TMI Blog1997 (5) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... and liabilities. The value of the assets acquired was Rs. 3,09,521. As on July 1, 1975, the account of the assessee in the books of the Four Fields Poultry Products showed a credit balance of Rs. 1,24,785.02. There were four other partners, namely, Jagdish Chander Mehra, Jugal Kishore Mehra, Jai Gopal Mehra and Joginder Lal Mehra. Each of them had credit balances of Rs. 42,000 to Rs. 48,000 in the aforesaid firm. The assessee having been permitted to take over the business of Four Fields Poultry Products along with all its assets and liabilities, was required to make payment of Rs. 1,82,037 in aggregate to all the partners in the settlement of the dues upon the dissolution of the firm. The dissolution deed provided that if the assessee was able to clear the liability of the outgoing partners by December 31, 1976, no interest was to be charged but if it was not able to clear the liability till that date interest at the rate of 15 per cent. per annum was to be charged. One of the assets taken over by the assessee comprised a building, the value of which was shown in the balance-sheet at Rs. 2,16,973 as on June 30, 1975. This was a tenanted property and fetched a rent of Rs. 30,000 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, having accepted the assessee as the owner of the property whose rental income was subjected to assessment, could not in law ignore the arrangement under which the ownership had passed to the assessee following the dissolution of the partnership firm. As a result of the arrangement brought about by the dissolution deed, the assessee had taken over the running business comprising assets and liabilities, which, in other words, implied that the ownership of the assets including that of the building had passed on to the assessee. By virtue of this, the assessee had become liable to pay a sum of Rs. 1,82,037 to the erstwhile partners for the ownership of all the assets including the building. It was held that if the assessee had borrowed the sum from a third party and had cleared the account of the erstwhile parnters, the Income-tax Officer would not have possibly any objection to the claim of the assessee to allow interest on the borrowed capital. It was true that the assessee had not borrowed the sum of Rs. 1,82,037 from the erstwhile partners. Instead of borrowing the funds from the third party, the assessee agreed to pay interest to its partners in case it failed to clear the liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee voluntarily or a capital charge) the amount of such charge; (v) where the property is subject to a ground rent, the amount of such ground rent; (vi) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital; (vii) any sums paid on account of land revenue or any other tax levied by the State Government in respect of the property; (viii) any sums spent to collect the rent from the property, not exceeding six per cent. of the annual value of the property; (ix) where the property is let and was vacant during a part of the year, that part of the annual value which is proportionate to the period during which the property is wholly unoccupied or, where the property is let out in parts, that portion of the annual value appropriate to any vacant part, which is proportionate to the period during which such part is wholly unoccupied; Explanation.---The deduction under this clause shall be made irrespective of whether the period during which the property or, as the case may be, part of the property was vacant precedes or follows the period during which it is let; (x) subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordance with the provisions contained in sections 30 to 43A. Various expenses known as revenue expenses are mentioned from section 30 onwards. Section 36(1)(iii) provides that the amount of the interest paid in respect of capital borrowed for the purposes of business or profession is deductible while computing the income referred to in section 28. Section 37 provides that any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". The Tribunal relied upon N. D. Radha Kishan's case [1983] 140 ITR 860 (P H) to arrive at the view it has taken. It is to be noticed that interest in the above case was allowed by the Tribunal under section 37, which was upheld by the High Court treating it to be an expenditure laid out for the purposes of business and not as an interest on the borrowed capital under section 36(1)(iii). Payment of interest is an expenditure for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated on August 10, 1953, to take over certain passenger and ferry services carried on by one of the former. The assessee-company took over assets, which were finally valued at Rs. 81,55,000 and agreed that the price was to be satisfied partly by allotment of 29,990 fully paid up shares of Rs. 100 each and the balance was to be treated as a loan and secured by a promissory note and hypothecation of all movable properties of the assessee-company. The balance remaining unpaid from time to time was to carry simple interest at 6 per cent. During the relevant accounting years, the assessee paid interest on the balance outstanding and the question was whether the interest paid was allowable as a deduction under section 10(2)(iii) or (xv) of the Indian Income-tax Act, 1922, in computing its profits. It was held that the expression "capital" used in 10(2)(iii), in the context in which it occurred, meant money and not any other asset. There was no capital borrowed by the assessee and the agreement to pay the balance of consideration due by the purchaser did not give rise to a loan. The claim for deduction of the amount of interest under section 10(2)(iii) was held to be inadmissible. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. United India Roller Flour Mills Ltd. [1985] 155 ITR 358 (Mad); CIT v. Lucas TVS Ltd. [1985] 153 ITR 239 (Mad); Rekhchand Gopaldas Mohta Spinning and Weaving Mills Ltd. v. CIT [1966] 60 ITR 699 (Bom); and CIT v. Orient Trading Co. [1994] 208 ITR 216 (Guj) to contend that the relationship of borrower and lender must come into existence before it can be said that any amount, capital or any other money is borrowed by one person from another to bring it within the ambit and scope of borrowed capital. We have gone through all these judgments and find that in all of these judgments, it has been held that there has to be a real transaction of borrowing and lending in order to amount to any borrowing. We concur with the observations made in these judgments to that effect. In fact, we have taken the same view and that is why we are not referring to the detailed facts of those cases and the principles deduced by the different High Courts on the facts determined. For the reasons stated above, it is held that the Tribunal was wrong in law in holding that the assessee is entitled to deduction of interest of Rs. 13,358 under section 24(1)(vi) of the Act. The question referred is answe ..... 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