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TMI Blog1983 (2) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... n u/s. 37 (1) of the Income-tax Act. 5. That the Commissioner (Appeals) should have further seen that the payment of overdraft interest to the bank was made by the appellant wholly for the purposes of its own business, viz., (1) dealing in shares (2) agency commission business and (3) trading in metal scrap. That the appellant craves leave to supplement, amend, cancel or otherwise modify any ground mentioned herein." 2. At the time of hearing, the assessee amended the grounds of appeal and the assessee's ld. counsel urged that the amended grounds of appeal may be taken up accordingly. The amended grounds of appeal are reproduced below: 1. "That on the facts and in the circumstances of the case the Commissioner of Income-tax (Appeals) was not justified in confirming the disallowance of Rs. 1,00,000 out of interest paid by the appellant on its Bank overdraft account. 2. That the Commissioner (Appeals) was wrong in assuming that the payment of overdraft interest to the Bank was made by the appellant mainly to help a sister concern and not in the character of a trader. 3. That the Commissioner (Appeals) also erred in holding that the interest on overdraft account was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closed much earlier, due to labour trouble. The other party, namely M/s. Hind Overseas Corporation (H.O.C. in short) furnished information that it used to supply metal scrap to K.E.W.L., which did not make timely payments and then the assessee company stood guarantee for which the assessee received commission from H.O.C. The ITO noted form the copy of the assessee's accounts with H.O.C. and from the details of commission, it is seen that upto July, 1976, the assessee earned commission of Rs. 35,867. 6. The ITO noticed that from 21st August 1976, the assessee started purchases on his own and started supply to K.E.W.L. He noticed also that there was an agreement amongst H.O.C, the assessee and K.E.W.L. on 20th December 1976 under which H.O.C. would raise bills on K.E.W.L. under advice to the assessee and it was further provided that if K.E.W.L. failed to pay any of the bills, the assessee would deposit such bill amounts with H.O.C. less del credere commission of Rs. 30 per tonne. He observed that Rs. 6,17,326 was paid by the assessee to H.O.C. on behalf of K.E.W.L. for different bills between 20th May 1976 to 28th July 1976, i.e., even before the assessee started purchases for K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding but only to make purchase on behalf of K.E.W.L. and to accommodate that party financially, knowing it well that this was not in the interest of the assessee business as K.E.W.L.'s financial position was not sound. The assessee could not furnish a copy of ledger account of K.E.W.L., but only summarised account was filed from which the ITO noticed that upto October, 1976, sales made were to the extent of Rs. 29,61,506 to K.E.W.L. but no interest was charged at all against outstanding bills upto the date. When asked why interest was not so charged, when the assessee continued to pay interest to bank for overdraft, it was stated that supplies were being made by the assessee on the stipulation that the bills will be paid within 45 days from the supply of materials. It was stated that interest would be charged subsequently, after the expiry of 45 days. The ITO mentioned that despite the credit period allowed and extended by the assessee, the assessee did not choose to compensate itself for the extra interest paid to the bank. He remarked that the assessee tried to benefit K.E.W.L. unduly and not for business purpose and commercial expediency. The ITO found that Rs. 3,17,855 was paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment in shares, the assessee utilised its overdraft amount, for which interest was paid as noted earlier. It was pointed out that Rs. 1,24,156 was realised from the customers on over due bills. It was submitted also that grace period of 45 days was allowed by the assessee for payment of the bills and that generally such grace periods were also received by the assessee from the suppliers for payment of their bills. It was contended that the manner in which the business transactions should be conducted, is the discretion of the assessee and simply because some transactions had resulted in low profit or even loss, there was no reason to doubt the bona fide nature of the transactions and no portion of the interest, paid should be disallowed on ground of commercial expediency. 14. The CIT(A) considered the facts of the case and agreed with the conclusion and observations made by the ITO that the assessee took overdraft mainly to help K.E.W.L. financially and, therefore, the expenditure incurred was mainly to help a sister concern and not by the assessee as a trader. He noted that u/s.36 (1)(iii), deduction is allowed for interest paid in respect of capital borrowed for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that interest paid on moneys borrowed had to be allowed u/s. 10(2)(iii) of the old IT Act and there was no warrant for disallowing a proportionate part of the interest referable to moneys borrowed for the purchase of securities whose interest was tax-free. The facts of the India Bank Ltd. were that in course of its business, the bank invested a large sum in securities, including securities from which interest was received and exempt from tax. Profits and loss on the purchase and sale of such securities were considered while computing the income of that assessee. Briefly speaking, it is urged that the claim of the assessee was proper although and the authorities below erred in rejecting the same. It is submitted that the claim may be allowed now. 16. On behalf of the revenue, the ld. departmental representative supports the order of the CIT(A), while arguing that the assessee's ld. counsel has taken a different line in respect of the claim, by filing amended grounds of appeal. However, it is urged that from the facts brought out by the ITO in the assessment order and reviewed by the CIT(A), it can be seen that there is no other alternative but to reject the claim of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The ITO has noted in the assessment order that during the assessment year under appeal, the assessee started a new business of trading "namely purchase and sale of goods for merchandise" and for this no change in the object clause of Memorandum was made but a mere approval of shareholders as per s. 149 (2A) of the Companies Act was found to be necessary by the Directors. Resolution was made. The ITO noted that the assessee entered into an agreement dt. 3rd May 1976 with H.O.C. in respect of an agency for sale of scrap, with a stipulation of commission @ Rs. 30 per tonne. He noted further that the commission received by the assessee upto July, 1976, was to the extent of Rs. 3,58,678. This commission income was taken into account in the computation. The objection of the ITO in respect of this claim of the assessee was that the assessee knew that K.E.W.L. was not financially strong and in fact certain specified suppliers declined to make further supplies due to irregular payments by K.E.W.L. and at that juncture, the assessee took over the purchases from such specified companies and made delivery of the goods to K.E.W.L. In his view, the ITO inferred that the company borrowed only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that decided case, the investment company originally was formed for acquiring, holding and otherwise dealing with shares and government securities. Later on, certain money was needed by the persons who owned the shares and securities and accordingly certain agreement was arrived at, under which payment has to be made in lieu of debentures "redeemable at the option of the registered holder at any time". The transaction was not challenged on the ground of fraud. The assessee claimed interest paid on these debentures as deduction under the old IT Act. The claim was rejected by the authorities on the ground that it was not an expenditure incurred for the purpose of earning income, profits or gains of the assessee and that even if it was so, it was at any rate not expenditure incurred solely for that purpose. It was held by the Supreme Court that the only question that should be considered was whether the transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the assessee and was made on the ground or commercial expediency. 19. The ITO was of the view that the transaction discussed above was made by the assessee for extra commer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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