Case: Madhav Prasad Jatia Vs. Commissioner Of Income Tax, U.P., Lucknow

1. The assessee, Smt. Indermani Jatia, widow of Seth Ganga Sagar Jatia of Khurja, carried ong and other businesses and derived income from various sources such as investment in shares, properties and businesses. However, the capital, assets and income in respect of different sources of income were incorporated in one common set of books. With a view to commemorate the memory of her deceased husband, on October 21, 1955 she promised a donation of Rs. 10 lacs for setting up an Engineering College at Khurja to be named "Seth Ganga Sagar Jatia Electrical Engineering Institute Khurja". She also promised a further sum of Rs. 1.5 lacs for the construction of a Female Hospital at Khurja but this subsequent donation of Rs. 1.5 lacs was to include the total interest that was to accrue on the sum of Rs. 10 lacs earlier donated to the college. In pursuance of the promise made on October 21, 1955 she actually made over a sum of Rs. 5.5 lacs by depositing the same in a joint account opened in the names of the District Magistrate, Bulandshahr and Smt. Indermani Jatia for the college while the balanc e of Rs. 4.5 lacs was left with the assessee and was treated as a debt to the Institution and interest thereon at 6% per annum with effect from October 21, 1955 was to be finally deposited in the Technical Institute account. These facts become clear from a certificate dated October 17, 1958, issued by the District Magistrate, Bulandshahr which was produced before the Appellate Tribunal2. The aforesaid transaction came to be recorded in the books of the assessee as follows: At the beginning of the accounting year (Samvat yearg period 135 to) relevant to the assessment year 195758 the capital account of the assessee showed a net credit balance of Rs. 23, 80, 753. Initially on November 21, 19 55, a sum of Rs. 10 lacs was debited to her capital account and corresponding credit was given to the account of the said Institute. At the close of the said accounting year (i.e. on) after debiting the aforesaid sum of Rs. 10 lacs the capital account showed a net credit balance of Rs. 15, 06, 891. Thereafter, during the same year of account the assessee actually paid only a sum of Rs. 5.5 lacs to the institution on January 7, 1956 from the overdraft account which she had with the Central Bank of India Ltd., Aligarh. At the beginning of the accounting year the amount outstanding in the overdraft was Rs. 2, 76, 965; further overdrafts were raised during the accounting year with the result that at the end o f the year the liability of the assessee to the bank was Rs. 9, 55, 660; among the further debits to this account during the year was said sum of Rs. 5.5 lacs paid to the Engineering College on January 7, 1956. The balance of the promised donation , namely, Rs. 4.5 lacs was, as stated earlier, treated as a debt due by her to the Institute and accordingly she was debited with interest thereon at 6% per annum with effect from October 21, 19553. In the assessment proceedings for the assessment years9 and0 the assessee claimed the deduction of three. 20,, Rs. 25, 470/and Rs. 18, 445/being the respective items of interest paid by her to the bank on Rs. 5.5 lacs during the Samvat years relevant to the said assessment years. The assessee contended that she had preferred to draw on the overdraft account of the bank for the purpose of paying the institution in order to save her income earning assets, namely, the shares, which she would have otherwise been required to dispose of and, therefore, the interest paid by her should be allowed. As regards interest on the remaining sum of Rs. 4.5 lacs (which was left as a loan with the assessee) that was debited to her account, the assessee urged that she was also entitled to claim the same as a permissible deduction; the claim in respect thereof, however, was made for the assessment years9 and. As regards the three sums paid by way of interest on Rs. 5.5 lacs to the bank, the taxing authorities took the view that said claim for deduction was not admissible either against business income under s. 10(2) or against income from investments under s. 12(2) of the Indian Income Tax Act, 1922. So also the claim for deduction of interest credited to the college account on Rs. 4.5 lacs was disallowed. The assessee preferred appeals to the Appellate Tribunal. It was contended on behalf of the assessee that she had promised a donation of Rs. 10 lacs to th e Engineering College on October 21, 1955, that the obligation to pay the said amount arose on November 21, 1955 when the amount was debited to her capital account and the corresponding credit was given to the account of the institution, and that out of this total donation a sum of Rs.5.5 lacs was actually deposited in the joint account of the assessee and the District Magistrate, Bulandshahr on January 7, 1956 for which the overdraft with the Central Bank was operated and hence the interest was deductible as business expenditure. As regards interest on Rs. 4.5 lacs that was debited to her account and credited to the Institutes account it was urged that this balance amount was kept in trust for the institution an d hence the accruing interest thereon which was debited to her account should be allowed as a deduction. In support of these submissions a certificate issued by the District Magistrate, Bulandshahr dated October 17, 1958 was produced before the Tribunal. The Appellate Tribunal, however, confirmed