B.J. Divan, C.J.

1. In this case, at the instance of the assessee, the following question has been referred to us for our opinion by the Income Tax Appellate Tribunal :

"Whether, on the facts and in the circumstances of the case, the applicant was entitled to claim a deduction of the full amount of interest paid by him to M/s. Dahyabhai Vanmalidas Lavsi, a firm from which he earned income as a partner, for the assessment years 1965-66 and 1966-67 ?"

2. We are concerned in this case with the assessment years 1965-66 and 1966-67, the relevant previous years being Samvat year 2020 and Samvat year 2021 respectively. The assessee is an individual and he was a partner at the relevant time in two firms, Messrs. Indian Textile Traders (hereinafter referred to as "the textile firm") and Messrs. Dahyabhai Vanmalidas Lavsi (hereinafter referred to as "the Lavsi firm"). The account of the assessee with the Lavsi firm showed a debit balance whereas the account of the assessee with the textile firm was to his credit at the end of each respective year. In each firm, the amount of interest payable by the partner to the firm or by the firm to the partner on the amount outstanding at the foot of the account was at the rate of six per cent. The assessee had a 20 per cent share in the Lavsi firm and his wife was a partner in Lavsi firm with a 25 per cent. share. In the textile firm the assessee had a 50 per cent share. At the end of Samvat year 2020, relevant to the assessment year 1965-66, the assessee paid an amount of Rs. 6,934 by way of interest to the Lavsi firm on the amount outstanding at the foot of the account. For Samvat year 2021, relevant to assessment year 1966-67, the assessee paid an amount of Rs. 7,338 by way of interest to the Lavsi firm. The assessee was paid interest at six per cent by the textile firm in respect of the amount standing to his credit and those amounts of interest in each of the assessment years were included in the total income of the assessee for the purposes of taxation. The assessee claimed that he had allowed his amount to remain with the textile firm and had earned interest and he had withdrawn moneys from the Lavsi firm so that ultimately he could earn interest from the textile firm. The Income Tax Officer noted that in the beginning of Samvat year 2020 there was a debit balance of Rs. 93, 769 which rose to Rs. 1,31,310 by the end of the year. He also noted that the debit balance was due to withdrawals by the assessee for the payment of Income Tax, insurance premium, meeting household expenses, etc. The Income Tax Officer found that the debit balance in the past was also due to such payments and not for any investment yielding income. Relying upon the decision of the Bombay High Court in Bai Bhuriben Lallubhai v. Commissioner of Income Tax [1956]29ITR543(Bom) , the Income Tax Officer disallowed the assessee's claim for the interest that he had paid to the Lavsi firm. In the appeal before the Appellate Assistant Commissioner, the same contentions were urged as were urged before the Income Tax Officer. It was also urged before the Appellate Assistant Commissioner that the interest payments to the Lavsi firm were allowed in the past and it was also contended that as the assessee had offered for assessment interest received from the firm, interest paid to the Lavsi firm should be set off and only the balance should be assessed. The Appellate Assistant Commissioner rejected all the contentions of the assessee and confirmed the order of the Income Tax Officer. The matter was taken in further appeal by the assessee to the Tribunal and the Tribunal passed a common order for both the years. The Tribunal found that out of the aggregate amount that the assessee had withdrawn from the Lavsi firm, an amount of Rs. 3,000 had been utilised by him for the purpose of investment in the textile firm. Barring this amount of Rs. 3,000, the rest of the money was borrowed for discharging what were found by the Tribunal to be purely personal liabilities. The Tribunal observed :

"No doubt, the assessee's interest income would have gone down and in that case the assessee would have earned to that extent lower income but if the assessee chose to follow a different course whereby he earned more interest and at the same time he has to pay interest for borrowings for purposes which would not justify deduction of interest paid from the assessee's taxable income, it cannot be held that the taxable interest income should be deemed to have been reduced to the extent of the interest paid which is otherwise not allowable."

3. So, the Tribunal allowed the appeals of the assessee so far as interest on Rs. 3,000 was concerned, that being the amount borrowed from the Lavsi firm for investment in the textile firm and the appeals as to the rest of the amounts of interest were dismissed. Thereafter, at the instance of the assessee, the question set out hereinabove has been referred to us for our opinion.

