1996 (1) TMI 49 - HC - Income Tax

Summary

Issues involved: Interpretation of interest payment claimed by the assessee for non-business purposes.

Summary:
The High Court of Madras addressed the issue of interest payment claimed by the assessee for non-business purposes. The Income-tax Officer disallowed interest payments for multiple assessment years, alleging they were used for personal purposes. However, the Appellate Assistant Commissioner overturned the disallowance, stating that the diverted capital inherited by the assessee was adequately covered by his own capital and interest-free capital. The Department appealed to the Tribunal, arguing that the borrowed capital was diverted for non-business activities by the assessee's father. The Tribunal, considering the balance-sheet, found no justification for disallowing the interest payments. The Department contended that the borrowed capital was used for non-business purposes, citing legal precedents. The High Court noted the father's death and the capital amounts in the balance-sheet, agreeing with the Department that a portion of the borrowed capital was used for non-business purposes. The Court disagreed with the Tribunal's presumption that withdrawals for personal use were from the assessee's capital, stating that the borrowed capital used for non-business purposes cannot claim interest deduction. Therefore, the Court ruled in favor of the Department, denying the deduction under section 36(1)(iii) for interest paid on borrowed capital used for non-business purposes.