2012 (12) TMI 898 - HC - Income Tax

Addition on account of excess interest expense Interest on Fixed deposit Assessee is a financial enterprise Interest paid in excess of the limit under Kerala Money Lenders Act - Explanation to Section 37 Expenditure prohibited by law or constitutes an offence Assessee contended that even where the income was found to be illegal, it was held that loss could be claimed as a deduction. If the income is tainted and he is forced to pay the tax, he poses the question as to how it could be held that the amount which is paid in excess of the legal limit under the Money Lenders Act should not be allowed to be deducted from the income Held that - Even though the purpose for which the amount was expended may not lead to the commission of an offence, the expenditure by way of payment of interest in excess of the limit imposed under the Kerala Money Lenders Act is prohibited. The grant of interest at the rate an excess of 14% is prohibited. The amount of deduction claimed by the appellant represents money paid as interest in excess of 14%. Therefore, the expenditure is in the teeth of the explanation to Section 37 which is the legal provision applicable. In favour of revenue

Summary

Issues Involved:
Assessment of income for financial enterprise - Disallowance of interest paid in excess of legal limit under Money Lenders Act - Claiming deduction for such interest - Interpretation of Section 37 of Income Tax Act, 1961 - Applicability of Explanation to Section 37 inserted by Finance Act, 1998 - Comparison with provisions under Income Tax Act, 1922.

Analysis:
The judgment pertains to an appeal filed by a financial enterprise challenging an order by the Tribunal regarding the disallowance of interest paid in excess of the legal limit under the Kerala Money Lenders Act for the assessment year 1996-97. The assessing officer enhanced the income by disallowing the excess interest paid by the appellant to depositors. The appellant contended that the Tribunal erred in not allowing a deduction for the excess interest paid, citing a judgment under the Income-tax Act, 1922. The appellant argued that even if the income was illegal, a deduction for loss could be claimed, questioning why the excess interest paid should not be allowed as a deduction. The appellant relied on Section 37 of the Income Tax Act, 1961, which allows deductions for expenditures laid out wholly and exclusively for business purposes.

The appellant further argued that the payment of excess interest should not be considered an offense to bypass the prohibition against deducting higher interest payments. The appellant drew support from a previous Apex Court judgment to counter the contention that any expenditure prohibited by law cannot be claimed as a deduction. On the other hand, the Revenue's counsel highlighted that the Explanation to Section 37 was inserted by the Finance Act No.2/1998, emphasizing that no similar explanation existed under the Income-Tax Act, 1922. The Revenue contended that the business conducted by the appellant was not illegal, and the Tribunal correctly applied the terms of the Explanation to the facts of the case.

The High Court dismissed the appeal, stating that the deduction claimed by the appellant for the excess interest paid was prohibited by the Explanation to Section 37 of the Income Tax Act, 1961. The court noted that the Apex Court judgment cited by the appellant did not consider a provision like Section 37 with the Explanation. The court emphasized that if an expenditure is incurred for a purpose constituting an offense or prohibited by law, it cannot be claimed as a deduction. The court concluded that the expenditure on interest paid in excess of the legal limit under the Money Lenders Act was prohibited by law, and therefore, no deduction could be allowed under Section 37. The judgment answered the questions against the appellant and dismissed the appeal.