1988 (3) TMI 110 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on Appeals, Limits Interest Disallowance to House Property Loans (A)

The Tribunal dismissed the appeals and upheld the CIT(A)'s decisions on all issues. The disallowance of interest on interest was restricted to loans for ... - Issues Involved:1. Disallowance of interest on interest.2. Additions made under Section 40A(8) representing interest on alleged deposits made by directors.3. Trading addition of Rs. 10,000 for the assessment year 1983-84.Detailed Analysis:1. Disallowance of Interest on Interest:The primary issue was whether the interest on interest should be disallowed for the assessment years 1979-80 to 1983-84. The assessee, a private limited company, claimed interest on loans taken for house property and business purposes under Sections 24(1)(vi), 36(1)(iii), and 37 of the Income Tax Act. The ITO disallowed the interest on interest, referencing the Supreme Court decision in Shew Kissen Bhatter vs. CIT, which stated that 'the real capital borrowed was that which was originally due and not the additional interest.' The ITO allowed interest only under specific sections, disallowing it under Section 37.In appeal, the CIT(A) noted similar issues had arisen in the past and the Tribunal had directed the ITO to examine the details to determine what part of the interest claimed represented interest on interest, which would be inadmissible under Section 24(1)(vi). The CIT(A) held that interest on loans for business purposes could not be disallowed under the Supreme Court's ruling and restricted the disallowance to interest on loans for house property construction. The CIT(A) left it open for the ITO to verify the calculations and make necessary adjustments.The Tribunal upheld the CIT(A)'s findings, stating that if an interest expenditure is not covered under Section 36(1)(iii), it could still be considered under Section 37. The Tribunal found no fault with the CIT(A)'s decision to leave the verification of figures to the ITO.2. Additions Made Under Section 40A(8):The second issue involved the disallowance of interest under Section 40A(8) for the assessment years 1980-81 to 1983-84. The ITO disallowed 15% of the interest claimed, asserting that the total interest claimed was allowable under Sections 36(1)(iii) or 37. The CIT(A) referred to earlier Tribunal decisions for the assessment years 1976-77 and 1977-78, where similar disallowances were deleted.The Tribunal noted that there was no finding that interest amounts were paid to directors or their relatives on credit balances in their current accounts or as deposits. Therefore, the decision of the Special Bench in Kaloomal Shorimal Sachdev Rangwalla (P) Ltd. vs. First ITO, which justified disallowance under Section 40A(8), was not applicable. The Tribunal upheld the CIT(A)'s decision to delete the disallowances based on earlier Tribunal decisions.3. Trading Addition of Rs. 10,000 for the Assessment Year 1983-84:The final issue was the trading addition of Rs. 10,000 made by the ITO for the assessment year 1983-84. The ITO noted discrepancies in the gross profit rates compared to the previous year and made the addition. The CIT(A) accepted the assessee's explanation that the fall in the gross profit rate in the manufacturing account was due to the setting up of a rival business by one of the directors and the subsequent letting out of machinery. The CIT(A) also noted that the trading account's gross profit rate was better in the assessment year in question.The Tribunal, concurring with the CIT(A)'s reasoning, found no merit in the ground of appeal and upheld the deletion of the trading addition.Conclusion:The appeals were dismissed, and the Tribunal upheld the CIT(A)'s decisions on all issues, including the disallowance of interest on interest, additions under Section 40A(8), and the trading addition for the assessment year 1983-84.