4. Before proceeding further with the matter, it must be pointed out that under section 37 of the Income Tax Act, 1961, any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "profits and gains of business or profession". In the instant case the Tribunal has found as a matter of fact that barring the amount of Rs. 3,000 which was borrowed from the Lavsi firm for the purpose of investment in the textile firm and to that extent the amount of Rs. 3,000 was borrowed for the earning of income, the rest of the borrowings were for the purposes of a purely personal nature. For this purpose the Tribunal accepted the finding of the Income Tax Officer that barring this amount of Rs. 3,000, borrowings from the Lavsi firm by the assessee were for the purpose of household expenses, for meeting the Income Tax liabilities and payment of insurance premia, etc. Thus, the Tribunal was justified in coming to the conclusion that these amounts were paid by the assessee for meeting his personal liability and were personal expenses of the assessee. Since that was the case, the expenditure in the shape of payment of interest in respect of these personal expenses of the assessee could never be allowed under section 37 of the Income Tax Act, 1961.

5. In Bai Bhuriben Lallubhai v. Commissioner of Income Tax [1956]29ITR543(Bom) , the Bombay High Court has held that if an assessee has no option but to incur an expenditure in order to make the earning of an income possible, then undoubtedly the exercise of that option is compulsory and any expenditure incurred by reason of the exercise of that option would come within the ambit of section 12(2) of the Indian Income Tax Act. But where the option has no connection with the carrying on of the business or the earning of the income and option depends upon personal considerations or upon motives of the assessee, that expenditure cannot possibly come within the ambit of section 12(2). The assessee in that case claimed to deduct under section 12(2) of the Indian Income Tax Act from interest earned by her from fixed deposit the interest on money borrowed by her for the purpose of meeting household expenses, purchasing jewellery and meeting advance payment of tax. It was held that the purpose for which the assessee borrowed money had no connection, whether direct or indirect, with the income which she earned from the fixed deposit and that she was not entitled to the deduction claimed under section 12(2). It might be that the assessee's motive was to save her fixed deposit and interest and to meet household expenses, etc., by means of a loan borrowed but that consideration was entirely irrelevant. Even as regards advance payment of tax the purpose of borrowing the money in order to pay advance tax was to discharge the statutory obligation upon the assessee; receipt of interest on that tax was purely incidental and, therefore, the assessee could not claim the deduction on that ground either. This decision of the Bombay High Court was followed by this High Court in Commissioner of Income Tax v. Mrs. Indumati Ratanlal [1968]70ITR353(Guj) . In that case the assessee's husband died leaving a will bequeathing half of his estate to his wife and the other half to his minor son. The estate consisted mainly of shares and securities. For the assessment year 1962-63, the assessee claimed that an amount of Rs. 15,397, being one-half of the interest on money borrowed for payment of estate duty, was deductible under section 57(iii) of the Income Tax Act, 1961, from the dividends derived from the shares and securities. It was held by the Division Bench of this High Court that there is no difference between interest paid on money borrowed to pay Income Tax and interest on money borrowed to pay estate duty. While the former is not paid for the purpose of making or earning the income, the latter is not made for the purpose of making or earning assets. Whether interest paid is allowable under section 57(iii) of the Act or not, depends upon the facts of each case. If property is received by a person subject to a charge for payment of a liability and moneys are borrowed for clearing that liability, the interest paid on such borrowed moneys will be an allowable expenditure. If, therefore, at the date when the estate duty was paid by the assessee, the shares were charged with the liability for payment of estate duty, the interest paid on the money borrowed to pay estate duty would be allowable under section 57(iii). If, however, the moneys had been borrowed by the assessee for the purpose of discharging what is purely a personal liability as an accountable person to pay the estate duty, the interest would not be allowable. In this case this High Court followed the decision of the Bombay High Court in Bhai Bhuriben Lallubhai v. Commissioner of Income Tax [1956]29ITR543(Bom) .

