1992 (11) TMI 86 - HC - Income Tax

Revenue's interest disallowance upheld for non-business borrowings, but notional interest on interest-free advances disallowed under Income-tax Act

HC held that on facts the ITO and Tribunal were justified in treating certain borrowings as not for business and upholding disallowance of interest for ... Claim for deduction is based on section 36(1)(iii) - Notional Interest On Interest Free Loans - Whether, the Tribunal was justified in upholding the action of the Inspecting Assistant Commissioner (Assessment) in including the interest on notional basis on interest-free advances made by the assessee to the managing director and others for the assessment years 1978-79 and 1979-80 ? HELD THAT:- The Tribunal found that, on the facts available and on the materials before it, it is satisfied that the Income-tax Officer disallowed the interest payment on valid grounds and the Commissioner of Income-tax (Appeals) was not justified in deleting the same for the reasons recorded by him. It is thus clear that the Tribunal accepted the findings of fact arrived at by the Income-tax Officer on the facts and materials before it. The findings of fact arrived at by the Income-tax Officer are that there were rotational loans and fresh loans were taken for the purpose of granting loan free of interest to the managing director. The Income-tax Officer also rejected the explanation that borrowing had to be made considering the voluminous contracts in hand and the probable financial requirements for the purpose of business. On the facts found, namely, that the loans were obtained to grant loan to the managing director free of interest, that the borrowing was not made considering the voluminous contracts in hand and the probable financial requirements for the business purpose of the company, the conclusion could only be that the loan was not borrowed for the purpose of business. We, therefore, answer the first question in the affirmative, that is, against the assessee and in favour of the Revenue. While the accounts reflected grant of interest-free loan to the managing director and others, the Income-tax Officer added Rs. 50,000, being the amount of interest the assessee ought to have charged in his business interest. The amount represents the interest on the interest-free loans granted to the managing director and others. The Tribunal upheld this in view of what it had decided for the earlier years. There is no finding of fact to the effect that actually the loan had been granted to the managing director or any other person on interest, or that interest had actually been collected and the collection of the interest was not reflected in the accounts. The finding of the Incometax Officer is that the assessee ought to have collected interest. In other words, the view of the Income-tax Officer, which has been accepted by the Tribunal was that the assessee, as a good business concern, should not have granted interest-free loan, or should have insisted on payment of interest. If the assessee had not bargained for interest, or had not collected interest, we fail to see how the income-tax authorities can fix a notional interest as due, or collected by the assessee. Our attention has not been invited to any provision of the Income-tax Act empowering the income-tax authorities to include in the income interest which was not due or not collected. In this view, we answer question No. (ii) in the negative, that is, in favour of the assessee and against the Revenue. Issues Involved: Disallowance of interest for assessment years 1973-74 and 1974-75, inclusion of interest on notional basis for assessment years 1978-79 and 1979-80.Dispute for Assessment Years 1973-74 and 1974-75: The assessee, a private limited company engaged in building construction, had claimed deduction of interest as business expenditure. The Income-tax Officer disallowed the deduction, stating the interest did not represent genuine business expenditure. The Officer found the company had raised loans and made interest-free advances to the managing director. The Commissioner of Income-tax deleted the disallowance, but the Tribunal upheld the Income-tax Officer's decision, stating the disallowance was valid based on the facts and materials. The Tribunal accepted the Officer's findings that loans were not for business purposes, leading to the disallowance of interest.Dispute for Assessment Years 1978-79 and 1979-80: The Income-tax Officer added back notional interest on unsecured loans and advances, which the Commissioner of Income-tax (Appeals) deleted. The Tribunal, in an appeal by the Revenue, restored the interest addition based on earlier decisions. The Tribunal's decision was based on the premise that loans were not for business purposes, hence interest should have been charged. However, there was no evidence that interest was actually collected, leading to the conclusion that notional interest should not be added.Conclusion: The High Court answered the first question against the assessee and in favor of the Revenue, affirming the disallowance of interest for assessment years 1973-74 and 1974-75. For the second question, the Court ruled in favor of the assessee and against the Revenue, stating that notional interest should not have been added for assessment years 1978-79 and 1979-80. The judgment was transmitted to the Income-tax Appellate Tribunal, Gauhati Bench, for further action.