the disallowance of interest claimed in respect of the sum of Rs. 5.5 lacs holding that the said sum of Rs. 5.5 lacsn from the bank was not borrowed for business purposes bu t was borrowed for making over the donation and, therefore, the claim could not be sustained under s. 10(2) ofthe Income Tax Act, 1922. As regards the interest accruing on the sum of Rs. 4.5 lacs in favour of the Engineering College, the Appel late Tribunal held that no donation of that sum had been made by the assessee, that it was at best a promise by the assessee to the District Magistrate to pay that amount for purpose of charity and the mere entries in the assessees own account book crediting the trust, which had yet to come into existence, would not amount to a gift or charity for a trust and as such the interest credited to the account of the Engineering College was also disallowed. Meanwhile, Smt. Indermani Jatia died and her legal heir Madhav Prasad Jatia was substituted in the proceedings4. On the question whether the interest on Rs. 5.5 lacs was deductible for the assessment years9 and, the Tribunal declined to make any re ference to the High Court, whereupon the assessee applied to the High Court under s. 66(2) and upon the application being allowed, the Tribunal referred the question whether interest on the overdraft of Rs. 5.5e sums ofRs.20,107 (for t he assessment year25, 470 (for the assessment year) andRs.18, 445 (for the assessment year 1959d to the Central Bank was allowable as a deduction under s. 10(2)(iii) or 10(2) (xv) of the Indian Income Tax Act, 1922 (being Income Tax Reference No. 775 of 1970). As regards the deduction of interest onRs.4.5 lacs claimed for the assessment years9 and, the Tribunal itself made a reference to the High Court under s.) andreferred for the opinion of the High Court the question whether in the facts and circumstances of the case the interest credited by the assessee to the account of Ganga Sagar Jatia Engineering College on the sum ofRs.4.5 lacs and accretion thereto was an admissible deduction for each of the said two years (being Income Tax Reference No. 342 of 1964). The High Court heard and disposed of both the references by a common judgment dated September 22, 1971. In the Reference No. 775 of 1970, the case of the assessee was that there was an obligation to payRs.10 lacs to the Engineering College, that for the time being the assessee decided to payRs.5.5 lacs, that it was open to the assessee to pay the amount from her business assets or to preserve the business assets for the purposes of earning income and instead borrow the amount from the bank and that she had accordingly borrowed the amount from the bank and, therefore, since the borrowing was made to preserve the business assets, the interest thereon was deductible under s. 10(2) (iii) or 10(2) (xv) of the Act. The High Court observed that there was nothing to show that the assessee would necessarily have had to employ the business assets for making payment of that amount, and secondly, it was only where money is borrowed for the purposes of business that interest paid thereon becomes admissible as a deduction, and since, in the instant case, the sum ofRs.4.4 lacs was admittedly borrowed from the Bank for making payment to the Engineering College it was not a payment directed to the business purposes. According to the High Court the mere circumstance that otherwise the assessee would have to resort to the liquidation of herg assets would not stamp the interest paid on such borrowings with the character of business expenditure. After referring to the decisions one of the Bombay High Court in Bai Bhuriben Lallubhai v. Commissioner of, Bombay North Cutch and Saurashtra and the other of the Calcutta High Court in Mannalal Ratanlal v. Commissioner ofx Calcutta, the High Court rejected the contention of the assessee and held that interest paid onRs.5.5 lacs in any of the years was not deductible either under s. 10(2) (iii) or 10(2) (xv) of the Act and answered the questions against the assessee. As regards the question referred to it in Income Tax Reference No. 342 of 1964, the High Court took the view that there was nothing on record before it to establish that the assessee had actually donated the entire amount ofRs.10 lacs to the Engineering College, that the certificate issued by the District Magistrate, Bulandshahr on October 17, 1958 merely showed that a balanc e ofRs.4.5 lacs was left as a loan with the assessee and that the interest accruing thereon from the date of the initial donation "was to be finally deposited in the account of the Technical Institute" and that though the assessee had made entries in her account books crediting the trust with the interest on the amount, the trust had not yet come into existence and as such the amount credited represented her own funds and lay entirely within her power of disposition. With such material on record, the High Court confirmed the Tribunals view thatRs.4.5 lacs had not been donated by the assessee on October 21, 1955 in favour of the Engineering College and, therefore, the interest credited by the assessee in favour of the Institute on the said sum and the accretion thereto continued to belong to the assessee and as such she was not entitled to the deduction claimed by her and accordingly the question was also answered against the assessee. On obtaining special leave the original assessee represented by her legal heir has preferred Civil Appeals Nos.3 of 1972 to this Court.

