2002 (10) TMI 56 - HC - Income Tax

Interest on borrowed capital - Tribunal came to the conclusion that nothing had been brought on record to show why the assessee-firm should have kept its money blocked with Tropical Fruits without charging any interest. Since the partners of the assessee were interested in Tropical Fruits, interest on borrowed capital was disallowed to the extent it lay with Tropical Fruits without earning any interest there. - The law here being well-settled, as to what is borrowing for business purposes, the facts as given above, in our opinion, could only lead to one conclusion of law, which is that the borrowings by the assessee kept as application money in Tropical Fruits were for use of the money for the assessee s business and thus the only conclusion of law would be that the interest thereon was deductible as revenue expense by the assessee. - The order of the Tribunal is set aside

Summary

Issues:
Interpretation of section 36(1)(iii) of the Income-tax Act, 1961 regarding deduction of interest paid on borrowed capital for business purposes in the context of a joint venture agreement between a partnership firm and a company from the USSR.

Analysis:
The case involved three assessment years, 1991-92, 1992-93, and 1993-94, concerning a partnership firm's joint venture with a company from the USSR. The firm contributed 60% of the capital, and the Russian party 40%, with the initial share capital target being Rs. 5.27 crores, later reduced to Rs. 3.68 crores. The firm contributed Rs. 2.21 crores, while the Russian party remitted Rs. 147.44 lakhs. Due to uncertainties in Russia, shares were not issued as planned, leading to a request for return of unconverted money by the Russian party.

The primary issue was whether interest paid on borrowed funds by the firm, advanced for the joint venture, could be claimed as a deduction under section 36(1)(iii) of the Income-tax Act. The Tribunal disallowed the deduction, questioning the need for keeping funds blocked without earning interest. The High Court raised a question of perversity, challenging the Tribunal's decision, emphasizing the necessity of considering the circumstances that led to the funds remaining unconverted.

The Court analyzed the concept of borrowing for business purposes, emphasizing that expenses must be related to business activities and not for private use. The Court highlighted that a reasonable authority would draw only one conclusion based on the facts presented. Referring to legal precedents, the Court concluded that the borrowed funds kept as application money in the joint venture were intended for the firm's business, justifying the deduction of interest as a revenue expense.

The Court set aside the Tribunal's order for all three assessment years, restoring the Commissioner of Income-tax (Appeals) decision in favor of the firm. Despite the complexity of the case, the Court commended both counsels for their arguments and fairness, deciding not to award costs to either party. The judgment was a combined decision for three related matters, with both judges concurring on the outcome.