1986 (10) TMI 32 - HC - Income Tax

Tribunal decisions on sugar stock, interest deductions, taxability, and disallowance

The Tribunal upheld the deletion of an addition in the closing stock of sugar, allowed the deduction of interest on cane purchase tax arrears, remanded ... Interest On Borrowed Capital Issues Involved:1. Deletion of addition made by the Income-tax Officer in the closing stock of sugar.2. Allowability of interest paid on cane purchase tax arrears as a deduction.3. Taxability of interest recoverable from M/s. Triveni Engineering Works Ltd.4. Disallowance of interest claimed by the assessee on borrowed capital.Summary:Issue 1: Deletion of Addition in Closing Stock of SugarThe Tribunal deleted the addition of Rs. 16,30,110 made by the Income-tax Officer on account of undervaluation of closing stock of sugar. The Tribunal had accepted the change in the method of valuation from market price to cost price or market value, whichever is lower, as bona fide and consistently followed in subsequent years. The Tribunal's earlier order for the assessment years 1969-70 and 1970-71 had become final, and the Department did not take further proceedings against it. The Tribunal's decision was based on the principle that the method of accounting regularly employed by an assessee should be followed unless it fails to properly deduce the income. The Tribunal's reliance on its earlier order was justified, and the deletion of the addition was upheld.Issue 2: Allowability of Interest on Cane Purchase Tax ArrearsThe Tribunal allowed the deduction of Rs. 3,08,800 paid as interest on cane purchase tax arrears under the U.P. Sugarcane (Purchase Tax) Act, 1961. The Tribunal relied on the decision in Kamlapat Motilal v. CIT [1976] 104 ITR 783, which was later approved by a larger Bench in Triveni Engineering Works Ltd. v. CIT [1983] 144 ITR 732. The Tribunal's decision was upheld as the interest payment was considered an allowable deduction under the Income-tax Act, 1961.Issue 3: Taxability of Interest Recoverable from M/s. Triveni Engineering Works Ltd.The Tribunal disallowed the claim of Rs. 4,34,827 as a bad debt, stating that the principal amount was still considered recoverable, and there was no evidence of collusion. The Tribunal did not address the assessee's argument that the amount should be allowed as a loss or expenditure on the grounds of commercial expediency. The matter was remanded to the Tribunal to rehear and decide afresh, considering the commercial expediency argument.Issue 4: Disallowance of Interest Claimed by the AssesseeThe Tribunal sustained the disallowance of Rs. 1,17,412 out of the interest claimed by the assessee on borrowed capital. The Tribunal found that part of the loans borrowed from the bank were diverted for purposes other than the assessee's own business, including loans to M/s. Triveni Engineering Works Ltd. and near relations of the directors. The Tribunal held that the deduction under section 36(1)(iii) of the Act could only be allowed if the loans were utilised for the assessee's own business. The disallowance was upheld as the loans were not proved to be for the assessee's business purposes.Conclusion:The questions referred at the instance of the Department were answered in the affirmative, in favour of the assessee. Questions referred at the instance of the assessee were answered as follows:- Question No. 1: No answer returned.- Questions Nos. 2 and 3: Returned unanswered with a direction for rehearing.- Question No. 4: Answered in the affirmative, against the assessee.No order as to costs was made due to the divided success of the parties.