1991 (4) TMI 64 - HC - Income Tax

Income From Undisclosed Sources Interest On Borrowed Capital Loss Speculative Transactions

Summary

Issues Involved:

1. Inflation of cotton purchase price.
2. Disallowance of interest on borrowings.
3. Addition to total income due to alleged excess consumption of cotton.
4. Deduction of compensation payments as non-speculative transactions.

Summary:

1. Inflation of Cotton Purchase Price:

The issue concerns the additions made by the Income-tax Officer (ITO) for the assessment years 1958-59, 1961-62, and 1962-63 due to inflation of cotton purchase prices. The ITO found that the prices of cotton supplied to the assessee-company were contracted at rates higher than the market rates, and the difference was pocketed by the director, Mr. G. Krishnan, and a broker. The Appellate Assistant Commissioner (AAC) deleted the additions for some years but upheld them for others. The Tribunal, after considering various case laws, upheld the additions for all years, stating that the inflation was deliberate and for the personal benefit of the managing director. The High Court affirmed the Tribunal's decision, stating that the company, through its directors, deliberately inflated expenses, which cannot be considered business expenditure.

2. Disallowance of Interest on Borrowings:

For the assessment years 1958-59 to 1963-64, the ITO disallowed interest on borrowings, suspecting that the borrowed funds were diverted for non-business purposes. The AAC deleted the disallowance for some years, stating that the transactions were genuine and the borrowed funds were used for business purposes. However, for other years, the AAC upheld the disallowance. The Tribunal, relying on various decisions, upheld the disallowance for all years. The High Court agreed with the Tribunal, stating that the borrowed funds were not utilized for business purposes but were diverted for personal benefits of the managing director, thus justifying the disallowance.

3. Addition to Total Income Due to Alleged Excess Consumption of Cotton:

For the assessment year 1961-62, the ITO added Rs. 4,40,000 to the total income, citing excessive wastage and invisible loss of cotton. The AAC and the Tribunal upheld the addition, stating that the actual cotton consumed was less than recorded, and the deficiency was due to the connivance of the managing director. The High Court affirmed the Tribunal's decision, stating that the company was complicit in the fraudulent transactions, and the addition was justified.

4. Deduction of Compensation Payments as Non-Speculative Transactions:

For the assessment years 1965-66 and 1966-67, the ITO disallowed deductions of Rs. 10,000 and Rs. 5,600, respectively, treating them as speculative transactions. The AAC upheld the disallowance, but the Tribunal allowed the deductions, stating that the damages were incurred in the regular course of business. The High Court agreed with the Tribunal, citing the Supreme Court's decision in CIT v. Shantilal P. Ltd., and held that the transactions were not speculative and the deductions were justified.

Conclusion:

The High Court answered all questions in the affirmative and against the assessee, except for the question referred by the Department, which was answered in the affirmative but against the Department. Parties were directed to bear their own costs.