Court's reasoning:
At the outset we would like to say that we do not find any substance in the contention of learned counsel for the appellant that there has been any confusion of the issue o r that any wrong approach has been adopted by the taxing authorities, the Tribunal or the High Court. After going through the Tribunals order as well as the judgment of the High Court we are clearly of the view that the case of the assessee has been considered both by the Tribunal as well as by the High Court under s. 10(2) (iii) or 10(2)(xv)and notunder s. 12(2). In fact, in Reference No. 775 of 1970 the questions framed by the Tribunal in terms referred to s.10(2)(iii)and10(2)(xv)andproceeded to seek the High Courts opinion as to whether the sums representing interest paid by the assessee to the Central Bank on the overdraft ofRs.5.5 lacs for the concerned three years were allowable as a deduction under either of the said provisions of the Actandthe High Court after considering the matterandthe authorities on the point has come to the conclusion that such interest was not allowable as a deduction under either of the said provisions It is true that the High Court did refer to the decision of the Bombay High Court in Bai Bhuribens case (supra) but that decision was referred to only for the purpose of emphasizing 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 irrelevantandTurning to the question of interest credited by the assessee during the assessment years0 to the account of the Engineering College on the sum ofRs.4.5 lacsandthe accretion thereto the real question is whether the gift or donation ofRs.4.5 lacswas completeanda trust of that amount came into existence in favour of the college as has been contended for by the assessee. The only material on which reliance has been placed by the assessee in this behalf consists of the entries made in the assessees books of accountsandthe certificate dated October 17, 1958 issued by the District Magistrate,r but from this material it is difficult to draw the inference suggested by the counsel for the appellant. In our view both the Tribunal as well as the High Court were right in taking the view that the certificate dated October 17, 1958 was of no avail to the ass essee inasmuch as it merely stated that the assessee had promised a donation ofRs.10 lacs on October 21, 1955, out of whichRs.5.5 lacs were deposited in the joint account maintained in the name of the assesseeandthe District Magistrate,shahr for the collegeandthe remaining sum ofRs.4.5 lacswas left as a loan with the assesseeandinterest thereon at 6% per annum was to be finally deposited in the Technical Institute account. The Tribunalandthe High Court were also right in ta king the view that beyond making entries in the books of account of the assessee there was no material on record to show that the assessee had actually made over a sum ofRs.4.5 lacsto the college or that the college had accepted the said donation with the result that the amount credited to the college account in her books represented her own fundsandlay entirely within her power of dispositionandthat being so, the interest credited by the assessee on the said sum ofRs.4.5 lacsandthe accretion thereto continued to belong to the assessee,, therefore, she was not entitled to the deduction in respect of such interests. Counsel for the assessee attempted to contend that the obligation to make over the said sum ofRs.4.5 lacscould be said to have become enforceable on the basis of promissory estoppel but in our view, no material has been placed on record by the assessee to show that acting on the promised donation the college authorities had actually incurred any e xpenditure towards construction or acted to their prejudice during the accounting period relevant to the assessment years0 so as to support the plea of promissory estoppel. Of course, if in any subsequent years the assessee is in a position to place any material before the taxing authorities or the Tribunal or the Court which would support the plea of promissory estoppel the position in such years may be different. It is thus obvious that if no trust in favour of the co llege in regard to the amount ofRs.4.5 lacscould be said to have come into existence either on October 21, 1955 or on November 21, 1955 or on any other subsequent date during the relevant years, no deduction in respect of interest credited by the assessee to the account of the college over the said sum can be allowedIn the circumstances, in our view, the High Court rightly answered the questions referred to it against the assessee in both the references.