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Issues involved: Whether interest paid by the assessee during the accounting period merited disallowance for the assessment year 1971-72.
Summary: The High Court of Bombay considered the case involving the disallowance of interest paid by an assessee firm during the accounting period relevant to the assessment year 1971-72. The firm had borrowed money in previous years and advanced a part of it to its sister concerns without interest. The Income-tax Officer disallowed the interest claimed by the assessee, leading to a dispute. The Appellate Assistant Commissioner reduced the disallowance, but the Tribunal accepted the assessee's claim in its entirety. The Tribunal noted that no fresh loans were advanced to sister concerns in the relevant year, and substantial amounts were recovered instead. The Tribunal held that the disallowance of interest was not justified, considering the change in the situation and the purpose of the borrowed funds being for business. The High Court, however, disagreed with the Tribunal's decision, stating that the disallowance of interest was justified based on the facts and circumstances of the case. In analyzing the situation, the High Court found that the loans taken by the assessee were mainly for its own business purposes, with only a small portion diverted to sister concerns. The Court emphasized that interest was charged at a rate of 4 per cent during the relevant year, unlike earlier years. Additionally, the Court noted that the amounts advanced to sister concerns were partly from borrowed funds, and the argument regarding sundry creditors was not sufficient to justify the disallowance of interest. Ultimately, the High Court answered the question of law in the affirmative, favoring the Revenue and ruling against the assessee. Therefore, the High Court upheld the disallowance of interest paid by the assessee during the accounting period for the assessment year 1971-72, based on the specific circumstances and utilization of borrowed funds for advancing money to sister concerns.
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