1970 (2) TMI 25 - HC - Income Tax

Whether the inference of the Tribunal that remittances to the U. K. came out of the profits earned in India and that the bank overdraft in India had in fact been utilised in carrying on the assessee s business was sustainable in law - Held, yes - hence, tribunal was correct in holding that the department was not justified in disallowing the interest paid by the assessee

Summary

Issues Involved:
1. Whether the inference of the Tribunal that remittances to the U.K. came out of the profits earned in India and that the bank overdraft in India had been utilized in carrying on the assessee's business was sustainable in law.
2. Whether, based on such inference, the Tribunal was right in holding that the income-tax authorities were not justified in disallowing any part of the bank's interest on the overdraft.

Issue-wise Detailed Analysis:

1. Sustainability of the Tribunal's Inference:
The High Court examined whether the Tribunal's inference that remittances to the U.K. came from profits earned in India and that the bank overdrafts in India had been utilized in carrying on the assessee's business was sustainable in law. The facts of the case reveal that the assessee, a non-resident sterling company owning tea gardens in India, remitted profits to the U.K. for dividend declarations and kept surplus balances in U.K. banks. The Income-tax Officer disallowed interest on overdrafts, arguing they were not wholly and exclusively for business purposes. The Tribunal found that profits were ploughed back into the business and remittances were made from profits, not loans. The Tribunal held that the overdrafts were used for business purposes, thus overturning the Income-tax Officer's disallowance of interest.

2. Justification of Disallowing Bank's Interest on Overdraft:
The High Court analyzed whether the Tribunal was correct in holding that the income-tax authorities were unjustified in disallowing any part of the bank's interest on the overdraft. The revenue authorities argued that interest on borrowed capital should not be deducted as it was not for the business purpose under section 10(2)(iii) of the Income-tax Act. They contended that dividends could only be paid out of profits, not capital, and that the remittances were independent transactions. The High Court found this argument flawed, emphasizing that the remittances were for paying dividends, a business purpose, and the subsequent interest earned on residual deposits did not alter this purpose. The Tribunal correctly interpreted that the remittances were from profits and the overdrafts were used for business, thus justifying the allowance of interest deduction.

Conclusion:
The High Court upheld the Tribunal's decision, answering both parts of the question in the affirmative. It ruled that the Tribunal's inference was sustainable in law and that the income-tax authorities were not justified in disallowing the bank's interest on the overdraft. The decision was in favor of the assessee, and the assessee was entitled to the costs of the reference.