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TMI Blog1982 (1) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of section 40(c) of the Act and, therefore, the addition made on that score should be deleted ? 2. Whether, on the facts and in the Circumstances of the case, the Appellate Tribunal was right in holding that for purposes of invoking the provisions of section 40(c) of the Income-tax Act, 1961, there should be established that there was a direct or indirect link between the assessee company's interest-bearing borrowings from outsiders and the advance made by the company to its directors without any interest? " The two questions really raise but a single point for our consideration. The assessee in this case is a private company. In its assessment for 1972-73, relevant to the previous year ended March 31, 1972, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks and the withdrawals effected by the managing director from the funds of the company. According to the Tribunal, s. 40(c) contemplated that there must be a link between the two, either direct or indirect. The Tribunal's view of s. 40(c) of the Act is challenged in this reference in the form of the two questions of law which we have set out earlier in this judgment. The matter really turns on the construction of s. 40(c) of the Act. Under the statutory scheme of the charge to tax on profits and gains of business, the Legislature provides for various allowances, deductions and charges. They are dealt with, in detail, is ss. 30 to 39 of the Act. Section 40, on the other hand, lays down what are expenses which shall not be deducted in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to be disallowed by the ITO represents expenditure which results directly or indirectly in the provision of any benefit to the managing director in this case. We have earlier referred to the basis on which both the AAC and the Tribunal had dealt with the matter of application of s. 40(c) of the Act. According to them, there must be a factual link established between the expenditure to be disallowed and the benefit or amenity to the director concerned, whether the link is direct or indirect or something of both. The AAC and the Tribunal held against the Department on this aspect of the case only because the ITO had not established the nexus between the expenditure by way of payment of interest by the assessee-company to the bank, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naging director. The answer plainly is In the negative. It might possibly be maintained that a portion of the capital borrowed by the assessee-company had been diverted to the use of the managing director. Bat in that event, the benefit resulting to the director is only the proceeds of the borrowing so diverted. The benefit does not result from the payment of interest by the company on borrowed capital. What the section requires is not that anything connected with the expenditure must be connected in some way to the benefit of the director. On the contrary, the connection to be established under this provision must be between the expenditure as such (in this case, the payment of interest on borrowed capital) and the benefit to the director. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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