1992 (7) TMI 51 - HC - Income Tax

Summary

Issues:
1. Interpretation of section 24(1)(vi) of the Income-tax Act, 1961 regarding deduction of interest on borrowed capital.
2. Allowability of deduction for interest payable to a bank in computing taxable income.
3. Dispute over the nature of rental income and corresponding deduction under different heads.
4. Consideration of accrual basis for claiming deductions under section 24(1)(vi) of the Act.

Analysis:
The case involved an application under section 256(2) of the Income-tax Act, 1961, where the Commissioner of Income-tax sought a reference from the Income-tax Appellate Tribunal regarding the allowability of a deduction for interest payable to a bank. The dispute arose from the assessment year 1983-84, where the assessee claimed a deduction of Rs. 73,414 as interest payable to the bank on borrowing invested in constructing godowns. The Income-tax Officer disallowed the deduction, citing reasons such as the absence of maintained books of account and indirect use of borrowing for non-commercial purposes. However, the Appellate Assistant Commissioner overturned this decision, allowing the deduction under section 24(1)(vi) of the Act, considering the borrowed capital's direct investment in the godowns.

The key contention revolved around the interpretation of section 24(1)(vi) which permits deductions for interest on borrowed capital used for property acquisition, construction, etc. The court emphasized that once the connection between borrowed capital and property investment is established, the deduction for interest payable becomes admissible, irrespective of actual payment. Unlike certain other deductions under section 24(1), the allowance for interest on borrowed capital is not contingent on actual payment, making it permissible on an accrual basis. The court upheld the Tribunal's decision to allow the deduction, emphasizing the nexus between borrowed capital and property investment as the determining factor.

The court concluded that the Tribunal's decision did not raise any statable question of law, as the answer was evident from a plain reading of the relevant provision. Therefore, the court rejected the application, with no order as to costs. The judgment clarified the applicability of section 24(1)(vi) in allowing deductions for interest on borrowed capital, highlighting the importance of establishing a direct link between borrowed funds and property investment for admissibility, regardless of actual payment, under the accrual basis of accounting.