1989 (7) TMI 132 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest expenses of Rs. 1,60,844.
2. Application of principles from Supreme Court judgments.
3. Charging of interest under section 215 of the I.T. Act.

Issue 1: Disallowance of Interest Expenses of Rs. 1,60,844

The appellant, a private limited company engaged in holding investments and financing industrial enterprises, declared a loss of Rs. 50,811 for the assessment year 1982-83. The ITO scrutinized the accounts and noted that the company had claimed interest expenses of Rs. 1,64,024, which included loans from various parties. The ITO found that the loans were used to purchase bonds, but no income from these bonds was declared, and a significant portion of these bonds was donated. The ITO disallowed Rs. 1,60,844 of the interest expenses under section 57(iii) of the I.T. Act, as the interest was not incurred for earning income. The CIT(A) upheld this disallowance, observing that the company's actions were aimed at reducing taxable income and the donations did not relate to earning income. The ITAT agreed with the CIT(A), noting that the company's conduct indicated no intention to earn income and served as a conduit between sister concerns.

Issue 2: Application of Principles from Supreme Court Judgments

The CIT(A) referenced the Supreme Court decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 48, emphasizing that the genuineness of transactions should be viewed from their fiscal impact. The ITAT supported this view, stating that the company's rapid transactions of obtaining loans, purchasing, donating, and selling bonds indicated an attempt to evade taxes. The ITAT agreed that the authorities rightly disallowed the interest expenses, as the company's activities did not demonstrate an intention to earn income.

Issue 3: Charging of Interest Under Section 215 of the I.T. Act

The CIT(A) confirmed the charging of interest under section 215 of the I.T. Act. The appellant argued that it could not have anticipated the disallowance of interest expenses. However, the ITAT found this argument unconvincing, noting that the appellant's actions indicated an intention to evade taxes. The ITAT upheld the CIT(A)'s decision, stating that the appellant was not entitled to relief from the interest charge under section 215.

Conclusion

The ITAT dismissed the appeal, agreeing with the authorities below that the appellant's actions were aimed at reducing taxable income and did not demonstrate an intention to earn income. The disallowance of interest expenses and the charging of interest under section 215 were upheld.