2000 (9) TMI 211 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of motor car expenses and general charges.
2. Addition of interest income on loan advanced to the erstwhile Managing Director.
3. Validity and effect of the resolution passed by the Board of Directors on 29-3-1983 waiving interest on the loan.

Issue-wise Detailed Analysis:

1. Disallowance of Motor Car Expenses and General Charges:
The assessee did not press Ground Numbers 2 and 3 related to the disallowance of motor car expenses (Rs. 15,875) and general charges (Rs. 1,811) during the hearing. Consequently, these grounds were rejected.

2. Addition of Interest Income on Loan Advanced to the Erstwhile Managing Director:
The Income-tax Officer (ITO) added Rs. 77,562 to the assessee's income as interest accrued on a loan of Rs. 5,17,081 advanced to the erstwhile Managing Director, Shri K. R. Patel, at an interest rate of 15%. The assessee did not charge interest for the assessment year 1983-84, citing a resolution passed by the Board of Directors on 29-3-1983, which waived the interest due to Shri Patel's financial and health conditions. The ITO held that the resolution was not ratified by the general meeting and considered the waiver premature and a colorable transaction. Therefore, the interest was deemed to have accrued and was included in the income.

The CIT(A) confirmed the ITO's addition, noting that the loan was given with a specific condition of charging interest, and the waiver was not based on commercial expediency but appeared to be a colorable transaction.

3. Validity and Effect of the Resolution Passed by the Board of Directors on 29-3-1983 Waiving Interest on the Loan:
The Tribunal had divergent views on this issue. The Accountant Member held that interest accrued from 1-4-1982 to 29-3-1983 and should be taxed, even though it was waived by the resolution on 29-3-1983. The Judicial Member disagreed, arguing that interest accrues at the end of the accounting year and since it was waived before 31-3-1983, no interest accrued during the year.

The Third Member (Vice President) resolved the difference, concluding that interest accrues on a day-to-day basis. Therefore, interest had accrued up to 29-3-1983, and the waiver on that date did not negate the accrual of interest for the period from 1-4-1982 to 29-3-1983. Consequently, the interest amount was taxable.

Conclusion:
The Tribunal concluded that interest income had accrued on a day-to-day basis up to 29-3-1983 and was taxable. The ITO was directed to calculate the interest on a simple interest basis at 15 1/2% per annum on the principal amount due as of 1-4-1982 and include it in the assessment. The appeal was partly allowed, affirming the addition of interest income while directing the ITO to recalculate the amount.