1977 (6) TMI 6 - HC - Income Tax

Court rules interest on borrowed capital for tax liabilities inadmissible, rejects addition of undisclosed income.

Kishinchand Chellaram Versus Commissioner Of Income-Tax, Bombay City III

The court upheld the disallowance of interest on borrowed capital used for tax liabilities, stating that interest on borrowings for non-business purposes ... Interest On Borrowed Capital Issues Involved:1. Disallowance of interest on borrowed capital utilized for tax liabilities.2. Addition of Rs. 77,000 as undisclosed income.Detailed Analysis:1. Disallowance of Interest on Borrowed Capital Utilized for Tax LiabilitiesFacts and Tribunal's Findings:The assessee, a registered firm, borrowed capital and utilized part of it for paying tax liabilities of the firm and its partners. The Income-tax Officer disallowed the interest on Rs. 9,41,344, which was used for non-business purposes, including tax payments. The Tribunal upheld this disallowance, stating that interest on borrowings used for non-business purposes is inadmissible.Arguments:- Assessee's Argument: The assessee argued that capital borrowed for business purposes should allow for interest deduction under section 10(2)(iii), regardless of subsequent utilization. They contended that paying taxes was necessary to avoid business closure, thus qualifying as a business purpose.- Revenue's Argument: The revenue countered that borrowed capital must be used for business purposes to qualify for interest deduction. They emphasized that tax liabilities arise after income accrues and are not business expenditures.Court's Analysis:The court analyzed section 10(2)(iii) and relevant case law, including Commissioner of Income-tax v. Indian Bank Ltd., Commissioner of Income-tax v. Bombay Samachar Ltd., and others. The court concluded that for interest to be deductible, the borrowed capital must be used for business purposes. It rejected the argument that paying taxes qualifies as a business purpose, as taxes are levied on profits already earned and do not constitute business expenditure.Conclusion:The court answered additional question No. 1 in the affirmative, upholding the disallowance of interest on borrowed capital used for tax liabilities.2. Addition of Rs. 77,000 as Undisclosed IncomeFacts and Tribunal's Findings:The assessee had credits totaling Rs. 77,000 in its books, attributed to four depositors. The Income-tax Officer added this amount as undisclosed income, citing lack of deposit receipts, non-traceability of depositors, and other discrepancies. The Appellate Assistant Commissioner deleted this addition, but the Tribunal reinstated it, questioning the genuineness of the deposits.Arguments:- Assessee's Argument: The assessee argued that there was no evidence to support the Income-tax Officer's findings. They pointed out that the sahi book showed similar transactions without revenue stamps and that large amounts were paid in cash or by bearer cheques.- Revenue's Argument: The revenue maintained that the circumstances justified treating the deposits as undisclosed income.Court's Analysis:The court scrutinized the evidence and found the Income-tax Officer's and Tribunal's conclusions based on equivocal circumstances. It noted that the sahi book did not consistently use revenue stamps and that large payments were made in cash or by bearer cheques. The court found no compelling evidence to support the addition of Rs. 77,000 as undisclosed income.Conclusion:The court answered additional question No. 2 in the negative, ruling in favor of the assessee and rejecting the addition of Rs. 77,000 as undisclosed income.Final Judgment:The court ruled partly in favor of both parties, with each bearing its own costs. The disallowance of interest on borrowed capital used for tax liabilities was upheld, while the addition of Rs. 77,000 as undisclosed income was rejected.