1995 (12) TMI 99 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of interest on advances made to Unitel Communications Ltd.
2. Disallowance of interest on advances made to Sapthagiri Traders Pvt. Ltd.
3. Classification of dividend and interest income under 'Other sources'.

Detailed Analysis:

1. Disallowance of Interest on Advances Made to Unitel Communications Ltd.:

The appellant, a company with public interest, did not charge interest on advances made to Unitel Communications Ltd. despite paying interest on borrowed funds. The Assessing Officer disallowed Rs. 41,95,380 of claimed interest, citing diversion of borrowed funds for non-business purposes. The CIT(Appeals) upheld this view, considering the transactions colorable and not justified on commercial expediency grounds. However, the appellant argued that as an investment company, it was within its business objectives to advance funds without interest to aid financially distressed companies like Unitel Communications Ltd., which was a joint sector project facing severe financial difficulties and had been recommended for winding up by the BIFR. The Tribunal agreed with the appellant, highlighting that the company's Memorandum and Articles of Association authorized such advances, and the action was commercially expedient given the appellant's substantial interest in Unitel Communications Ltd. and its commitment to financial institutions. Consequently, the Tribunal deleted the disallowance of Rs. 41,95,380.

2. Disallowance of Interest on Advances Made to Sapthagiri Traders Pvt. Ltd.:

The appellant also made interest-free advances to Sapthagiri Traders Pvt. Ltd., leading to a disallowance of Rs. 40,07,010 by the Assessing Officer. The CIT(Appeals) upheld this disallowance, noting no commercial expediency or substantial stake justifying such advances. The appellant failed to provide material evidence similar to that presented for Unitel Communications Ltd. The Tribunal sustained the disallowance, agreeing with the CIT(Appeals) that the advances to Sapthagiri Traders Pvt. Ltd. were not justified on grounds of commercial expediency.

3. Classification of Dividend and Interest Income Under 'Other Sources':

The CIT(Appeals) classified the appellant's dividend and interest income under 'Other sources', despite the appellant's argument that such income should be considered part of its business activities. The Tribunal concurred with the CIT(Appeals) regarding dividend income, noting that the appellant's primary activity of dealing in shares had not occurred during the relevant previous year. However, the Tribunal held that interest income, given the company's objectives and frequency of advances, should be classified as business income. Thus, the Tribunal modified the CIT(Appeals)'s order to treat interest income as business income.

Conclusion:

The Tribunal partly allowed the appeal, deleting the disallowance of interest related to Unitel Communications Ltd., sustaining the disallowance related to Sapthagiri Traders Pvt. Ltd., and reclassifying interest income as business income while maintaining the classification of dividend income under 'Other sources'.