1983 (10) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Disallowance of interest paid on borrowed funds u/s 36(1)(iii) of the Income-tax Act, 1961.
2. Onus of proof regarding the use of borrowed funds.
3. Applicability of s. 57(iii) of the Income-tax Act for deduction of interest paid.

Summary:

1. Disallowance of Interest Paid on Borrowed Funds u/s 36(1)(iii):
The primary issue was whether the interest paid by the assessee on borrowed funds could be disallowed for the assessment years 1969-70 to 1974-75. The Income-tax Officer (ITO) disallowed the interest for the assessment years 1969-70 and 1970-71 u/s 40(c) of the Act, and for the years 1971-72 to 1974-75, the ITO held that the borrowed funds were not used for the purpose of the business but for investment in shares, thus disallowing the interest u/s 36(1)(iii). The Tribunal found that the borrowed funds were used for "non-business purposes" and upheld the allowance claimed by the assessee, stating that the interest on borrowed funds should be allowed against "receipts under other heads."

2. Onus of Proof Regarding the Use of Borrowed Funds:
The Tribunal placed the onus on the Revenue to prove that the advances made to the directors came from borrowed funds. The Revenue contended that the onus is on the assessee to show that the borrowed funds were used for the business purpose. The court referred to the decisions in *Mir Mohd. Ali v. CIT* and *Milapchand R. Shah v. CIT*, which established that the assessee must prove that the borrowed funds were used for business purposes to claim the deduction.

3. Applicability of s. 57(iii) for Deduction of Interest Paid:
The assessee argued that even if the interest payments were not allowable u/s 36(1)(iii), they should be deductible u/s 57(iii) as expenses incurred for earning income. The court referred to *CIT v. Rajendra Prasad Mody* and *CIT v. Motor Credit Co. P. Ltd.*, which supported the claim under s. 57(iii). However, the court noted that the question referred did not encompass the applicability of s. 57(iii) and that the Tribunal had not specifically considered this aspect. Even if considered, the court held that since the assessee resolved not to collect interest from January 1, 1968, the expenditure could not be considered as incurred for earning income.

Conclusion:
The court concluded that the Tribunal's finding that no part of the interest paid by the assessee on borrowed funds could be disallowed was not justified. The questions referred were answered in the negative and in favor of the Revenue. The Revenue was awarded costs from the assessee, with counsel's fee fixed at Rs. 500.