2006 (10) TMI 92 - HC - Income Tax

Interest on borrowed capital held that if assessee had sufficient funds other than borrowed money for giving the mount as loan to any other concern the conditions of sec. 36(1)(ii) has been complied with & assessee is entitled to full allowance of interest for A.Y. 1980-81

Summary

Issues Involved:
1. Reasonable opportunity to meet the case regarding accrual of interest.
2. Accrual of interest at 18% per annum on advances.
3. Nature of advance to M/s. Malik & Co. as business or non-business advance.
4. Disallowance of Rs. 1,98,607 under section 36(1)(iii) of the Income-tax Act, 1961.
5. Confirmation of disallowance for the assessment year 1980-81.

Detailed Analysis:

Reasonable Opportunity to Meet the Case:
The Tribunal concluded that the assessee had a reasonable opportunity to present her case regarding the accrual of interest on advances made to M/s. Mohan General Trading Co., Calcutta, and M/s. Malik & Co., Kanpur. The Tribunal rejected the assessee's plea for additional opportunities to explain her viewpoint, stating that the assessee should have brought any variations in the agreement clauses on record during the hearing.

Accrual of Interest at 18% Per Annum:
The Tribunal upheld the finding that interest at the rate of 18% per annum accrued to the assessee on the advances made to M/s. Mohan General Trading Co. and M/s. Malik & Co. This conclusion was based on the terms of the agreements, which stipulated that interest would be charged if the projects were not completed within a specified period.

Nature of Advance to M/s. Malik & Co.:
The Tribunal held that the advance made to M/s. Malik & Co. was not a business advance. The Tribunal found that the loans given to M/s. Malik & Co. were not out of the borrowings on which the assessee was paying interest. Therefore, no part of the interest paid on the borrowings could be disallowed on the grounds that interest-bearing loans were diverted to provide interest-free loans to M/s. Malik & Co.

Disallowance of Rs. 1,98,607 Under Section 36(1)(iii):
The Tribunal confirmed the disallowance of Rs. 1,98,607 under section 36(1)(iii) for the assessment year 1980-81. The Tribunal relied on the clause in the agreements that provided for charging interest if the projects were not completed within the specified period. The Tribunal noted that the assessee had not charged interest from M/s. Mohan General Trading Co. and M/s. Malik & Co., despite paying interest on borrowings.

Confirmation of Disallowance for Assessment Year 1980-81:
The Tribunal's decision to confirm the disallowance for the assessment year 1980-81 was challenged by the assessee. The High Court found that the borrowed money on which the assessee paid interest was not diverted towards interest-free loans to M/s. Mohan General Trading Co. and M/s. Malik & Co. The court referred to the remand report, which indicated that the borrowings were not utilized as interest-free loans. The court also considered the precedent that if the assessee had sufficient funds other than borrowed money, the conditions of section 36(1)(iii) were complied with, allowing the full interest deduction on borrowed capital.

Conclusion:
The High Court concluded that the Tribunal was not justified in confirming the disallowance of Rs. 1,98,607 for the assessment year 1980-81. Consequently, the court answered question No. 5 in favor of the assessee and against the Revenue, rendering the other questions academic and returning them unanswered.