TMI Blog1999 (7) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... that agreement, the assessee was liable to pay finance charges to the trust for the amount of loan. During the previous years relevant to the assessment years 1969-70, 1970-71 and 1971-72, the assessee credited Rs. 1,54,884, Rs. 1,70,848 and Rs. 82,120, respectively, to the account of the trust as finance charges for a loan of Rs. 2 lakhs and claimed the same as deduction in the computation of its income of the respective years. The claim was allowed by the Income-tax Officer. However, while completing the assessment of the assessee for the assessment year 1975-76, the Income-tax Officer found that the trust was founded by one Shri D. D. Desai, who was a senior member of the group of shareholders known as "Apar Group" and the affairs of the said trust, which was a charitable trust, were controlled by the founder of the assessee-company Shri D. D. Thakur through his kith and kin. The Income-tax Officer was of the opinion that payment of finance charges at exorbitant rates was not by way of interest but for extraneous consideration. The Income-tax Officer held that the payment of finance charges at the rate of 15 per cent. per annum on the amount borrowed can only be considered reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was contended that the Commissioner (Appeals) went wrong in reversing the above finding of the Income-tax Officer without taking note of this aspect of the matter and the Tribunal perpetuated that wrong by upholding the same. Mr. S. J. Mehta, learned counsel for the assessee, on the other hand, submits that, having found that the amount of Rs. 2 lakhs had in fact been borrowed by the assessee from the trust and the amount claimed as finance charges had been credited to the account of the trust in terms of the memorandum of agreement between the assessee and the trust, the Income-tax Officer had no power or authority to disallow any portion of the amount payable to the trust under the said agreement by way of finance charges. Learned counsel contended that in such circumstances, this court cannot go behind the finding of fact arrived at by the authorities below and take a different view in the matter. According to him, section 36(1)(iii) of the Act which provides for deduction of interest in respect of the capital borrowed for the purpose of the business or profession does not authorise or empower the Income-tax Officer to examine the reasonableness of the rate of interest. Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1% (one per cent.) of the net sale proceeds of the company every year by way of return provided that in no case the amount payable by way of dues to the financiers by the company shall be less than Rs. 30,000 for a year." Under the said agreement, the assessee-company was obliged to repay the amount with interest thereon on or before March 31, 1972, unless the parties consented to extend the time for repayment. The admitted position is that no repayment was made on or before that date. It remained with the assessee for years. It appears even in the accounts of the assessee for the assessment year 1979-80. There is also no dispute about the fact that the trust was founded by one of the directors of the assessee-company. Admittedly, all the shares of the assessee-company are held by the members of one family of which the said director was a senior member. There is nothing on record to show that the assessee's financial condition justified borrowing a sum of Rs. 2 lakhs on the terms set out in the agreement, as a result of which, it was required to pay for borrowing a sum of Rs. 2 lakhs, Rs. 1,54,884 as finance charges in one year, Rs. 1,70,848 in the second year and Rs. 82,120 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such advances, only interest is payable. There is no other reason put forth for paying one per cent. of the sales towards such interest, whether it is called interest or financial charges." In view of the above, in our view, in the facts and circumstances of the case, the action of the Income-tax Officer was fully justified and the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal were not correct in reversing the same. We have also given our careful consideration to the submission of Mr. Mehta that the Income-tax Officer has no power under section 36(1)(iii) of the Act to examine the reasonableness of the rate of interest paid by the assessee on borrowings and to disallow any part of the amount which is paid by the assessee as interest on borrowings. We find it difficult to accept the above contention because, in our opinion, the Income-tax Officer is undoubtedly entitled, while considering the claim for deduction under section 36(1)(iii) of the Act to examine whether the amount paid as interest is really "interest" and if he finds that it is not wholly interest but partly interest and partly payment for extra-commercial consideration, to allow only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on supports the case of the assessee. On the other hand, in our opinion, that judgment, in the facts and circumstances of the present case, goes against the assessee. In that case, the assessee was an employee of a firm earning a salary of Rs. 10,572 and Rs. 500 from shares annually. He entered into a coal raising contract with a coal company, but as he did not have the requisite funds for his business, he entered into an agreement with a public charitable trust for the advance to him of sums up to rupees one and half lakhs on payment of interest at the rate of six per cent. per annum and 11/16ths of the profits of the business. The assessee agreed that the coal raising contract would be carried on in accordance with the policy settled between him and the trust, The trust could withdraw its money at any time and stop further advances. It was not liable for any losses. The assessee was also to send monthly returns to the trust. In pursuance of this agreement, the assessee paid during the accounting years relevant to the assessment years 1947-48 and 1948-49 besides interest, the sum of Rs. 72,963 and Rs. 75,526 and claimed these amounts as allowable deductions. The Appellate Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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