1984 (5) TMI 108 - AT - Income Tax

Summary

Issues:
Disallowance of interest deduction under the Income-tax Act due to contravention of section 58A of the Companies Act.

Analysis:
The appeal by the revenue was against the Commissioner (Appeals) canceling two disallowances made by the ITO. The case involved a company that accepted deposits from its members, contravening section 58A of the Companies Act. The ITO disallowed the deduction claimed for interest payable on these deposits, citing irregularity and illegality. However, the Commissioner (Appeals) noted that the borrowings were required for business purposes and allowed the deduction, as done in the preceding assessment year. The revenue contended that the interest liability could not be allowed as a deduction under the Income-tax Act due to the contravention of the Companies Act. The Tribunal disagreed, emphasizing the protection of depositors under section 58A and the liability to pay interest even in cases of void contracts. The Tribunal confirmed the Commissioner's decision to allow the deduction, stating that the interest liability was a legitimate business expenditure and not a consequence of the contravention. The Tribunal dismissed the appeal, affirming the allowance of the interest deduction.

In summary, the Tribunal upheld the allowance of the interest deduction despite the contravention of section 58A of the Companies Act. The decision was based on the necessity of borrowings for business purposes, the liability to pay interest even in void contracts, and the distinction between penalty payments and business expenditures. The Tribunal emphasized the business nature of the interest liability and confirmed the Commissioner's decision to allow the deduction, dismissing the revenue's appeal.