COMMISSIONER OF INCOME-TAX VS HINDUSTAN CONDUCTORS (P.) LTD.
2001 P T D 2806
[240 I T R 16]
[Bombay High Court (India)]
Before Dr. B.P. Saraf and Mrs. Ranjana Desai, JJ
COMMISSIONER OF INCOME‑TAX
versus
HINDUSTAN CONDUCTORS (P.) LTD.
Income‑tax Reference No.603 of 1987, decided on 23/07/1999.
Income‑tax‑‑‑--
‑‑‑‑Interest on borrowed capital‑‑‑Interest on original loan plus interest which had accrued over several years‑‑‑Part of such interest disallowed by Assessing Officer‑‑‑Rate of interest reduced to fifteen per cent. in relevant accounting year‑‑‑Disallowance of part of interest in prior years did not result in amount ceasing to be payable to creditor‑‑‑Interest on .balance which included accrued interest was deductible‑‑‑Indian Income Tax Act, 1961, S.36.
The assessee was a private limited company. The shares of the assessee were held by the member of a single family. In its assessment for the assessment year 1978‑79 relevant to the previous year ended on April 30, 1977, the assessee claimed deduction of a sum of Rs.1,34,045 towards finance charges payable to one D.D. Foundation Trust. Under an agreement, dated March 5, 1967, the assessee had received a loan of Rs.2,00,000 from the said trust. Under the agreement between the assessee and the trust, the assessee agreed to pay finance charges calculated at the rate of 1 per cent. of the turnover or Rs.30,000 whichever was higher as a return for the loan advanced by the trust to the assessee. The assessee had been crediting finance charges every year in the account of the trust. These finance charges were allowed as a deduction in the assessment years prior to the assessment year 1975‑76. In the assessment for the assessment year 1975‑76, the Income‑tax Officer found that the trust was founded by D, who was a senior member of the group of the shareholders known as "Apar Group" and the affairs of the said trust, which was a public charitable trust, were controlled by the founder of the assessee‑company through his kith and kin. According to the Income‑tax Officer, the payment by way of financing charges at a most exorbitant rate was not wholly by way of interest. He, therefore, allowed finance charges calculated at the rate of 15 per cent. of the‑amount borrowed as interest on borrowing under section 36(1)(iii) of the Income Tax Act, 1961, and disallowed the balance. In view of the above findings, the Income- tax Officer reopened the assessments of the assessee for the assessment years 1969‑70 to 1971‑72 and disallowed part of the amount paid by way of finance charges to the trust which was in excess of 15 per cent. of the sum borrowed. This was upheld by the High Court. During the previous year relevant to the assessment year 1978‑79, the assessee modified the original agreement. As a result, the payment of finance charges was restricted to 15 per cent. of the outstanding amount of loan. In fact, by addition of the proviso, the assessee accepted the finding of the Income‑tax Officer in the earlier assessment years that the interest, in the facts and circumstances, was only an amount calculated at the rate of 15 per cent. per annum of the amount borrowed and the excess was not interest but payment for extra commercial considerations. In the previous year relevant to the assessment year under consideration, the credit balance in the account of the trust was Rs.7,51,238, which represented the amount of original loan plus accrued interest over the years, The assessee claimed a sum of Rs.1,34,045 as deduction on account of finance charges calculated at the rate of 15 per cent. on the total outstanding amount of Rs.9,51,233. The Income‑tax officer, however, restricted the claim to 15 per cent. on the amount of Rs.2,00,000 plus the accumulated outstanding finance charges, which were allowed by him in the past. He, therefore, allowed a sum of Rs.48,000 and disallowed the balance. The above order of the Income‑tax Officer was reversed by the Commissioner (Appeals). The appeal of the Revenue was also dismissed by the Tribunal. On a reference:
Held, that disallowance of any pan of the finance charges in any of the earlier assessment years by the Income‑tax Officer did not mean that the amount ceased to be payable to the trust under the agreement. In the instant case, the amount was credited to the account of the trust. No amount was paid to the trust in the past. It could have been paid. There was no legal bar on that. In any event, the amount of loan with accumulated finance charges was the amount due to the trust which the trust was free to withdraw at any time and invest in whatever manner it thought fit. The trust was, therefore, entitled to interest on the amount outstanding to its credit in the .accounts of the assessee. That being so, the finance charges should have been calculated on the outstanding amount of loan with accrued finance charges. The Tribunal was justified in holding that the payment representing finance charges on the loan taken from D.D. Foundation Trust and on accumulated finance charges was allowable as deduction for the assessment year 1978‑79.
