1999 (7) TMI 55 - HC - Income Tax

Summary

Issues Involved:
1. Whether the payment of finance charges on the loan taken from a closely connected trust is allowable in full as a deduction for the assessment years 1969-70, 1970-71, and 1971-72.

Summary:

Issue 1: Allowability of Finance Charges as Deduction u/s 36(1)(iii)

The assessee, a private limited company, borrowed Rs. 2 lakhs from D.R. Foundation Trust and claimed finance charges as deductions for the assessment years 1969-70, 1970-71, and 1971-72. The Income-tax Officer (ITO) initially allowed these deductions but later reopened the assessments u/s 147(a) upon discovering that the trust was founded by a director of the assessee-company. The ITO found the finance charges excessive and allowed only 15% per annum as interest u/s 36(1)(iii), disallowing the excess amount as payment for extra-commercial considerations.

The Commissioner of Income-tax (Appeals) reversed the ITO's decision, allowing the full deduction, which was upheld by the Income-tax Appellate Tribunal (the Tribunal). The Revenue appealed, arguing that the ITO was justified in disallowing the excess finance charges as they were not purely interest but included extra-commercial considerations.

The court examined the agreement and found that the finance charges included payments beyond interest, intended to benefit the trust founded by a director of the assessee-company. The court held that the ITO was justified in allowing only the part of the finance charges that could be regarded as interest and disallowing the balance as payments for extra-commercial considerations.

The court emphasized that u/s 36(1)(iii), the ITO has the authority to examine whether the amount claimed as interest is genuinely interest and to disallow any part that is not. The court cited the Supreme Court decision in Dharamvir Dhir v. CIT, which supports the view that only genuine interest payments are deductible.

Conclusion:

The court answered the question in the negative, ruling in favor of the Revenue and against the assessee, affirming that the ITO was justified in disallowing the excess finance charges as they were not purely interest but included extra-commercial considerations.