6. Bai Bhuriben Lallubhai's case [1956]29ITR543(Bom) was again followed by this court in Smt. Padmavati Jaykrishna v. Commissioner of Income Tax [1975]101ITR153(Guj) . It was held by the Division Bench in that case that in order to earn the deduction from the "income from other sources" contemplated by section 57(iii) of the Income Tax Act, 1961, the assessee has to prove two things, namely, (1) that the expenses in question were incurred for the purpose of earning the income sought to be taxed, and (2) that such expenditure was incurred "wholly and exclusively" for the said purpose. It was held that the legislature has made similar provision for deduction of the expenditure incurred for the purpose of business of profession in Section 37. But the expression "for the purpose of business or profession" has wider implications than the expression "for the purpose of making or earning income" used in section 57(iii). The purpose contemplated by section 57(iii) is more specific in character inasmuch as it points to a precise and specific object of making or earning income. Motive with which the expenditure is incurred is irrelevant under this section. In that particular case the assessee sought to deduct interest on amounts borrowed for payment of Income Tax, wealth-tax and annuity deposit under section 57(iii) on the ground that if she had not borrowed the money, she would have had to liquidate her shareholdings and thus would have lost one of her sources of income and in any case the annuity deposit would earn interest. It was held by the Division Bench that it could not be said that the result of the borrowing was saving of dividend income from shares because by borrowing loans the assessee had saved her income not only from one source, namely, the shareholding, but from all other sources as well from which she must be receiving income. Saving of income from shares was an incidental result of borrowing loans and that incident did not supply any evidence of "purpose". Even if it were conceded that the assessee was required to take loans with a view to save her investment in shares it could not be said that the interest in question was expenditure incurred "wholly and exclusively" for the purpose of earning income from investment. The immediate purpose of taking the loan on interest was to pay taxes, etc. It could be that the other purpose was to save one of her sources of income but this would show that the purpose was a dual one and would not be covered by section 57(iii). At the relevant time it was obligatory to make annuity deposit and the earning of interest through such deposit was merely incidental. The interest on the borrowed amount was, therefore, not deductible under section 57(iii). It may be pointed out that by the Taxation Laws (Amendment) Act, 1975, now by virtue of the newly introduced section 80V, interest on amounts borrowed to pay Income Tax is deductible as an expenditure but that would not apply so far as the years under assessment before us are concerned.

7. With these two authorities of this court and with the decision of Bai Bhuriben Lallubhai's case [1956]29ITR543(Bom) before us, we are asked by Mr. Shah to reconsider the position as regards the payment of such interest in the light of certain observations of the Bombay High Court in Commissioner of Income Tax v. H. H., Maharani Vijaykuverba Saheb of Morvi [1975]100ITR67(Bom) . There the Division Bench of the Bombay High Court was concerned with interest on an amount borrowed from a bank for the purpose of payment of estate duty and it was held that the amount of interest was deductible because the assessees had no option except to incur an expenditure in order to make the earning of the income possible. The assessees before the court were trustees of a trust created by the deceased in favour of his son, Prince M. The trust property comprised of shares and securities and the income of the trust was by of dividends from shares and interest on securities. The settlor died within two years of the execution of the trust deed, and the property comprised in the trust was includible in the property passing on the death of the settlor and was liable to estate duty. The estate duty payable by the trustees, who were the assessees, was Rs. 8,25,300 and the amount was paid immediately by borrowing the amount from the Bank of India Ltd., and the interest paid to the bank until the whole amount was repaid, was claimed as deductible allowance and this amount was held to be a deductible allowance. The Bombay High Court held that in view of the charge created on the property under section 74(2) of the Estate Duty Act, the trustees had no option except to incur an expenditure in order to make the earning of the income from dividends and interest on securities possible; if they had not borrowed the amount from the bank for payment of estate duty they would have had to realise some of the shares and securities by selling them and thus the income from dividends and interest on shares and securities held by them would have been reduced. We find that this decision of the Bombay High Court is in direct conflict with the view expressed by this Court in Commissioner of Income Tax v. Mrs. Indumati Ratanlal [1968]70ITR353(Guj) and in Smt. Padmavati Jaykrishna v. Commissioner of Income Tax [1975]101ITR153(Guj) . We prefer to follow the view of this Court in Commissioner of Income Tax v. Mrs. Indumati Ratanlal [1968]70ITR353(Guj) and Smt. Padmavati Jaykrishna v. Commissioner of Income Tax [1975]101ITR153(Guj) . The present case would not fall under section 37 in any event by virtue of the fact that the amounts were spent except to the extent of Rs. 3,000 for the personal expenses of the assessee as has been found by the Tribunal. The case would also not fall under section 57 because it cannot be said that the amount of interest paid to the Lavsi firm the assessee was for the purpose of earning the income or interest from the textile firm. In view of these clear conclusions, so far as the facts of the case are concerned, it must be held that the view taken by the Tribunal following the decision of Bai Bhuriben Lallubhai's case [1956]29ITR543(Bom) was correct.

8. We, therefore, answer the question referred to us in the negative and against the assessee, that is, in favour of the revenue. The assessee will pay the costs of this reference to the Commissioner.