Allahabad H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest on the amount of Rs. 2,80,000 at the same rate at which interest was paid by the assessee-company on the loans taken by it cannot be allowed as a deduction in working out the business income of the assessee-company ?

High Court Of Allahabad

Saraya Sugar Mills (P) Ltd. vs. CIT

M.C. Agarwal & B.K. Sharma, JJ.

IT Ref. No. 255 of 1982

15th December, 1999

Counsel Appeared

Shambhu Chopra, for the Assessee : A.N. Mahajan, for the RevenueJUDGMENT

BY THE COURT :

At the instance of the assessee, the Tribunal, Allahabad, has referred the followed question stated to be of law and to arise out of its order dt. 28th Sept., 1981, passed in ITA No. 924 (All) of 1980 for the opinion of this Court :

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest on the amount of Rs. 2,80,000 at the same rate at which interest was paid by the assessee-company on the loans taken by it cannot be allowed as a deduction in working out the business income of the assessee-company ?”

We have heard Sri Shambhu Chopra, learned counsel for the assessee, and Shri A.N. Mahajan, learned standing counsel for the respondent. The facts of the case are that the assessee had borrowed funds from the banks and had made interest-free advances to its directors. The finding was that the borrowed funds were diverted in making advances to the directors to the extent of Rs. 2,80,000. This finding of fact is not under challenge in the present reference. In making the assessment the AO disallowed interest proportionate to the aforesaid advances. The matter came to the Tribunal which held that the disallowance has to be of the proportionate interest calculated at the same rate at which the moneys had been borrowed from the banks and to determine this the Tribunal remitted the matter back to the CIT(A). In the question as aforesaid, it is not in dispute that the interest proportionate to the interest-free advances made to the directors is disallowable. In fact it has been so held by this Court in the assessee’s own cases in CIT vs. Saraya Sugar Mills (P) Ltd. (1992) 193 ITR 575 (All) : TC 15R.1169 and CIT vs. Saraya Sugar Mills (P) Ltd. (1993) 110 CTR (All) 23 : (1993) 201 ITR 181 (All) : TC 15R.1170 that part of the interest paid to the bank can be disallowed to the extent to which the money has not been utilised for the purposes of the business. The Tribunal’s direction that the disallowance be made by calculating the amount of interest at the same rate at which interest was paid by the assessee-company on the loans taken by it, is in accordance with law and we answer the aforesaid question in the affirmative, i.e., against the assessee and in favour of the CIT.

[Citation : 246 ITR 509]

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