1999 (2) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee was entitled to deduction of interest money paid to two firms as business expenditure.

Detailed Analysis:

1. Entitlement to Deduction of Interest Money as Business Expenditure:

The primary issue revolves around whether the interest paid by the assessee to two firms can be considered as a business expenditure under Section 37 of the Income Tax Act, 1961.

Facts and Background:
The assessee, a member of the HUF of Harivallabh Mulchand, was involved in money-lending and hosiery business. Due to a partial partition of the HUF, financial adjustments required the assessee to make payments to two firms run by HUF members, namely, M/s Laxmi Vijay Hosiery Works and M/s Harivallabh Mulchand. The assessee's account was debited in these firms' books as he did not make the payment immediately. Consequently, the assessee paid interest on these debited amounts and claimed this interest as a business expenditure deduction.

Assessment and Appeals:
The Assessing Officer (AO) rejected the assessee's claim for deduction of interest as business expenditure, a decision upheld by the Appellate Assistant Commissioner (AAC). However, the Tribunal allowed the appeals, reasoning that if the assessee had withdrawn funds from his money-lending business to pay the firms, his business income would have reduced.

Revenue's Argument:
The Revenue argued that under Section 37 of the IT Act, the interest paid could not be allowed as a business expenditure because the assessee did not borrow money from the firms for business purposes. The debited amount was used to settle personal obligations arising from the HUF partition, not for business activities. The Revenue relied on judgments from Gopaldas Dahyabhai Lavsi vs. CIT and Bai Bhuriben Lallubhai vs. CIT to support their stance.

Assessee's Argument:
The assessee contended that the interest paid should be considered a business expenditure because retaining funds in the money-lending business instead of withdrawing them to settle personal debts allowed him to earn more interest income, which was offered for taxation. The assessee cited the Supreme Court judgment in Badal Ram Laxmi Narain vs. CIT to argue that the interest paid was indirectly used for business purposes.

Court's Analysis:
The court examined Section 37, which allows deductions for expenditures laid out wholly and exclusively for business purposes. The court noted that the debited amount was not used for business purposes but to meet personal obligations from the HUF partition. The interest paid on such an amount could not be considered a business expenditure. The court emphasized that there must be a connection or nexus between the expenditure and the business, which was absent in this case.

Conclusion:
The court concluded that the interest paid by the assessee to the two firms could not be treated as business expenditure. The immediate purpose of the debited amount was to delay personal payments due to the HUF partition, not for business purposes. Therefore, the interest paid did not qualify for deduction under Section 37. The court answered the question in the negative, ruling against the assessee and in favor of the Revenue.

Disposition:
The reference was disposed of with no order as to costs.