Interest paid on a loan taken to pay income tax is not an allowable deduction under the IT Act.

SHANKAR PRASAD MITRA, J.

1. THIS is a reference under s. 66(1) of the Indian IT Act, 1922. The assessment year is 1952-53. The corresponding accounting year is 2007-8 Dewali. The assessee is a partner in the registered firm of M/s Sadhuram Tolaram. From this firm the assessee derived one-third of the income in each of the three heads, namely, property, business and other sources. In the year of account relevant to the said assessment year, the assessee borrowed a certain sum of money for the purpose of paying income-tax in respect of assessments for preceding years. The assessee paid a sum of Rs. 1,934 (Rupees one thousand and nine hundred and thirty-four) as interest on this borrowing.

2. THE ITO refused to allow deduction of this sum of interest from the total income of the assessee. Before the AAC the assessee contended that if he had not borrowed money, he would have been compelled to liquidate part of his income yielding assets, which would have resulted in the reduction of his assessable income. It was said that the borrowings was for the purpose of maintaining income-yielding assets intact. THE AAC held that there was no connection between the expenditure incurred and the income earned. He confirmed the disallowance by the ITO. On appeal to the Tribunal, the assessee contended that :

(1) his share of interest income from M/s Sadhuram Tolaram was Rs. 20,394 (Rupees twenty thousand and three hundred and ninety-four);

(2) there was litigation between the partners of the firm in the relevant accounting year, which prevented the withdrawals of money for paying the income-tax dues of the assessee and which necessitated the loss that the assessee had obtained;

(3) to the extent the borrowing had been made, the income-yielding asset had been preserved which otherwise would have been liquidated and would have interfered with the income brought to assessment; and

(4) the payment of interest was an allowable deduction against the income.

The Departmental Representative argued before the Tribunal that in the absence of connection between the expenditure and the income sought to be taxed, the payment of interest claimed ought not to be allowed.

3. THE Tribunal has held that the assessee was not entitled to claim the allowance of interest as a charge against the taxable income.

4. BOTH the AAC and the Tribunal have relied on the judgment of the Bombay High Court in Bai Bhuriben Lallubhai vs. CIT. (1956) 29 ITR 543 On these facts the following question has arisen :

"Whether, on the facts and in the circumstances of the case, the payment of Rs. 1,934 (Rupees one thousand and nine hundred and thirty-four) constituted an allowable deduction against the 1/3rd share of income from M/s Sadhuram Tolara ? "

In view of the points urged before the AAC and the Tribunal, Mr. J.C. Pal, learned counsel for the assessee, has argued that the connection between the income and the expenditure may be direct or indirect. In the instant case, continues Mr. Pal, there was an obligation to pay the income-tax; the assessee had liquid money with the firm of Sadhuram Tolaram; because of quarrel between the partners of the firm the assessee could not withdraw the money from the firm to pay his income- tax dues; the assessee, in the circumstances, was forced to make a saving which had an income; and for the purpose of paying tax on that forced income the assessee was compelled to borrow money. In other words, according to Mr. Pal, it is a case of compulsory saving which necessitated compulsory borrowing to clear off the tax liabilities. Mr. Pal contends that on these facts it is clear that there was a direct or at any rate indirect connection between the income and the expenditure and the tax authorities have wrongly decided this case.

5. IN this reference the assessee is claiming a deduction out of his assessable income which is admittedly liable to tax. If he claims a deduction or allowance it is for him to satisfy the Court that there is some statutory provi