(a) Income-tax---

--Interest on borrowed capital---Borrowed capital utilised in advancing loans---Part of loans written off---Interest on borrowed capital not related to interest receivable by assessee---Interest on borrowed capital could not be disallowed---Indian Income Tax Act, 1961.

The assessee paid interest of Rs.11,36,592 and Rs.15,41,844 in the assessment years 1981-82 and 1982-83, respectively, on the amounts borrowed by him earlier. The Income Tax Officer found that, at the same time, he had a good number of loan accounts as well as investment accounts by way of loans and others. The investments in the form of loans were always shown as a part of investment under the head "Irons". During the accounting year 1979-80 relevant to the assessment year 1980-81, the assessee wrote off the loans from two companies on the ground that the debtor-companies went into liquidation under a Court order. This ad of writing off of the loans was upheld by the Commissioner of Income Tax (Appeals) in quantum appeals. The Income Tax Officer was of the opinion that the interest payable on the borrowed sums to support the advance was not allowable. The Income Tax Officer disallowed part of the interest on borrowed capital. The Commissioner of Income-tax (Appeals) deleted the disallowance and his order was upheld by the Tribunal. On a reference:

Held, that it was on record that the assessee had borrowed monies and, out of such borrowed money, he had advanced loans to the two companies. These loans were written off. This, however, had not absolved the assessee of the liability of paying interest to his creditors on the amounts borrowed by him. The interest payable by him to his creditors and the interest received by him from his debtors were not related so as to justify the exclusion of interest payable by him on the ground of non-receipt of interest receivable by him. The Tribunal was justified in holding that the nature of the income derived by the assessee from the loans advanced by him should not have any effect on his liability to pay interest to his creditors and, as such, there was no reason for disallowing the interest on the amounts of loans received by the assessee from his creditors.

(b) Income-tax-.

----Loss---Carry forward and set off---Business loss determined in accordance with law---Assessee entitled to carry forward and set off such loss---Indian Income Tax Act, 1961.

In the assessment year 1981-82, the assessee suffered business loss, which was duly determined by the Income Tax Officer. It was also noted in the assessment order that the return for the said assessment year was filed in time but, in spite of this, the Income Tax Officer did not carry forward the said loss as determined and set it off against the income for the year under appeal. On appeal, the Commissioner of Income-tax (Appeals) directed that the said loss should be carried forward and set off against the income of the assessment year under appeal. The Tribunal dismissed the appeal from the order of the Commissioner of Income-tax (Appeals). On a reference:

Held, that the Commissioner of Income-tax (Appeals) found that, in the assessment order for the earlier year 1980-81, the business loss was determined in accordance with law. The assessee was entitled to carry forward the loss and set it off in the assessment year 1981-82.

JUDGMENT

AJIT K. SENGUPTA, J.---In this reference under section 256(2) of the Income Tax Act, 1961, the Tribunal has prepared the statement of case with the following questions of law relating to the assessment years 1981-82 and 1982-83:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that part of the interest amounting to Rs.1,87,618 paid on moneys borrowed to advance loans amounting to Rs.42,08,459 and Rs.3,55,021 to Messrs East India Electrical and Messrs New India Electrical (Cal.) Pvt. Ltd. should be disallowed?

(2) Whether the Tribunal was justified in holding that the interest payable by the assessee to its creditors and the interest received by him from his debtors were not interrelated so as to justify the exclusion of interest payable by him on the ground of non-receipt of interest receivable by him?

(3) Whether the Tribunal was justified in holding that the nature of income receivable from the advance made was not material in deciding the issue of the admissibility of interest on monies borrowed to support the above advances`.'"

The additional question of law for the assessment year 1981-82 is as follows:

'"Whether the Tribunal was justified in upholding the order of the Commissioner of Income-tax (Appeals) directing the Income Tax officer while deciding the appeal for the assessment year 1980-81 to set off against the income for the assessment year 1981-82 when the Income Tax Officer did not carry forward the loss?"

The facts pertaining to all the questions are that the assessee paid interest of Rs.11,36,592 and Rs.15,41,844 in the assessment years 1981-82 and 1982-83, respectively, on the amounts borrowed by him earlier. The Income Tax Officer found that at the same time he had a good number of loan accounts as well as investment accounts by way of loans and others. The investment in the form of loans were always shown as a part of investment under the head "Loans". During the year 1979-80 relevant to the assessment year 1980-81, the assessee wrote off the loans of Rs.12,08,459.78 due from Messrs East India Electricals and Rs.3,55,217.47 due from Messrs New India Electricals (Cal.) Pvt. Ltd. on the ground that the debtor-companies went into liquidation under order dated January 19, 1979, of this Court. This act of writing off of the loans was upheld by the Commissioner of Income-tax (Appeals) in the quantum appeals.

