1976 (11) TMI 57 - HC - Income Tax

High Court Upholds Deductions for Interest Paid on Borrowings

The High Court upheld the Tribunal's decision to allow deductions for interest paid on borrowings used for income-tax liabilities, emphasizing the ... Assessment Year, Interest On Borrowed Capital Issues involved: Deduction of interest paid on borrowings utilized for payment of income-tax liabilities of the firm and partners.Summary:The judgment pertains to a case where the Commissioner of Income-tax sought a ruling on whether interest paid on borrowings used partly for income-tax liabilities could be considered wholly and exclusively laid out for business purposes. The assessee, a registered firm, faced disallowance of interest on borrowed funds for assessment years 1958-59 to 1965-66. The Income-tax Officer disallowed specific amounts, citing that borrowings were not solely for business purposes but also for settling tax liabilities. The Appellate Assistant Commissioner upheld the disallowance for certain years but reversed it for others. Appeals were made to the Tribunal, where the revenue argued against allowing the deductions based on past decisions. The assessee contended that the Tribunal should reconsider the matter due to changed circumstances post a relevant court decision. The Tribunal, considering the special circumstances and the nature of the business, allowed the deductions based on the conditions specified under section 10(2)(iii) of the Income Tax Act. The Tribunal emphasized that the purpose of borrowings and payment of interest was crucial, irrespective of the subsequent use of funds. The High Court upheld the Tribunal's decision, emphasizing the validity of the grounds cited for allowing the deductions. The Court rejected the revenue's argument that past disallowances should influence the current ruling, highlighting the importance of the specific circumstances of the case. The Court discharged the rule, affirming the Tribunal's decision to allow the deductions with costs.