1980 (12) TMI 79 - AT - Income Tax

Summary

Issues Involved:
1. Genuineness of the agreement for hiring trucks.
2. Allowability of interest paid on borrowals from the firm.
3. Intermingling of borrowal account and hiring charges account.
4. Rate of interest claimed by the assessee.
5. Disallowance of miscellaneous and traveling expenses.

Detailed Analysis:

1. Genuineness of the Agreement for Hiring Trucks:
The primary issue was whether the agreement entered into by the assessee with the firm for the hiring of trucks was genuine. The Income Tax Officer (ITO) considered the agreement a "colourable transaction." However, the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the agreement was genuine, stating that the ITO failed to prove that the arrangement was a sham. This finding was not contested further, and the Tribunal saw no reason to differ from the CIT(A)'s view.

2. Allowability of Interest Paid on Borrowals from the Firm:
The ITO disallowed the interest payable by the assessee to the firm, arguing that the borrowals were not for business purposes and were intended to reduce profits. The CIT(A), while recognizing the genuineness of the agreement, adjusted the accounts and allowed a partial relief. The Tribunal found that the company needed funds for its business and borrowed through the firm due to restrictions imposed by the Reserve Bank of India. The Tribunal held that the borrowals were indeed for business purposes and thus, the interest paid should be allowed as a business expenditure.

3. Intermingling of Borrowal Account and Hiring Charges Account:
The ITO and CIT(A) attempted to intermix the borrowal account and the hiring charges account, disallowing a portion of the interest. However, the Tribunal emphasized Clause 7 of the hiring agreement, which explicitly stated that no interest shall be payable on the hiring charges and no adjustment should be made between the borrowal account and the hiring charges account. The Tribunal upheld that the two accounts must be kept separate, and the interest on borrowals should not be disallowed based on the firm's outstanding hiring charges.

4. Rate of Interest Claimed by the Assessee:
The assessee claimed an interest rate of 24%, which was the same rate the firm paid to its creditors. The Tribunal found that the firm borrowed money specifically to pass it on to the assessee company and charged the same rate of interest it paid. Therefore, the Tribunal saw no reason to reduce the interest rate from 24%.

5. Disallowance of Miscellaneous and Traveling Expenses:
The ITO disallowed Rs. 1,000 under miscellaneous expenses and Rs. 2,000 under traveling expenses due to lack of details and proper vouchers. The Tribunal agreed with these routine disallowances given their small amounts and lack of sufficient documentation.

Conclusion:
The appeal was allowed in part. The Tribunal upheld the genuineness of the hiring agreement and allowed the interest paid on borrowals as a business expenditure. It maintained the separation of the borrowal and hiring charges accounts as stipulated by Clause 7 of the agreement and confirmed the interest rate of 24%. The minor disallowances for miscellaneous and traveling expenses were not interfered with.