Interest paid on borrowings used to pay income tax or annuity deposits is not allowable as a deduction.

( 1 ) THIS reference arises out of the income-tax assessment of M. M. Thapar of Calcutta, the assessee, in the assessment years 1965-66 to 1969-70, the previous years being the financial years from 1964-65 onwards. The facts found and/or admitted are, inter alia, that the assessee had during the said assessment years earned taxable income, but, for payment of tax, he borrowed money. In the assessments, he claimed deductions of the interest paid on such borrowings.

( 2 ) THE Income-tax Officer rejected the assessee's claim. On further appeal, the Appellate Assistant Commissioner took the view that the purpose of the borrowing, on which interest was paid, was payment of taxes and not investment and, therefore, the assessee was not entitled to any deduction. , It was also urged before the Appellate Assistant Commissioner that a part of such interest paid was attributable to loans raised for payment of annuity deposit by the assessee and such interest should be allowed as an expenditure under Section 57 of the Income-tax Act, 1961. The Appellate Assistant Commissioner held that an annuity deposit did not possess the characteristics of income assessable under the head " Other sources" and, therefore, no deduction was permissible on account of interest paid on money borrowed for the purpose of making such deposits.

( 3 ) BEING aggrieved, the assessee preferred a further appeal before the Income-tax Appellate Tribunal. The Tribunal, following a decision of this court in the case of Mannalal Ratanlal v. Commissioner of Income-tax [1965] 58 ITR 84 (Cal), held that the assessee was not entitled to any deduction in respect of interest paid on money borrowed for payment of tax. As to the claim for deduction of interest on borrowings to pay annuity deposit the Tribunal did not accept the same as an allowable deduction under Section 12 (2) of the Indian Income-tax Act, 1922, holding that the interest paid had no connection with the interest earned from annuity deposits. The appeals of the assessee were dismissed.

( 4 ) BEING aggrieved the assessee has initiated the present reference under Section 256 (1) of the Income-tax Act, 1961, and the following questions have been referred :"1. Whether, on the facts and in the circumstances of the case, -the Appellate Tribunal was right in holding that the interest paid to Northern India Share

Dealers Private Ltd. on borrowings utilised for payment of income-tax was not an allowable deduction in computing the total income of the assessee ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest paid to Northern India Share Dealers Private Ltd. on borrowings utilised for payment of annuity deposit was not an allowable deduction in computing the total income of the assessee ?"

( 5 ) DR. Debi Pal, learned counsel for the assessee, placed before us a Circular No. C. B. R. D. O. C. No. 4 (86)-I. T. /49 dated the 4th February, 1950, where it has been directed that where deduction for interest on loans was claimed against business profits, the fact that the borrowed money was immediately utilised for payment of tax would not necessarily negative the claim.

( 6 ) DRAWING inspiration from this circular, Dr. Pal contended that whatever be the decision of this court in the case of Mannalal Ratanldl [1965] 58 ITR 84 (Cal), the revenue ought to have allowed the deduction claimed on the basis of the same. It appears to us, however, that this circular has no application in the facts and circumstances of the instant case. The subject of the circular is Section 18a-demands met by loans. In this case, the clear case of the assessee is that the borrowings were made specifically for payment of income-tax and not for any other business purpose.

( 7 ) THE matter, in our opinion, is concluded by the decision in Mannalal Ratanlal [1965] 58 ITR 84 (Cal), where it was held by a Division Bench of this court that the interest paid on any sum borro