Gujarat High Court
H.K. (Investment) Co. Pvt. Ltd. vs Commissioner Of Income-Tax on 10 December, 1993
Author: M.B. Shah
Bench: J.M. Panchal, M.B. Shah
JUDGMENT M.B. Shah, J.
1. For the assessment years 1974-75 and 1975-76, the assessee - Messrs. H. K. (Investment) Company Private Limited - claimed before the Income-tax Officer that the interest paid by it for its borrowings should be allowed fully against the business income and it should not be apportioned between the business income and the dividend income. Income-tax Officer rejected the claim and allocated the interest payments between the business income and the dividend income on the basis of the formula suggested by the Income-tax Appellate Tribunal by its order dated February 23, 1974, passed in Appeals Nos. 941 to 944/(Ahd.) of 1972-73 for the assessment years 1966-67 to 1969-70. The Appellate Assistant Commissioner also rejected the claim of the assessee. Hence, the assessee filed an appeal before the Tribunal. Before the Tribunal, the following grounds were raised at the time of hearing of the appeal :
"(i) The appellant was having business income in the form of interest and, hence, while determining the business income, the entire interest paid should be adjusted against interest receipts irrespective of the fact whether some borrowed funds were utilised for investment in partnership firms or to acquire shares. The appellant was having money-leading business and so the amount of net interest was required to be determined in the first instance.
(ii) Since the appellant was having income from business as well as other sources, the appellant should be given an option to adjust interest paid in such a way as to benefit most.
(iii) The appellant was an investment company and, hence, moneys borrowed were for the purpose of business of holding investments. The dividend income, though a part of business income flowing from the business of holding investments, had to be taxed under the head 'Other sources'. Hence, only gross dividend receipts should be separated to be taxed under the head 'Other sources'.
(iv) If the above arguments of the appellant are rejected, the interest should be divided into three proportionate rates keeping in view the moneys invested, namely, (a) moneys invested in partnership firms, (b) moneys invested in other business, e.g., money-lending, and (c) moneys invested in shares. Only that proportion of the interest which fell into the third category, at the most, will be adjusted against dividend income."
2. The Tribunal rejected the first three grounds of the assessee mainly relying upon its earlier decision dated February 23, 1974. It, however, considered the last alternative contention of the appellant that the gross amount of interest should be bifurcated proportionately between (a) interest received and share from the firm which constitutes business income, and (b) dividend income taxable under the head "Other sources".
3. Being aggrieved by the said order, the assessee filed a reference application and the Tribunal has referred the following two questions for our opinion under section 256(1) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in not allowing the claim of the appellant that the entire interest payment should be allowed as business expenditure for (a) assessment year 1974-75, and (b) assessment year 1975-76?
2. In the event of question No. 1 being answered in the affirmative -
Whether, on the facts and in the circumstances of the case, the allocation of interest payment against various heads should be of net interest payment after deducting interest received by the assessee for (a) assessment year 1974-75, and (b) assessment year 1975-76?"
4. We may make it clear that, at the time of hearing of this matter, in spite of service being made, the assessee has not engaged any advocate nor has it made any other arrangement.
5. In our view, the order dated September 11, 1980, passed by the Tribunal is in accordance with section 36(1)(iii) and section 57(iii) of the Act, which are as under :
"36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 -...................
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession.
Explanation. - Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause."
"57. The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely :- ...........
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income."
6. In view of the aforesaid provisions, it can be stated that, on the facts and in the circumstances, of the case, the Tribunal was right in law in not allowing the claim of the assessee that the entire interest payment should be allowed as business expenditure for (a) assessment year 1974-75, and (b) assessment year 1975-76. There is nothing on record to establish that the entire amount of interest was paid in respect of capital borrowed for the purposes of the business. Hence, question No. 1 is answered in the affirmative, i.e. in favour of the Revenue and against the assessee.
7. Regarding question No. 2, the Tribunal has considered the said contention in paragraph 11 of its judgment. In the said order, the Tribunal has dealt with the question as to whether the payments which are made by the assessee towards interest are wholly deductible in computing the income from business or the amount to claimed as deduction required to be split up in the manner discussed therein and has held that only the gross amount of interest would enter into the computation for the purpose of allocation and not the net amount.
8. In our view, the Tribunal was right in holding that only the gross amount of interest would enter into the computation for the purpose of allocation and not the net amount. Hence, question No. 2 is answered in the negative, i.e., in favour of the Revenue and against the assessee.
9. In the result, the reference stands disposed of accordingly with no order as to costs.