1984 (9) TMI 3 - HC - Income Tax

Summary

Issues:
1. Applicability of section 40(c) to old creditors related to directors of the company.
2. Correctness of the Tribunal's decision on interest payment to creditors under section 40(c).

Analysis:
The case involved questions referred by the Income-tax Appellate Tribunal regarding the application of section 40(c) of the Income-tax Act, 1961 to interest payments made by an assessee-company to old creditors related to its directors. The Tribunal disallowed a portion of the interest payment, leading to an appeal by the Department. The Tribunal held that section 40(c) deals with expenditure resulting in remuneration, benefit, or amenity to a relative of a director, which does not include interest paid to creditors. It emphasized that interest paid is not remuneration or a benefit enjoyed by an employee, and therefore, not covered under section 40(c). The Tribunal also rejected arguments regarding the company's financial decisions and upheld the Appellate Assistant Commissioner's decision to delete the disallowed amount.

The Income-tax Officer disallowed a portion of the interest payment based on section 40(c), arguing that the loans from directors' relatives did not serve legitimate business needs. However, the Appellate Assistant Commissioner and the Tribunal disagreed, pointing out that the loans were not excessive and were essential for the company's financial requirements. The Tribunal highlighted that interest on borrowed money for business purposes, as in this case, should be allowed as a deduction under section 36(1)(iii) of the Act, and cannot be considered as remuneration or benefit under section 40(c).

The judgment concluded that the interest paid to old creditors related to the directors did not fall within the ambit of section 40(c) as it was not an expenditure resulting in remuneration, benefit, or amenity. Therefore, the Tribunal's decision to allow the interest payment was upheld, answering both questions in favor of the assessee. The judges agreed on the decision, and each party was directed to bear its own costs.