The Income Tax Officer was of the opinion that the interest income under other sources was shown by the assessee in the assessment year 1977-78 and thus the amounts lost their capacity of fetching or earning any income at all during the year being written off in the preceding year. So, he was of the opinion that "the interest payable on the borrowed sum to support the above advance is not allowable in view of the provisions of section 67. The Income Tax Officer also found that the assessee had debited interest at 12 per cent. on the supporting borrowed capital of the above sum. Therefore, a sum of Rs.1,87,618 (Rs.15,63,481 at 12 per cent.) is disallowed. In view of the above, the payments of interest of Rs.9,48,974 (Rs.11,36,692 less Rs.1,87,618) in the assessment year 1981-82 and Rs.13,54,226 (Rs.15,41,844 less Rs.1,77,618) in the assessment year 1982-83 were only allowed by the Income Tax Officer. The assessee, being aggrieved by the order of the Income Tax Officer, agitated the action of the Income Tax Officer before the Commissioner of Income-tax (Appeals).

The Commissioner of Income-tax (Appeals) held that the activity of the assessee of advancing loans to various parties out of moneys borrowed was an organised activity undertaken by the assessee and therefore, its income or loss is liable to be taxed as profits and gains of business and not as income from other sources. In his opinion, the bad debt of Rs.15,63,481 was a business debt which became irrecoverable in the course of the money-lending business carried on by the-assessee and as such no part of the interest paid on borrowed money to advance the loan can be disallowed. The Commissioner of Income-tax (Appeals) accordingly deleted the amount of Rs.1,87,618 which was disallowed by the Income Tax Officer.

The Revenue, being aggrieved by the order of the Commissioner of Income-tax (Appeals) preferred a second appeal before the Tribunal. It was argued by the Departmental representative that the assessee did not carry on money-lending business and as such, the income derived from the loans advanced (which were written off) could not be taxed as profits and gains of the business but as income from other sources. It was further contended that the interest payable by the assessee on the amounts borrowed also could not be allowed.

The Tribunal was of the opinion that the matter was not rightly appreciated by the Income Tax Officer as well as the Commissioner of Income-tax (Appeals) in its proper perspective. However, after considering the submissions of the authorised representatives for the parties and on examination of the materials on record and the facts and circumstances of the case, the Tribunal upheld the order of the Commissioner of Income-tax (Appeals) deleting the disallowance.

We have considered the submissions of the parties. It is on record that the assessee borrowed money from his creditors and, out of such borrowed money, he advanced the two loans to Messrs East India Electricals and Messrs New India Electricals (Cal.) Pvt. Ltd. These loans were written off by the assessee in the assessment year 1980-81 and it was upheld by the Commissioner of Income-tax (Appeals). So, the assessee is not receiving any interest out of the loans advanced to those two concerns and subsequently written off. This, however, has not absolved the assessee of the liability of paying interest to his creditors on the amounts borrowed by him. The interest payable by him to his creditors and the interest received by him from his debtors are not related so as to justify the exclusion of interest payable by him on the ground of non-receipt of interest receivable by him. The interest payable by him could have been disallowed on the ground that the amounts advanced by him were not for the purpose of his business for which the loans were taken by him. The Income Tax Officer did not proceed on that basis for exclusion of the interest payable by him although the amounts borrowed by him were allowed in the past. Although the loans advanced by the assessee have been written off, he has not been absolved of the' liability of paying interest to his creditors. Under such circumstances, there is no reason for disallowing the interest on the amounts of loans taken by the assessee. The Tribunal, in our opinion, was justified in holding that the nature of the income derived by the assessee from the loans advanced by him should not have any effect on his liability to pay interest to his creditors and, as such, there is no reason for disallowing the interest on the amounts of loans received by the assessee from his creditors.

Accordingly, questions Nos. 1, 2 and 3 are answered in the affirmative and in favour of the assessee.

With regard to the additional question, the facts are that in the assessment year 1981-82, the assessee suffered business loss, which was duly determined by the assessing Income Tax Officer. It was also noted in the said assessment order that the return for the said assessment year was filed in time but, in spite of this, the Income Tax Officer did not carry forward the said loss as determined and set it off against the income for the year under appeal. On appeal, the Commissioner of Income-tax directed that the said loss should be carried forward and set off against the income of the assessment year under appeal. The Department has challenged the order of the Commissioner of Income-tax (Appeals) allowing carry forward and set off of business loss. The Tribunal, by its order, however, dismissed the said appeal and answered, inter alia, as follows:

"It is for the Income Tax Officer dealing with the assessment in the subsequent year to determine whether the loss of the previous year may be set off against the profits of that year. So whether there was any order for set off in the assessment order for the assessment year 1980-81 would not. be conclusive on the question. It was for the assessing Income Tax Officer in the assessment year under appeal to decide whether the set off should be allowed or not. This aspect was ignored by the Income-Tax Officer."

The Commissioner of Income-tax (Appeals) found that, in the assessment order for the earlier year 1980-81, the business loss was determined in accordance with law. There is a discussion in the assessment order that the return showing the loss for the said earlier year was filed in time.

On the basis of this finding, the Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) that the loss for that year should be carried forward and set off against the income of the assessment year under appeal.

There is no reason to interfere with the decision of the Tribunal.

Accordingly, the additional question is also answered in the affirmative and in favour of the assessee.

There will be no order as to costs

SHYAMAL KUMAR SEN, J: --I agree,

M.BA./220/T.F. Order accordingly,