2009 (10) TMI 574 - HC - Income Tax

Interest on borrowed capital Expenditure in relation to income not forming part of total income funds diverted to sister concern of which assessee was a partner share income from firm not taxable Interest not deductible

Summary

Issues:
1. Deduction of interest expenses attributable to investment in shares.
2. Disallowance of gratuity contribution premium under section 43B(b) of the Income-tax Act.

Issue 1: Deduction of Interest Expenses:
The respondent, a limited company engaged in servicing and sales of vehicles, borrowed significant amounts and advanced interest-free loans to sister concerns, i.e., partnership firms. The Assessing Officer disallowed the interest expenses on borrowed funds advanced to the firms, stating it was not for business purposes. The first appellate authority initially allowed the appeal, but the Tribunal upheld the disallowance. The appellant contended that the interest paid on borrowed capital for interest-free loans was not a business expenditure. The respondent argued that the claim was allowable based on a Supreme Court decision. However, the loan in question was from a limited company to partnership firms, not subsidiaries. The Tribunal's decision did not consider the commercial expediency of the loans. The Court held that the interest-free loans to partnership firms, which did not generate taxable income for the respondent, were rightly disallowed. The Tribunal's decision was reversed, and the disallowance of interest was restored.

Issue 2: Disallowance of Gratuity Contribution Premium:
The second issue involved the disallowance under section 43B(b) for the premium paid to the employees' gratuity fund maintained by LIC. The Tribunal allowed the claim based on a Supreme Court decision, stating that deduction should be allowed if the remittance was made before the date of filing the return. However, the Tribunal did not verify if the payment was made before the return filing date. The Court found this to be a controversial fact and granted the assessee an opportunity to prove the payment timing to the Assessing Officer. If the payments were made before filing the return, they should be allowed; otherwise, the claim should be disallowed, with the right to claim in the following year. The appeal was partially allowed on this issue.

This detailed analysis of the judgment from the Kerala High Court addresses the issues of deduction of interest expenses and the disallowance of gratuity contribution premium under the Income-tax Act.