High Court Upholds Interest Payment Bifurcation Decision

The High Court upheld the Tribunal's decision to bifurcate interest payments between business income and dividend income for the assessment years 1974-75 and 1975-76. The Court ruled that the entire interest payment could not be allowed as business expenditure since it was not all paid for business purposes. Additionally, the Court agreed with the Tribunal that only the gross amount of interest should be considered for allocation purposes, not the net amount. The Court answered both questions in favor of the Revenue, and the reference was disposed of with no costs awarded.

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Issues involved:
Assessment of interest payments against business income and dividend income for the assessment years 1974-75 and 1975-76.

Summary:

The assessee, Messrs. H. K. (Investment) Company Private Limited, claimed that interest paid for borrowings should be fully allowed against business income without apportionment. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim, allocating interest payments based on a formula suggested by the Income-tax Appellate Tribunal. The Tribunal considered various grounds raised by the appellant, ultimately rejecting the first three and bifurcating interest between business income and dividend income.

The Tribunal referred two questions under section 256(1) of the Income-tax Act, 1961, regarding the allowance of interest payments as business expenditure and the allocation of interest against different heads. The High Court held that the Tribunal's order was in accordance with relevant sections of the Act, stating that the entire interest payment could not be allowed as business expenditure as it was not all paid for business purposes. The Court answered question No. 1 in favor of the Revenue.

Regarding question No. 2, the High Court agreed with the Tribunal that only the gross amount of interest should be considered for allocation purposes, not the net amount. Thus, question No. 2 was answered in favor of the Revenue. The reference was disposed of with no costs awarded.

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