Mysore Cafe building that the liabilities of the three persons could have been met. 9. So far as the first question is concerned, it hardly poses any problem for answering it. Section 24(1)(iv) of the Act envisages deduction of an annual charge from the income from property. Section 27(iv) defines "annual charge" to mean a charge to secure an annual liability, but does not include any tax in respect of property or income from property imposed by a local authority or the Central or a State Government. 10. The assessee claimed deduction of Rs. 2,000 which represents the interest payable on the instalments of the estate duty payable. First of all, the estate duty cannot be regarded as an annual charge. It is only a charge on the assets under section 74 of the Estate Duty Act. The annual instalments obtained by the assessee cannot be regarded as an annual charge much less the interest payable thereon. Therefore, the assessee cannot claim deduction of the interest amount of Rs. 2,000 payable on the estate duty. 11. It is only a charge on the assets under section 74 of the Estate Duty Act. The annual instalments obtained by the assessee cannot be regarded as an annual charge much less the interest payable thereon. Therefore, the assessee cannot claim deduction of the interest amount of Rs. 2,000 payable on the estate duty. 11. Turning now to the next question as to whether the assessee was entitled to a deduction of interest of Rs. 3,960 from her income either under the head "Business" or under the head "Other sources", it may be stated that this also cannot be allowed in view of the clear finding recorded by the Tribunal that the payment of interest has nothing to do with the making or earning of the income or leasing of Neo Mysore Cafe building. When that finding is not shown to have been illegal or erroneous, the answer to the second question should, therefore, be in the affirmative, since it cannot be deducted under section 57(iii) of the Act. 12. In the result, we answer both the questions in the affirmative and against the assessee. In the circumstances of the case, we make no order as to costs.