1969 (6) TMI 2 - HC - Income Tax

Court allows full interest deduction for business borrowing

The High Court of Bombay ruled in favor of the assessee, allowing the full interest amount as a deduction under section 10(2)(iii) of the Indian ... Interest On Borrowed Capital - allowability as deduction Issues:- Whether the interest paid by the assessee on its borrowing during the assessment years 1953-54 to 1956-57 was an admissible deduction under the Indian Income-tax ActRs.Analysis:The judgment delivered by the High Court of Bombay addressed the issue of whether the interest paid by the assessee on its borrowing during the assessment years 1953-54 to 1956-57 was an admissible deduction under the Indian Income-tax Act. The assessee, a publisher of a Gujarati newspaper, had common expenditure arrangements with two sister concerns. The Income-tax Officer disallowed a portion of the interest claimed by the assessee, arguing that since the assessee did not charge interest on balances due from the sister concerns, it should not be allowed a deduction on the interest paid to creditors. The Appellate Assistant Commissioner upheld this decision, stating that the balances due were considered loans advanced by the assessee. However, the Tribunal disagreed, allowing the full interest amount as a deduction under section 10(2)(iii).The High Court upheld the Tribunal's decision, emphasizing that the balances due were not loans advanced by the assessee but were related to common expenditure arrangements. The court clarified that the borrowed capital was used for the business, not for advancing loans to the sister concerns. It cited precedent to support the assessee's right to claim interest deduction if the borrowed capital was used for business purposes, regardless of profitability. The court rejected the Income-tax Officer's argument that the assessee should have collected outstandings to reduce borrowing, stating that the relevant conditions for claiming interest deduction were borrowing for business purposes and actual payment of interest.The court criticized the Appellate Assistant Commissioner's view that the assessee diverted borrowed capital for loans to sister concerns, asserting that it was not supported by the facts. Referring to legal precedents, the court reiterated that the availability of resources at the time of borrowing did not affect the deduction claim if the interest was paid on borrowed capital for business purposes. Ultimately, the court ruled in favor of the assessee, affirming that the interest paid on borrowed capital was an allowable deduction under section 10(2)(iii) of the Income-tax Act. The Commissioner was directed to pay the costs of the assessee, and the question was answered in the affirmative.