2007 (9) TMI 23 - HC - Income Tax

Deduction - AO contended that assessee not entitle for deduction for the interest paid for the borrowed fund and for the bakshish paid to the labourer employed by third party - Held that revenue contention was not correct and allowed deduction

Summary

Issues:
1. Disallowance of notional interest on advances paid to harvesting transport contractors.
2. Disallowance of bakshish payment made to harvesting and transport laborers.

Issue 1: Disallowance of notional interest on advances paid to harvesting transport contractors:
The appeal filed by the Commissioner of Income-tax challenged the order of the Income-tax Appellate Tribunal regarding the assessment year 1995-96. The Assessing Officer disallowed notional interest, claiming that the society had diverted interest-bearing funds to harvesting transport contractors at a lower rate than the borrowed funds' interest. The Commissioner of Income-tax (Appeals) upheld the disallowance, but the Tribunal reversed it, stating the expenses were for commercial expediency. The Revenue argued that the advances were a diversion of borrowed funds, as there was no contractual obligation to make them. However, the respondent's counsel contended that such advances were a common practice in Maharashtra and essential for timely sugarcane supply. The Tribunal held that the advances were in the business interest of the society, ensuring prompt supply of sugarcane. The court agreed, emphasizing the necessity of timely supply for the society's business. The court found that the advances were adjusted from the total payable to contractors, hence not a diversion of funds for non-business purposes.

Issue 2: Disallowance of bakshish payment made to harvesting and transport laborers:
The Revenue contended that bakshish payments were not covered by agreements and were voluntary, thus not business expenditure. However, the respondent argued that such payments were a long-standing practice in Maharashtra to ensure laborers' continued work during adverse conditions. The Tribunal found the payments necessary for business and consistent with past practices. The court agreed, noting the importance of skilled labor for harvesting and transportation. The Revenue's argument that the lack of specific details on bakshish payments should lead to disallowance was dismissed since the genuineness of payments was not questioned. The court emphasized that if bakshish payments were unreasonable or unconnected to business, they could be disallowed. However, in this case, the payments were deemed reasonable and necessary for business purposes. Thus, the Tribunal's decision to allow the bakshish payment as business expenditure was upheld.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the respondent and against the Revenue on both issues. The court found that the advances and bakshish payments were essential for the society's business interests and consistent with past practices in the region. The appeal was disposed of with no order as to costs.