2006 (4) TMI 233 - AT - Income Tax

Summary

Issues:
Deletion of addition made towards interest on deposits on credit card holders.

Analysis:
The case involved appeals by the Revenue against the deletion of additions made towards interest on deposits on credit card holders. The assessee, engaged in credit card business, required members to deposit funds and collected finance charges from credit card holders. The business was transferred to a subsidiary company, and royalty was paid to the assessee. The Revenue contended that after the transfer, the business was no longer that of the assessee, and interest payment to credit card holders was SIFCO's obligation. The assessee argued that as the business was continued by the subsidiary with transferred assets and liabilities, interest should be allowed. The Tribunal analyzed relevant provisions, stating that interest on borrowed capital is deductible if borrowed for business purposes and paid thereon. It concluded that the assessee was not entitled to interest deduction as the credit card business was transferred, and the relationship with credit card holders did not constitute borrowing for business purposes.

The Revenue further challenged the allowance of interest relating to amounts due from SIFCO as business expenditure. The Department argued that the entities were separate, citing relevant case law. The assessee contended that the sum due from SIFCO arose from transferred borrowed funds, and the relationship was business-related. The Tribunal held that as the credit card business was transferred, the assessee was not liable for interest on these loans, and such interest could not be considered as business expenditure. The order of the CIT(A) was reversed, and the Revenue succeeded on this issue as well.

In conclusion, the Tribunal allowed the Revenue's appeals, ruling against the assessee's claims for deduction of interest on credit card holders' deposits and interest on amounts due from SIFCO. The judgments were based on the transfer of the credit card business to a subsidiary, determining the liabilities and obligations of the assessee in relation to interest payments in the context of business activities.