1992 (2) TMI 115 - AT - Income Tax

Summary

Issues: Disallowance of interests paid to trusts under section 40A(9) & (11) - Whether deduction should be allowed.

Analysis:
The judgment by the Appellate Tribunal ITAT Ahmedabad-C involved a dispute regarding the disallowance of interests paid by an assessee-firm to two trusts under section 40A(9) & (11) of the Income Tax Act. The assessee had contributed a sum to the trusts, and the trusts, in turn, deposited the amount with the assessee and earned interest on it. The assessing authority disallowed the deduction of interest paid by the assessee to the trusts, citing a retrospective amendment introduced by the Finance Act, 1984. The CIT(A) upheld the disallowance, stating that the contributions made by the assessee flowed back to the assessee in the form of deposits. However, the learned counsel for the assessee argued that the funds belonged to the trusts, and the assessee was only entitled to recover the unspent amount, not the interest income.

The Senior D.R. supported the department's decision, emphasizing that the retrospective amendment was intended to discourage the creation of trusts for tax avoidance purposes. The Tribunal analyzed the relevant provisions of section 40A(9), (10) & (11) and the CBDT Circular No. 387, dated 6th July, 1984. The circular explained the purpose of the retrospective amendment to prevent tax avoidance through trusts. It clarified that the assessee could claim the return of unexpended amounts from the trusts. The Tribunal noted that the trusts continued to be the owners of the unspent amounts until the assessee claimed repayment.

The Tribunal observed that the trusts had credited interest income in their accounts, paid taxes on it, and filed returns showing the interest income received from the assessee. The assessments of the trusts for the relevant year were accepted under section 143(1). As no evidence was presented to challenge the finality of these assessments, the Tribunal concluded that the deduction for interest paid by the assessee to the trusts should be allowed. Consequently, the appeal was allowed in favor of the assessee.