Interest payments made by the assessee were not deductible under Section 12(2) of the Indian Income-tax Act because they were not incurred solely for the purpose of making or earning the interest income.

Headnote:
INCOME TAX - Section 12(2) - Interest paid on borrowed money - Not deductible - Not incurred solely for the purpose of making or earning the income.
Fact of the Case:

The assessee had various sources of income, including interest on fixed deposit. She borrowed money for household expenses, purchasing jewellery, and advance tax payment, and paid interest on these borrowings. She claimed to deduct these interest payments from her interest income under Section 12(2) of the Indian Income-tax Act.
Finding of the Court:

The Tribunal negated the assessee's claim, holding that the interest payments were not incurred solely for the purpose of making or earning the interest income.
Issues: Whether the interest payments made by the assessee were deductible under Section 12(2) of the Indian Income-tax Act.
Ratio Decidendi: The purpose of the expenditure incurred must be in order to earn the income. The expenditure may be incurred for any commercial purpose, but there must be a connection or a nexus between the expenditure incurred and the income earned. In this case, the interest payments were not connected with the earning of the interest income. The purchase of jewellery, household expenses, and advance tax payment did not facilitate the earning of the income.
Final Decision: The assessee's claim for deduction of interest payments under Section 12(2) was denied.

Judgment

1. This reference raises a fairly short and simple question.

The assessee for the assessment years 1949-50 and 1950-51 had various sources of income and one of the sources of income was interest on fixed deposit. That income was assessable to tax under Section 12 as being an income from "other sources." In the year 1949-50, she received interest on fixed deposit in the sum of Rs. 2,256-0-0 and in the year 1950-51 she received a sum of Rs. 2,904-0-0.

Now, in these two years, she borrowed various sums of money for the purpose of meeting her household expenses, purchasing jewellery and meeting advance tax payment and she had to pay interest on these borrowings. In the year 1949-50, she paid Rs. 1,648-0-0 as interest and in the year 1950-51 she paid Rs. 2,530-0-0 as interest. The assessee claimed to deduct these two 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. The Tribunal has negatived her claim and the assessee has come on this reference.

2. Before we examine the facts, it is necessary, first, to turn to the section itself The deduction which is permissible under Sub-section (2) of Section 12 is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax. Therefore, in order to decide whether a deduction is permissible under Sub-section (2), we have to examine the nature of the expenditure. The purpose for which the expenditure is incurred must be in order to earn the income. The expenditure may be incurred for any commercial purpose.

The connection between the expenditure and the earning of the income may not be direct. However indirect the connection may be, there must be a connection or a nexus between the expenditure incurred and the income earned. If we apply this test to the facts of this case, it is clear that the expenditure incurred by the assessee which she claims as a deduction under Sub-section (2), has no connection whatsoever whether direct or indirect with the Income she has earned on her fixed deposit.

For the sake of argument, confining ourselves to the case of jewellery, the position put simply is this: The assessee wants to purchase some jewellery, she has no spare cash with her, she borrows money to purchase jewellery and on the borrowing she has to pay interest. It is this interest which she pays which she claims is a permissible deduction under Sub-section (2) of Section 12. Now, the purpose for which this interest was paid was in order that she should have money to buy the jewellery. This is clearly the purpose and obviously that purpose has no connection whatever direct or indirect with the income which she earns from her fixed deposit.

The purchase of jewellery does not facilitate the earning of the income. Her fixed deposit is not affected by the fact of her purchasing the jewellery or not purchasing the jewellery. But what is rather ingeniously urged by Mr. Mehta is that the assessee had the option either of taking the money from the fixed deposit and thereby reducing the income or borrowing money and paying interest on it. Inasmuch as she exercised the option of borrowing money, she preserved the source of the income and therefore this expenditure is an allowable expenditure.

3. Now, what Sub-section (2) emphasises is the purpose for which the expenditure is incurred. The Court is not concerned with the motive of the assessee, and what Mr. Mehta in fact asks us to do is to probe into the motive of the assessee. It may be that the assessees motive was to save her fixed deposit and interest accruing from it and to purchase jewellery by means of loan borrow-ed from some person or other. But that consideration is entirely irrelevant. What we are concerned with is the actual action on the part, of the, assessee and not the action she could have taken under the circumstances.

If she had chosen to purchase this jewellery by withdrawing money from the fixed deposit, then und

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