2006 (4) TMI 516 - HC - Income Tax

Summary

Issues:
1. Disallowance of deduction claimed by the assessee for interest paid to trade creditors.
2. Reversal of the disallowance by the Tribunal.
3. Justification of the deduction claimed by the assessee.
4. Legal infirmity in the Tribunal's decision.
5. Lack of substantial question of law for consideration.

The judgment pertains to a case where the Assessing Officer disallowed a deduction claimed by the assessee for interest paid to trade creditors, as the assessee had not recovered interest from its debtors, one of whom was its sister concern. The Tribunal reversed this view, emphasizing that there was no direct linkage between the interest paid to creditors and the debts to be recovered from other parties. The Tribunal held that the interest payment to suppliers was allowable as a deduction under section 37(1) of the Income Tax Act, as it was incurred wholly and exclusively for the purpose of business. The Tribunal rejected the argument that the assessee should have also charged interest from trade debtors, stating that a trader cannot be compelled to earn income if it chooses not to do so. The Tribunal upheld the order of the CIT(A) and dismissed the appeal filed by the revenue, emphasizing that the reasons for paying interest to trade creditors and not charging interest from trade debtors were different and should not be mixed up.

The High Court concurred with the Tribunal's decision, stating that there was no legal infirmity in allowing the deduction claimed by the assessee for interest paid to trade creditors. The Court highlighted that the failure of the assessee to charge interest from trade debtors did not preclude the allowance of interest paid to trade creditors as a deduction, especially when the genuineness of the payment made by the assessee was not in dispute. The Court concluded that no substantial question of law arose for consideration in the appeal and thus dismissed it.

In summary, the judgment clarifies that the interest payment made by the assessee to trade creditors was allowable as a deduction for the purpose of business, even though interest was not charged from trade debtors. The decision underscores the distinct reasons for paying interest to creditors and not charging interest from debtors, emphasizing that these reasons should not be conflated for the purpose of denying a legitimate deduction.