Court rules interest payment on borrowed funds disallowed for non-business use.

The High Court of MADRAS ruled against the private limited company regarding the disallowance of interest payment on borrowed funds for the assessment year 1976-77 under section 256(1) of the Income-tax Act, 1961. The court held that the borrowed funds were utilized for non-business purposes, aligning with a prior case law precedent, resulting in the disallowance of the interest claimed by the company.

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Issues involved: Interpretation of interest payment on borrowed funds for assessment year 1976-77 under section 256(1) of the Income-tax Act, 1961.

Summary:
The High Court of MADRAS considered the case of a private limited company engaged in the manufacture of cotton yarn for the assessment year 1976-77. The company had claimed interest payment on borrowed capital in its return, resulting in a net loss. The Income-tax Officer disallowed a portion of the interest payment based on the stand that borrowed funds were advanced to directors without interest in previous years. The Commissioner of Income-tax (Appeals) allowed the claim, which was upheld by the Tribunal citing a previous decision related to the same assessee. However, the High Court referred to a prior case law where interest on borrowed funds for non-business purposes was disallowed, leading to a negative answer in favor of the Department regarding the disallowance of interest for the assessment year 1976-77.

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