TMI Blog1983 (10) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1978 relates to the assessment year 1974-75. The assessee herein is a limited company in which the late G. N. Sam and his wife Savitri were directors. The company wanted to buy shares of another company M/s. Cambodia Mills Ltd., and for that purpose had borrowed funds from the public by inviting deposits. Certain sums were advanced to M/s. Dalal and Co., share brokers for the purchase of shares and in the calendar year 1959, advances had been made to the extent of Rs. 7.48 lakhs. Although the company has made these advances to purchase shares, shares were not actually purchased by it and it had transferred these advances made to the share brokers to its two directors, G.N. Sam and Savitri. These advances made to the share brokers were thus closed and to the said extent, the directors had been shown as debtors in the books of the company. G.N. Sam died on January 9,1961. The amount standing to the debit of G.N. Sam as on January 1, 1961, was Rs. 4.73 lakhs and it remained as a debit balance due to the estate of late G.N. Sam. By the end of the accounting year 1967, the total debts due by the estate of G. N. Sam stood at Rs. 12.35 lakhs. The company has been charging interest at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. The other reason given by the Tribunal for upholding the allowance claimed by the assessee regarding the interest payment on the amount borrowed is that the provisions of s. 40(c) of the Act would not apply, since the estate of late G. N. Sam was not a person with substantial interest in the company. Dissatisfied with the decision of the Tribunal, the Revenue has sought and obtained the above references, all of which raise a common question as to whether the findings of the Tribunal that no part of the interest paid by the assessee on borrowings could be disallowed is justified. The question is whether, on the facts established in this case, the view taken by the Tribunal could legally be supported. The learned counsel for the Revenue contends that the Tribunal having given a finding that the borrowing by the company was not for the purpose of the business and that the borrowed funds had been utilised for non-business purposes of the company, i.e., for investment in shares, has gone back on that finding, when it states that there is no evidence in this case to show whether the advances made to the directors for the purchase of shares were from the free cash available with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the borrowings cannot be allowed as a deduction under s. 10(2)(iii) of the 1922 Act from the income of the firm. In the course of its judgment, the court said that the test is not whether the money borrowed continued to be available for the purpose of the business during the year of assessment, but whether it was in its origin money borrowed as capital for the assessee's business and whether interest was paid on that borrowed capital, existing or lost, during the year of assessment and that it does not mean that whatever might have been done with the sum borrowed, the interest paid on it was allowable as a deduction. The learned judges after referring to the decision in A. L. A. R. Brothers v. CIT [1928] 3 ITC 209 (Mad) observed that the real ratio of that decision is that when money was borrowed for the purpose of the business or the needs of the business required such borrowal and that it was in fact utilised for the purpose of the business, the interest paid on the borrowed capital was liable to be deducted under s. 10(2)(iii) of the 1922 Act, that whether the money was borrowed for the purpose of the business or not could only be ascertained by the use to which the money was p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mad), support the Revenue and on the basis of these decisions, the allowance of interest paid on capital borrowed upheld by the Tribunal cannot legally be sustained. The learned counsel for the assessee refers to the following decisions in CIT v. Rajendra Prasad Mody [1978] 115 ITR 519 (SC) and CIT v. Motor Credit Co. P. Ltd. [1981] 127 ITR 572 (Mad), in support of his claim that even if the finding of the Tribunal that the interest payments cannot be taken to be on the amounts borrowed for the purpose of the business is accepted, still the assessee could claim deduction under s. 57(iii) of the Act on the basis that the interest payments are expenses incurred by the assessee for the purpose of earning the income. CIT v. Rajendra Prasad Mody [1978] 115 ITR 519 (SC) is a decision of the Supreme Court, wherein the Supreme Court upheld a deduction claimed by the assessee under s. 57(iii) of the Act as admissible in computing the assessee's income from dividend under the head " Income from other sources ". In that case, the assessee had borrowed moneys for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration. The firms defaulted in making repayments towards hire purchase instalments. Consequently, the buses were seized by the company. Since there was no prospect of receiving even the principal amount, the company did not credit the interest on the outstanding from the two firms, even though it was adopting the mercantile system of accounting. The ITO, however, included a sum of Rs. 56,163 by way of accrued interest on the amounts outstanding from these two firms. The AAC deleted the said addition. The Tribunal, when the matter came before it, held that the assessee could not have expected to get any interest income on the outstanding found due from the two firms and it would be wholly unrealistic on the part of the assessee to take credit for the interest income which is not realisable and, consequently, confirmed the order of the AAC. On a reference, this court held that the Tribunal was correct in its conclusion that though the assessee had adopted the mercantile system of accounting, no interest income could be assessed in its hands on accrual basis as it would be very unrealistic on the part of the assessee to take credit for highly illusory interest. We do not see how thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act." The learned counsel for the Revenue appears to be right in his submission that the question as framed and referred to us cannot be understood to be wide enough to comprehend the question as to whether the claim of the assessee, though not allowable under s. 36(1)(iii) of the Act, could be allowed as a deduction under s. 57(iii) of the Act. As a matter of fact, before the Tribunal the claim that the interest payments should be allowed as expenditure under s. 57(iii) had not been put forth, and there is no discussion on that question by the Tribunal in its order, though the Tribunal in a passing observation has stated that even if the interest on the borrowed funds is not allowable under " business ", it could be allowed against " receipts under other heads". Thus, the scope and ambit of s. 57(iii) and its applicability to the facts in this case have not been specifically considered by the Tribunal in its order. Therefore, that question which has not been specifically considered by the Tribunal cannot be taken to arise out of the question referred to us. Therefore, the assessee is not entitled to put forth an alternative claim that even if he is not entitled to get all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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