1982 (6) TMI 27 - HC - Income Tax

Court rules on deduction of interest for dividend vs. tax payments

The court ruled in favor of the assessee for the deduction of interest on borrowed money for dividend payment but against the assessee for the deduction ... Deductibility of interest - interest on capital borrowed for the purposes of the business or profession - payment of dividend as a purpose of business - payment of taxes not a purpose of business - in pari materiaInterest on capital borrowed for the purposes of the business or profession - payment of dividend as a purpose of business - deductibility of interest - Payment of interest on moneys borrowed for the payment of dividend is an allowable deduction under s. 36(1)(iii) of the Income-tax Act, 1961. - HELD THAT: - The Court accepted that amounts borrowed by a company constitute capital borrowing. The determinative question was whether payment of dividend can be regarded as expenditure 'for the purposes of the business or profession' within clause (iii) of sub-s. (1) of s. 36. Relying on the Calcutta High Court decision in CIT v. Tingri Tea Company Ltd., and the broader construction of the phrase adopted by the Supreme Court in CIT v. Malayalam Plantations Ltd., the Court held that declaration and payment of dividends fall within the purposes of a company's business. The Court noted that s. 10(2)(iii) of the earlier Act is in pari materia with s. 36(1)(iii) of the 1961 Act and that previous authority of this Court has approved the reasoning; on that basis the interest paid on borrowings for payment of dividend was held deductible.Answered in the affirmative; interest on borrowings for payment of dividend is allowable as a deduction.Deductibility of interest - payment of taxes not a purpose of business - Payment of interest on moneys borrowed for the payment of taxes is not an allowable deduction under the Income-tax Act, 1961. - HELD THAT: - The Court recorded that the question was concluded against the assessee by this Court's earlier decision in Kishinchand Chellaram v. CIT. Applying that precedent, the Court held that borrowings to meet tax liabilities do not constitute borrowings incurred 'for the purposes of the business or profession' and therefore interest on such borrowings is not deductible under s. 36(1)(iii).Answered in the negative; interest on borrowings for payment of taxes is not allowable as a deduction.Final Conclusion: For assessment year 1964-65, interest on borrowings used to pay dividends was allowed as a deduction under s. 36(1)(iii), whereas interest on borrowings used to pay taxes was disallowed; no order as to costs. Issues involved: The judgment involves two main issues: 1. Whether the payment of interest by the assessee on borrowed money for the payment of dividend is an allowable deduction under the Income-tax Act, 1961Rs. 2. Whether the payment of interest by the assessee on borrowed money for the payment of taxes is an allowable deduction under the Income-tax Act, 1961Rs.Issue 1 - Payment of interest for dividend: The assessee, a company manufacturing and selling sugar, had an overdraft account primarily used for tax payments and dividend. The interest paid on this overdraft was claimed as a deduction. The Tribunal allowed the deduction for dividend payment but disallowed it for tax payments. The court considered the deduction u/s 36(1)(iii) of the Income-tax Act, which allows deduction for interest paid on capital borrowed for business purposes. The court referred to a case where the payment of dividend was considered part of the business purpose. It was held that the payment of dividend can be seen as for the purpose of business, and therefore, the interest paid on borrowed money for dividend payment is an allowable deduction.Issue 2 - Payment of interest for taxes: Regarding the payment of interest on borrowed money for taxes, the court noted a previous decision that concluded against the assessee. Referring to the decision in Kishinchand Chellaram v. CIT, it was held that the question is answered in the negative and against the assessee.Conclusion: The court ruled in favor of the assessee for the deduction of interest on borrowed money for dividend payment but against the assessee for the deduction of interest on borrowed money for tax payments. Due to the divided success, no order was given regarding costs.