2001 (12) TMI 6 - HC - Income Tax

Whether on the facts and in the circumstances of the case the claim on account of interest was allowable? - Tribunal has found that the source of income viz. shares stood transferred and hence the purpose for which the borrowing had been made stood frustrated. In fact the expenditure had not been incurred for preserving and maintaining the source of income nor was it a case where the assessee had no option except to incur the expenditure but on the contrary the assessee had the option viz. it was not necessary for the assessee to transfer the shares for claiming the deduction and yet the assessee exercised the option the other way by transferring shares which had no connection with the making or earning of the income. - we do not find any infirmity with the order of the Tribunal and the Tribunal was right in holding that the assessee s claim on account of interest was not allowable.

Summary

Issues involved:
Claim of interest as allowable expenditure under section 57(iii) of the Income-tax Act, 1961 for assessment years 1978-79, 1979-80, and 1980-81.

Analysis:
The case involved a dispute regarding the allowability of interest claimed as a deductible expenditure under section 57(iii) of the Income-tax Act, 1961. The Income-tax Officer disallowed the claimed amounts for the assessment years in question, stating that the expenditure on interest was not wholly and exclusively laid out for the purpose of making or earning income. The Commissioner of Income-tax (Appeals) upheld the disallowance but restricted the amount for the later years. The Tribunal confirmed the disallowance. The applicant argued that the borrowing and interest payment were for commercial considerations to facilitate the activities of a subsidiary company, fulfilling the requirements of section 57(iii). The applicant relied on a previous court decision and specific tests to support their claim.

The Revenue, on the other hand, contended that there was no established nexus between the expenditure and income-making purpose. They argued that the purpose of borrowing was not solely for making or earning income, as required by the Act. The Revenue relied on the Tribunal's findings and previous court decisions to support their position.

The Court analyzed the provisions of the Act and found that the applicant was not carrying on a business generating income falling under specific heads mentioned in the Act. The interest claimed was against income from other sources, not earned from the investments in question. The Court noted that the source of income (shares) had been transferred, rendering the purpose of borrowing frustrated. The Court rejected the argument that the consideration for share transfer was a form of investment, as it was non-interest bearing. The Court concluded that the borrowing was not utilized for making or earning income, and the purpose for which it was made had ceased to exist.

The Court upheld the Tribunal's decision, stating that the applicant's claim for interest deduction was not allowable. The judgment favored the Revenue, and the reference was answered in the negative. The Court found no infirmity in the Tribunal's order and disposed of the reference with no costs awarded.

This detailed analysis highlights the arguments presented by both sides, the application of relevant legal provisions, and the Court's reasoning leading to the final decision in favor of the Revenue.