1986 (3) TMI 119 - AT - Income Tax

Summary

Issues:
1. Taxability of interest charged on doubtful debts.
2. Treatment of expenses incurred for raising funds in London.

Analysis:

Issue 1:
The appeal involved a dispute regarding the taxability of interest charged on doubtful debts by a non-resident company doing banking business in India. The department contested the deletion of the addition of Rs. 44,55,972 made by the ITO on the grounds that the interest charged on doubtful debts should be included in taxable income. The Commissioner (Appeals) relied on a circular from 1952, which stated that if there was little possibility of loan repayment, the interest need not be included in taxable income. However, this circular was withdrawn in 1978. The Commissioner (Appeals) followed a decision by the Kerala High Court and allowed the deduction based on the circular of 1952. The ITAT, in its judgment, referenced a recent Supreme Court decision affirming that interest on sticky advances should be included in total income under the mercantile system of accounting, regardless of whether the interest is credited to a suspense account or an interest account. The ITAT held that the circulars could not detract from the Income-tax Act, and therefore, reversed the Commissioner's order, restoring the addition of Rs. 44,55,972 to the total income of the assessee.

Issue 2:
Another aspect of the appeal involved the treatment of expenses incurred for raising funds in London by the non-resident company. The company had to make a deposit to the Reserve Bank of India in the Bank of England, London, which did not earn any interest. The company claimed the expense as the 'cost of raising funds,' including interest for borrowing the funds. The Commissioner (Appeals) allowed the deduction, considering it as an admissible expenditure incidental to the business carried out by the company in India. The ITAT, after considering arguments from both parties, found that if the expense consisted of interest, it would be admissible under section 36(1)(iii) of the Act. However, regarding other components of the expense, the ITAT was not convinced and directed the assessing officer to bring relevant facts on record and decide the matter afresh in accordance with the law.

The ITAT partially allowed the departmental appeal, dismissed one cross-objection, and treated another cross-objection as partly allowed for statistical purposes.