2013 (9) TMI 746 - HC - Income Tax

Disallowance of interest to sister concern Held that - Loan of Rs.17.19 lakhs advanced to the sister concern M/s Rampur International (P) Ltd advanced in the year 1985 was held to be advanced from the funds available with the assessee-company in the form of share capital, share application money, reserve and surplus other than borrowed money, affirmed the findings of the Income Tax Appellate Tribunal that the assessee company had sufficient funds other than borrowed money for giving to its sister concern and that the conditions of Section 36 (1) (iii) of the Act have been complied with. The assessee-company was entitled to full allowance of the amount of interest paid by it on borrowed capital. Allowance of interest in distillery unit, fertilizer unit and biogas unit as income from other sources - Held that - Assessee-company had received interest on the deposits/advances made by it to its debtors. The amount of interest was not relatable to any late payment of the invoices/bills or compensation/damages, and thus the amount of interest by any stretch of imagination could not be treated as income from business. It had to be treated under the head income from other sources Decided against the Assessee.

Summary

Issues:
1. Disallowance of interest to sister concern M/s Rampur International
2. Allowance of interest income in distillery unit, fertilizer unit, and biogas unit

Analysis:

1. Disallowance of interest to sister concern M/s Rampur International:
The appeal in this case arose from an order of the Income Tax Appellate Tribunal regarding the disallowance of interest to a sister concern. The Court examined whether the disallowance of interest amounting to Rs.3,60,990 to the sister concern was justified. After reviewing the facts, the Court found that the loan advanced to the sister concern was from funds available with the assessee-company, such as share capital, share application money, and reserve and surplus, other than borrowed money. The Court affirmed the Tribunal's findings that the assessee had sufficient funds other than borrowed money for the transaction, thereby complying with the conditions of Section 36(1)(iii) of the Income Tax Act. Consequently, the assessee was deemed entitled to a full allowance of the interest paid on borrowed capital.

2. Allowance of interest income in distillery unit, fertilizer unit, and biogas unit:
The second issue pertained to the allowance of interest income in various units as income from business or other sources. The Tribunal had reversed the order of the Commissioner of Income Tax (Appeals) regarding the treatment of interest income in the distillery, fertilizer, and biogas units. The Court, referring to a previous judgment involving the same parties, held that the interest received by the assessee on deposits/advances made to debtors was not related to late payments or damages but was merely income from other sources. Therefore, the Court determined that the interest income in question could not be categorized as income from business and should instead be treated under the head "income from other sources."

In conclusion, the Court relied on a prior judgment between the same parties for a different assessment year and ruled in favor of the assessee regarding the disallowance of interest to the sister concern and in favor of the department regarding the treatment of interest income in the various units. The Income Tax Appeal was disposed of accordingly.