1981 (2) TMI 36 - HC - Income Tax

Summary

Issues Involved:
1. Whether the interest paid on bank overdraft used for advance tax payment is an admissible deduction in computing business income.

Issue-wise Detailed Analysis:

1. Admissibility of Interest Paid on Bank Overdraft for Advance Tax Payment:

The primary issue in this case is whether the interest amounting to Rs. 6,769 paid by the assessee on a bank overdraft, which was used for the payment of advance tax, is an admissible deduction in computing the assessee's business income for the assessment year 1970-71.

Facts and Background:

The assessee had an overdraft account with the bank. On December 12, 1969, the account showed a debit balance of Rs. 1,39,412. The assessee paid an advance tax of Rs. 18,05,000 on December 15, 1969, which increased the overdraft to Rs. 14,63,593 by December 31, 1969. The Income Tax Officer (ITO) disallowed the proportionate interest amounting to Rs. 6,769, holding that the payment of advance tax could not be treated as a business expense.

Appeal to AAC:

The assessee appealed to the Appellate Assistant Commissioner (AAC), arguing that the advance tax was paid out of business profits and not the overdraft account. The AAC upheld the ITO's decision, stating that the payment of advance tax increased the overdraft balance and there was no adequate cash surplus to support the argument that the tax was paid out of business profits.

Tribunal's Decision:

The assessee further appealed to the Tribunal, which upheld the AAC's decision. The Tribunal noted that the advance tax payment increased the overdraft and concluded that the taxes were paid from borrowings from the bank, thus disallowing the interest as a business expense.

High Court's Analysis:

The High Court examined the facts and contentions presented. The assessee argued that the profits were sufficient to cover the advance tax payment and that the presumption should be that the tax was paid out of profits, not the overdraft. The court referred to several precedents, including the cases of V. V. R. Firm v. CIT, CIT v. Nadimuthu Pillai, and Fellowes-Gordon v. IRC, to support the argument that remittances or payments made from accounts with mixed funds (profits and overdrafts) should be presumed to be made from profits if the profits were sufficient to cover the payments.

Legal Precedents and Reasoning:

The court noted that the Tribunal's decision was based on the factual finding that the advance tax payment increased the overdraft. The court also considered the decision in Mannalal Ratanlal v. CIT, which held that interest on money borrowed to pay income tax is not deductible as a business expense. The court acknowledged the argument that income tax payment is necessary for carrying on business, but emphasized the statutory prohibition under Section 40(a)(ii) of the Income Tax Act, 1961, which disallows deductions for any sum paid on account of tax levied on profits or gains of business.

Conclusion:

The High Court concluded that the Tribunal's decision could not be upheld on the ground that the taxes were paid out of borrowings from the bank. The court answered the question in the negative, in favor of the assessee, stating that the interest paid on the overdraft used for advance tax payment should not be disallowed as a business expense.

Costs:

The court ordered that each party will bear its own costs.