1989 (11) TMI 28 - HC - Income Tax

Non-resident company denied deduction for interest paid on borrowed funds used for share investment.

The High Court held that the deduction claimed by the non-resident company was not allowable under section 58(1)(a)(ii) of the Income-tax Act, 1961. The ... Income Deemed To Accrue Or Arise In India, Other Sources Issues Involved:1. Entitlement to deduction under section 57(iii) of the Income-tax Act, 1961.2. Applicability of section 58(1)(a)(ii) of the Income-tax Act, 1961.3. Interpretation of the phrase 'money brought into India in cash or kind'.4. Relevance of the letter dated February 19, 1974, from Swiss Bank Corporation.Issue-wise Detailed Analysis:1. Entitlement to Deduction under Section 57(iii) of the Income-tax Act, 1961:The assessee, a non-resident company, claimed a deduction for interest paid on borrowings used for investing in shares of Widia (India) Limited. The Income-tax Officer (ITO) rejected the claim, stating that interest could only be allowed if there was income under the head 'Dividend,' which was not the case here. The ITO also noted that the dividend income was exempt under section 80K of the Act and not liable to tax, thus disallowing the interest deduction. The Appellate Assistant Commissioner (AAC) disagreed, stating that the absence of taxable income does not make the expenditure disallowable, and upheld the interest deduction. The Tribunal agreed with the AAC, leading to the present reference to the High Court.2. Applicability of Section 58(1)(a)(ii) of the Income-tax Act, 1961:Section 58 overrides section 57 and declares that certain amounts are not deductible in computing income under 'Income from other sources.' Specifically, any interest on money borrowed for investment, payable outside India to a non-resident, is not deductible unless tax is deducted at the time of payment, or the tax is paid by the non-resident, or there is a statutory agent in India. The ITO applied this provision to disallow the interest deduction. The AAC and Tribunal upheld this view, leading to the examination of whether the deduction claimed by the assessee was hit by section 58(1)(a)(ii).3. Interpretation of the Phrase 'Money Brought into India in Cash or Kind':The assessee argued that the borrowed money was used to purchase machinery, which was then sent to India, and shares were allotted in lieu of the sale price of the machinery. The assessee contended that 'money brought into India in cash or kind' should be interpreted to mean currency or recognised commercial forms like bills of exchange, not goods or machinery. The High Court examined the definitions of 'money,' 'currency,' 'cash,' and 'in kind' and concluded that 'money in kind' includes goods or commodities as distinguished from money. The court disagreed with the Calcutta High Court's view that the phrase should be confined to currency, stating that such an interpretation would be tautological and redundant.4. Relevance of the Letter Dated February 19, 1974, from Swiss Bank Corporation:The letter indicated that the Swiss Bank Corporation granted a credit line to the assessee to invest in shares of Widia (India) Limited. The court found that the letter established that the loan was for the purpose of investment in shares, regardless of how the money was subsequently used (e.g., purchasing machinery). The court concluded that the arrangement between the assessee and the Swiss Bank Corporation was to invest in shares, making the interest on the borrowed money subject to section 58(1)(a)(ii).Conclusion:The High Court concluded that the deduction claimed by the assessee was hit by section 58(1)(a)(ii) of the Income-tax Act, 1961. The court found that the borrowed money was indeed brought into India in kind (machinery), and the arrangement between the assessee and the Swiss Bank Corporation was for the purpose of investing in shares of Widia (India) Limited. Therefore, the interest paid on the borrowed money was not allowable as a deduction. The court answered the reference in the affirmative and against the assessee.