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2015 (8) TMI 16 - RAJASTHAN HIGH COURT

2015 (8) TMI 16 - RAJASTHAN HIGH COURT - TMI - Deduction on account of payment of interest on interest - whether was allowable under section 36(i)(iii) and Section 37(1)? - Held that:- In the present case, there is an additional feature that assessee failed to explain the amount which was claimed to be deducted under section 36(1)(iii) of the Act. It was found that the entire capital was paid and what was remaining in the account was interest on which the interest was shown and which was sought .....

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ur of revenue. - D. B. Income Tax Appeal No. 133/2006 - Dated:- 14-7-2015 - Sunil Ambwani And Vijay Bishnoi,JJ. For the Appellant : Mr Sunil Bhandari For the Respondent : None JUDGMENT By The Court ( Per Hon'ble Sunil Ambwani, CJ ) 1. We have heard learned counsel appearing for the Department. 2. The appeal was admitted on 12.12.2006, after which, it could not be listed as the service on respondent was not found to be sufficient. The Department has applied and carried out publication of noti .....

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legally justified in holding that the deduction on account of payment of interest on interest was allowable under section 36(i)(iii) and Section 37(1) of the Act of 1961?" 5. The facts of the case are that a return declaring income of ₹ 38,590/- was filed on 2.12.1996 alongwith the statement of total income, copies of trading and P/L account, balance-sheet and its annexures. The audit report was also filed under section 44AB of the Income Tax Act, 1961 (for short, "the Act" .....

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re, the credit balance represents only cumulative interest on interest for the past so many years, therefore, the interest liability claimed is wholly referable to interest on interest. Since interest amounting to ₹ 14985/- had already been disallowed on ingenuine credits, the balance amount of ₹ 3,67,202/- is disallowed in view of the judgments cited supra." 6. The Appellate Authority (Commissioner of Income Tax (Appeals)), partly allowed the appeal of the assessee on the claim .....

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mount in relation to Sec.214 of the Act, in our opinion the Assessing Officer disallowed this claim of the assessee as according to him the assess was not entitled to deduction in respect of interest on interest, and that the assessee was not able to compute the element of interest on interest included in the total claim of ₹ 3,82,187. But the Assessing Officer has no where refuted the claim of the assessee that the assessee had utilized the borrowed fund only for the purpose of business. .....

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partment has relied on the judgment of the Supreme Court in Shew Kissen Bhatter V/s Commissioner of Income Tax, West Bengal (1973 ITR (Vol.89) 61), in which the Supreme Court considering the question of payment of interest on interest for which the claim was made under section 9(1)(iv) of the Act held as follows:- "The question is whether the assessee is entitled to deduct the compound interest payable by him in accordance with the terms of the contract referred to earlier or whether he is .....

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was liable to pay interest on interest. Or to put it differently, when the interest payable is not paid, the same became a part of the principal and thereafter, interest has to be paid not only on the original principal but also on that part of the interest which had become a part of the principal. It cannot be said that the interest which became a part of the principal can be considered as the capital charge. What the assessee is entitled to deduct is the interest payable by him on the capital .....

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ded that the law permits his client to deduct any interest paid by him on the capital borrowed or charged and 'any interest' included compound interest also. This, to our minds, appears to be a fallacious argument. The compound interest is payable not on the capital charge but on that part of the interest on which he has agreed to pay interest. That is not the capital taken note of by section 9 (1) (v). If we accept Mr. Chagla's contention as correct, then the door will be open for e .....

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ceding year cannot be considered as expenditure laid out or expended wholly or exclusively for purpose of making or earning income. 10. The Bombay High Court in Commissioner of Income Tax V/s Hindustan Conductors (P) Ltd. ((2000) 108 Taxman 258 (Bom.) considered the same question with respect of allowability of the interest on interest under section 36(1)(iii) of the Act and held in paragraphs 8 and 9 as follows:- "8. We have also given our careful consideration to the submission of Mr. Meh .....

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he finds that it is not wholly interest but partly interest and partly payment for extra commercial consideration to allow only that part of the so-called interest which in his opinion is 'interest' and disallow the balance which is for extra commercial considerations. It is true that in the normal course the ITO cannot disallow any part of the interest on the ground that the rate of interest is high but that does not mean that he has to allow anything and everything claimed by the asses .....

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loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. (per Lord Wright in Riches v. Westminister Bank Ltd. [1947] AC 390 at 396, 398 HL). It is only interest in the above sense which is deductible under Section 36(1) (iii). If in the garb of interest something more is paid over and above 'interest', that something cannot be allowed as deduction under this section. It will not be correct to say that once a claim is made .....

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the assessee is entitled to deduction only of that part of the amount paid by him for money borrowed which can genuinely be regarded as interest. Any and every payment in the garb of interest in excess of what can really be termed as 'interest' cannot be allowed as a deduction under that section." 11. In the present case, the assessee had failed to give break up of the interest attributable to interest on interest and the interest attributable to original principal. It was seen from .....

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is the interest on money borrowed, which can be genuinely regarded as interest. When the principal amount borrowed stood repaid, the interest on interest was not a genuine amount, even if it was payable to the creditor which will qualify for deduction. 12. We do not find that the Appellate Authority and the ITAT have given sufficient and cogent reasons in holding that the assessee is entitled to deduction under section 36(1)(iii) of the Act and Section 37(1) of the Act. The ITAT has relied on t .....

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