1996 (1) TMI 40 - HC - Income Tax

Summary

Issues involved: Interpretation of interest payment on borrowed funds for assessment year 1976-77 under section 256(1) of the Income-tax Act, 1961.

Summary:
The High Court of MADRAS considered the case of a private limited company engaged in the manufacture of cotton yarn for the assessment year 1976-77. The company had claimed interest payment on borrowed capital in its return, resulting in a net loss. The Income-tax Officer disallowed a portion of the interest payment based on the stand that borrowed funds were advanced to directors without interest in previous years. The Commissioner of Income-tax (Appeals) allowed the claim, which was upheld by the Tribunal citing a previous decision related to the same assessee. However, the High Court referred to a prior case law where interest on borrowed funds for non-business purposes was disallowed, leading to a negative answer in favor of the Department regarding the disallowance of interest for the assessment year 1976-77.