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TMI Blog2013 (6) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the above, provisions of section 37(1) may not be applicable in respect of interest on the capital borrowed for business purpose. The taxpayer claims that the funds were borrowed in the personal capacity and not in the name of business concern - Held that:- The payment of interest on the borrowed capital falls within section 36(1)(iii and hence the provisions of section 37(1) may not be applicable. Therefore, it may be immaterial whether the money was borrowed in personal capacity or not? - C.O. 10/Coch/2012 (Arising out of I.T.A No. 115/Coch/2012) - - - Dated:- 22-3-2013 - N.R.S. GANESAN AND B.R. BASKARAN, JJ. For the Appellant : Smt. Susan George. For the Respondent : T.M. Sreedharan. ORDER:- N.R.S. Ganesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culation scheme; therefore, it was held that the expenditure could not be allowed. The ld. DR has also placed her reliance on the judgment of the Bombay High Court in CIT v. Taraporvala Sons Co (P.) Ltd. [1999] 239 ITR 319 3. On the contrary, Shri T.M. Sreedharan, the ld. senior counsel for the taxpayer submitted that the taxpayer is doing money lending business in the name and style "Kannattu Arun Finance". No money was borrowed in the name of "Kannattu Arun Finance". According to the ld. senior counsel, the taxpayer borrowed money in his individual capacity. RBI does not prohibit borrowal in individual capacity. Since the money was borrowed in individual capacity, according to the ld. senior counsel it was not shown in the books of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the CIT(A), after considering the Explanation to section 37(1) found that interest on such deposit in personal capacity is not forbidden by law. According to the ld. senior counsel, the taxpayer has not committed any offence as provided in Explanation to section 37(1) of the Act. According to the ld. senior counsel, the interest paid by the taxpayer is only for employing capital for the business and not for the purpose of incurring expenditure. Therefore, according to the ld. senior counsel, Explanation 1 to section 37(1) may not be applicable. 5. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the provisions of section 37(1) of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and no deduction shall be allowed in respect of such expenditure. While clarifying Explanation to section 37(1) the CBDT clarified in circular No.772 dated 23-12-1998 as under: "20.1 Section 37 of the Income-tax Act is amended to provide that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of the claims made by certain assessees in respect of payments on account of protection money, extortion, hafta, bribes, etc. as business expenditure. It is well decided that unlawful ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka High Court and Bombay High Court. In Smt. Amarjeet Kaur's case (supra) and in Taraporvala Sons Co. (P) Ltd.'s case (supra) the payment of interest was not on the money borrowed for capital. In Taraporvala Sons Co (P) Ltd.'s case (supra), the payment was made as secret commission. In Smt. Amarjeet Kaur's case (supra), deposit linked incentive scheme was found to be money circulation scheme. The relevant expenditure in both cases were allowable u/s 37(1) of the Act. Therefore, the High Court found that expenditure would fall under Explanation to section 37(1) of the Act. In this case, the expenditure/interest is allowable under section 36(1)(iii), therefore, the Explanation to section 37(1) is not applicable. Accordingly, the order of CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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