1960 (9) TMI 1 - HC - Income Tax

Interest on borrowed capital - whether the whole of that payment towards interest was an allowable deduction under section 10(2)(iii)

Summary

Issues:
- Deductibility of interest payment under section 10(2)(iii) of the Income-tax Act.
- Treatment of advances made by the assessee to Sungo Limited and other debtors.
- Relevance of borrowed capital usage in determining business purposes.
- Entitlement to deduct waived interest from assessable income.

Analysis:
The judgment addressed the issue of deductibility of interest payment under section 10(2)(iii) of the Income-tax Act. The court considered the assessee-company's borrowing of capital and the payment of Rs. 10,475 as interest in the relevant year. It was established that the loans were genuine, and the payment of interest was not in dispute. The central question was whether the entire interest payment was an allowable deduction under the Act.

Regarding the treatment of advances made by the assessee to Sungo Limited and other debtors, the court noted that the advances were part of the normal course of the assessee's business activities. Despite the waiver of interest on certain advances, it was emphasized that the nature of the original loans and advances remained unchanged. The court highlighted that the borrowed capital was utilized in the ordinary course of business, and the waiver of interest did not alter the purpose for which the loans were obtained.

The judgment delved into the relevance of borrowed capital usage in determining business purposes. It was emphasized that the assessee did not borrow a specific sum expressly for advancing to debtors but mixed borrowed funds with general funds for lending purposes. The court concluded that if the loans were borrowed for business purposes and the advances were made in the normal course of business, the requirements of section 10(2)(iii) were satisfied, irrespective of subsequent interest waivers.

Furthermore, the judgment discussed the entitlement to deduct waived interest from assessable income. The court clarified that the department could not challenge the deduction of interest that had been waived by the assessee, especially if the waiver was not based on business considerations. The focus was on whether the interest paid to creditors met the statutory requirements for deduction, rather than on the taxation of waived income that did not affect the interest deduction eligibility.

In conclusion, the court ruled in favor of the assessee, allowing the deduction of the full interest payment from assessable income under section 10(2)(iii) of the Income-tax Act. The judgment highlighted the consistent treatment of borrowed capital for business purposes and affirmed the assessee's right to claim the deduction based on the statutory requirements.