1982 (6) TMI 27 - HC - Income Tax

Summary

Issues involved:
The judgment involves two main issues:
1. Whether the payment of interest by the assessee on borrowed money for the payment of dividend is an allowable deduction under the Income-tax Act, 1961?
2. Whether the payment of interest by the assessee on borrowed money for the payment of taxes is an allowable deduction under the Income-tax Act, 1961?

Issue 1 - Payment of interest for dividend:
The assessee, a company manufacturing and selling sugar, had an overdraft account primarily used for tax payments and dividend. The interest paid on this overdraft was claimed as a deduction. The Tribunal allowed the deduction for dividend payment but disallowed it for tax payments. The court considered the deduction u/s 36(1)(iii) of the Income-tax Act, which allows deduction for interest paid on capital borrowed for business purposes. The court referred to a case where the payment of dividend was considered part of the business purpose. It was held that the payment of dividend can be seen as for the purpose of business, and therefore, the interest paid on borrowed money for dividend payment is an allowable deduction.

Issue 2 - Payment of interest for taxes:
Regarding the payment of interest on borrowed money for taxes, the court noted a previous decision that concluded against the assessee. Referring to the decision in Kishinchand Chellaram v. CIT, it was held that the question is answered in the negative and against the assessee.

Conclusion:
The court ruled in favor of the assessee for the deduction of interest on borrowed money for dividend payment but against the assessee for the deduction of interest on borrowed money for tax payments. Due to the divided success, no order was given regarding costs.