1985 (12) TMI 76 - AT - Income Tax

Summary

Issues:
- Application of section 40A(8) of the Income-tax Act, 1961 to disallow 15% of interest paid to various persons by the assessee-company.
- Classification of the assessee-company as an 'investment company' under sub-clause (ii) of clause (c) of Explanation to section 40A(8).
- Treatment of interest paid on current accounts of directors under section 40A(8).

Analysis:
1. The appeal before the Appellate Tribunal ITAT BOMBAY-A involved the application of section 40A(8) of the Income-tax Act, 1961, where the ITO disallowed 15% of interest paid by the assessee-company to various persons. The Commissioner (Appeals) accepted the alternative contention that interest on the current accounts of two directors did not attract section 40A(8), leading to the deletion of the disallowance on those accounts.

2. The primary issue was whether the assessee-company could be classified as an 'investment company' under sub-clause (ii) of clause (c) of the Explanation to section 40A(8). The assessee argued that its principal business was investments due to substantial holdings in sister concerns, while the revenue contended that the principal business was exports, not investments.

3. The Tribunal analyzed the nature of the investments held by the assessee-company, noting that shares were in subsidiary or associated companies where directors overlapped. It concluded that there was no continuous, substantive, systematic activity in the investments, unlike the export business, which showed significant turnover. The Tribunal rejected the claim that the company was an 'investment company' and upheld the applicability of section 40A(8).

4. Regarding the treatment of interest on the directors' current accounts, the Tribunal referred to sub-clause (vii) of clause (b) of the Explanation to section 40A(8), which exempts advances in the course of business. The Tribunal found that the interest paid on the directors' current accounts did not fall under this exemption, leading to the restoration of the disallowance made by the ITO.

5. Ultimately, the Tribunal dismissed the appeal by the assessee-company, upholding the disallowance of interest under section 40A(8), while allowing the appeal by the revenue. The Tribunal's decision was based on the lack of continuous investment activity and the non-applicability of exemptions for interest on directors' current accounts, as per the provisions of the Income-tax Act, 1961.