1983 (11) TMI 31 - HC - Income Tax

High Court rules interest rate for disallowance should match firm's actual rate paid.

The High Court ruled in favor of the Revenue, holding that the Tribunal's decision on interest calculation was incorrect. The Court emphasized that the ... Business Expenditure, Interest On Borrowed Capital Issues:1. Determination of interest to be charged on overdrawings of partners2. Allowability of interest paid on borrowings as a business expenditure3. Disallowance of interest paid for non-business purposesAnalysis:The judgment pertains to a case where the Revenue questioned the Appellate Tribunal's decision regarding the interest to be charged on the overdrawings of partners. The firm, consisting of four partners, had debit balances in loan and annuity deposit accounts. The Income Tax Officer (ITO) estimated interest on partners' drawings and overdrawings, which was contested by the assessee. The Appellate Authority Commission (AAC) considered interest credited to partners on capital contributions and sustained the addition based on the interest rate of 9 1/2 per cent. The Tribunal found that borrowed funds were used for non-business purposes, leading to a disallowance of interest. However, the Tribunal's computation of disallowance at 6% interest was challenged by the Revenue.The High Court noted that part of the borrowed funds was used for non-business purposes, justifying the disallowance of interest paid on that portion. The Court disagreed with the Tribunal's use of 6% interest for the disallowance calculation, emphasizing that the firm paid interest at 9 1/2 per cent on its borrowings. It was clarified that interest at the actual rate of 9 1/2 per cent should be considered for disallowance, not the 6% interest paid by partners on their loans to the firm. Consequently, the Court ruled in favor of the Revenue, holding that the Tribunal's decision on interest calculation was incorrect. The question posed by the Revenue was answered negatively, resulting in no costs being awarded.In conclusion, the judgment addressed the appropriate interest rate to be considered for the disallowance of interest paid on borrowed amounts used for non-business purposes. The Court emphasized the disparity between the interest rates paid by the firm and partners, leading to the rejection of the Tribunal's computation based on 6% interest. The decision highlighted the necessity of aligning the interest rate for disallowance with the actual rate paid by the firm, ensuring consistency in determining business expenditures.