1986 (11) TMI 25 - HC - Income Tax

Summary

Issues:
1. Deduction claimed by the assessee for interest paid to a trust.
2. Determination of whether the trust is a juristic person.
3. Refusal of the Appellate Tribunal to state a case under section 256(1) of the Income-tax Act.
4. Appeal by the Department to the Supreme Court regarding the refusal to state a case.
5. Appeal by the assessee to the Appellate Assistant Commissioner.
6. Appeal by the Department to the Appellate Tribunal.
7. Application under section 256(1) of the Act for a reference to the High Court.
8. Refusal of the Tribunal to state a case under section 256(2) of the Act.
9. Justification of the claim for payment of interest as a revenue expenditure.

Analysis:

1. The case involved the deduction claimed by the assessee, a private limited company, for interest paid to a trust. The Department disputed the claim, alleging that the trust was not a juristic person but a camouflage for the assessee's income. The matter had been previously subject to proceedings regarding the status of the trust as a juristic person.

2. The Appellate Tribunal determined that the trust was a separate entity from the assessee, with the trust having sufficient funds to advance loans. The Appellate Assistant Commissioner and the Appellate Tribunal both ruled in favor of the assessee, allowing the deduction for interest paid to the trust as a business expense.

3. The Department filed applications under section 256(1) of the Income-tax Act for a reference to the High Court, but the Tribunal refused to state a case, citing that the issue was a question of fact.

4. The Department appealed to the Supreme Court against the decision of the High Court to not call for a statement of the case. The Supreme Court directed the Tribunal to send a statement of the case to the High Court for consideration.

5. The Appellate Assistant Commissioner, following the decision of the High Court, held that the Income-tax Officer was not justified in disallowing the interest deduction as a protective measure and fully deleted the addition under that head.

6. The Appellate Tribunal, in the second appeal, upheld the decision of the Appellate Assistant Commissioner, emphasizing that the interest paid to the trust was allowable as a deduction in computing business income.

7. The High Court, upon review, found that the Appellate Tribunal's decision had become erroneous in law as it had not considered the validity of the claim based on any material other than the High Court's decision, which had been subsequently reversed by the Supreme Court.

8. Consequently, the High Court held that the Tribunal was not justified in allowing the claim for payment of interest as a revenue expenditure, pending further clarification after the Supreme Court's decision on the matter.

9. In conclusion, the reference was answered negatively, with no costs awarded. The Chief Justice agreed with the judgment.