1983 (2) TMI 82 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 1,00,000 out of interest paid on Bank overdraft account.
2. Assumption that overdraft interest was paid mainly to help a sister concern.
3. Deduction of overdraft interest under Section 36(1)(iii) of the Income-tax Act.
4. Incidental expenditure on Bank interest and commercial expediency under Section 37(1) of the Income-tax Act.
5. Payment of overdraft interest for the appellant's own business purposes.

Detailed Analysis:

1. Disallowance of Rs. 1,00,000 out of interest paid on Bank overdraft account:

The assessee appealed against the disallowance of Rs. 1,00,000 out of the interest paid on its Bank overdraft account. The Income Tax Officer (ITO) had concluded that the overdraft was primarily used to support a sister concern, Kumardhubi Engineering Works Ltd. (K.E.W.L.), which was financially weak. The ITO inferred that the interest was not incurred for the assessee's business purposes but was an extra commercial consideration. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this disallowance, emphasizing that the capital borrowed was mainly for helping a sister concern, not for the assessee's business.

2. Assumption that overdraft interest was paid mainly to help a sister concern:

The CIT(A) and ITO assumed that the primary purpose of the overdraft was to help K.E.W.L. financially. The ITO noted that the assessee made purchases from different parties but sold exclusively to K.E.W.L., despite knowing K.E.W.L.'s poor financial condition. The ITO observed that the assessee continued to procure supplies for K.E.W.L. even after knowing that the profit margins were meager and that K.E.W.L. was financially unstable, indicating that the transactions were for extra commercial considerations.

3. Deduction of overdraft interest under Section 36(1)(iii) of the Income-tax Act:

The assessee argued that the interest paid on the overdraft should be allowed as a deduction under Section 36(1)(iii) of the Income-tax Act, which permits deduction of interest paid on capital borrowed for the purposes of the business. The assessee contended that the overdraft was used for genuine business requirements, including dealing in shares, agency commission business, and trading in metal scrap. The assessee cited the case of CIT vs. Tingri Tea Company Ltd., where it was held that if the test of "the purpose of the business" is satisfied, no further conditions should be imposed for allowing interest as a deduction.

4. Incidental expenditure on Bank interest and commercial expediency under Section 37(1) of the Income-tax Act:

The assessee claimed that the expenditure on Bank interest was incidental to its business and justified by commercial expediency, thus deductible under Section 37(1) of the Income-tax Act. The assessee argued that the transactions with K.E.W.L. were conducted in the ordinary course of business and that the interest paid was a necessary business expense. The assessee cited the Supreme Court decision in Eastern Investments Ltd. vs. CIT, where it was held that transactions made on the grounds of commercial expediency should be allowed as business expenses.

5. Payment of overdraft interest for the appellant's own business purposes:

The assessee emphasized that the overdraft was used wholly for its own business purposes, including dealing in shares, agency commission business, and trading in metal scrap. The assessee argued that it had substantial investments in K.E.W.L. and that supporting K.E.W.L. was in the interest of the assessee's business. The assessee contended that the transactions were not for extra commercial considerations but were necessary to sustain its business activities and investments.

Conclusion:

The Tribunal found merit in the assessee's arguments. It noted that the assessee had substantial investments in K.E.W.L. and that supporting K.E.W.L. was in the interest of the assessee's business. The Tribunal referred to the decision in CIT vs. Tingri Tea Company Ltd. and Eastern Investments Ltd. vs. CIT, concluding that the interest paid on the overdraft was for the purposes of the business and should be allowed as a deduction. The Tribunal set aside the orders of the CIT(A) and ITO, allowing the assessee's appeal and directing the ITO to work out the relief admissible to the assessee.

Final Judgment:

The appeal by the assessee was allowed, and the disallowance of Rs. 1,00,000 out of the interest paid on the Bank overdraft account was set aside. The ITO was directed to grant the necessary relief to the assessee.