Riches v. Westminster Bank Ltd. (1947) AC 390 (HL) ref.
R.V. Desai with P.S. Jetley for the Commissioner.
S.J. Mehta with I.M. Munim and Ms. A. Vissanji for the Assessee.
JUDGMENT
DR. B.P. SARAF, J.‑‑‑By this reference under section 256(1) of the Income Tax Act, 1961, the Income‑tax Appellate Tribunal has referred the following question of law to this Court for opinion:
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the payment of Rs.36,045 representing finance charges on the loan taken from D.D. Foundation Trust and on accumulated finance charges was allowable as deduction for the assessment year 1978‑79?"
The assessee is a private limited company. The shares of the assessee are held by the members of a single family. In its assessment for the assessment year 1978‑79 relevant to the previous year ended on April 30, 1977, the assessee claimed deduction 9f a sum of Rs.1,34,045 towards finance charges payable to one D.D. Foundation Trust, Bombay (hereinafter referred to as "the trust"). Under an agreement, dated March 5, 1967, the assessee had received a loan of Rs.2,00,000 from the said trust. Under the agreement between the assessee and the trust, the assessee agreed to pay finance charges calculated at the rate of one per cent. of the turnover or Rs.30,000 whichever was higher as a return for the loan advanced by the trust to the assessee. The assessee had been crediting finance charges every year in the account of the trust. These finance charges were allowed as a deduction in the assessment years prior to the assessment year 1975‑76. In the assessment for the assessment year 1975‑76, the Income‑tax Officer found that the trust was founded by Shri D.D. Desai, who was a senior member of the group of the shareholders known as "Apar Group" and the affairs of the said trust, which was public charitable trust, were controlled by the founder of the assessee‑company through his kith and kin. According to the Income‑tax Officer, the payment by way of financing charges at a most exorbitant rate was not wholly by way of interest. He, therefore, allowed finance charges calculated at the rate of 15 per cent. of the amount borrowed as interest on borrowing under section 36(1)(iii) of the Act and disallowed the balance. In view of the above findings, the Income‑‑tax Officer reopened the assessments of the assessee for the assessment years 1969‑70 to 1971‑72, and disallowed part of the amount paid by way of finance charges to the trust which was in excess of 15 per cent. of the sum borrowed. The order of the Income‑tax Officer was, however, reversed by the Commissioner of Income‑tax (Appeals). The appeal of the Revenue was also dismissed by the Income‑tax Appellate Tribunal ("the Tribunal"). The Revenue came to this Court by way of reference, which was numbered as Income‑tax Reference No.438 of 1987. In that case, in the facts and circumstances of the case, this Court held that the Tribunal was wrong in reversing the order of the Income -tax Officer and the Commissioner of Income‑tax (Appeals). It was observed:
....in our opinion, the Income‑tax Officer is undoubtedly entitled while considering claim for deduction under section 36(1)(iii) of the Act to examine whether the amount paid as interest is really 'interest' and if he finds that it is not wholly interest but partly interest end partly payment for extra commercial consideration, to allow only that part of the so‑called interest which in his opinion is 'interest' and disallow the balance which is for extra commercial considerations. It is true that in the normal course, the Income‑tax Officer cannot disallow any part of the interest on the ground that the rate of interest is high but that does not mean that he has to allow anything and everything claimed by the assessee, as interest on amounts borrowed, even if he finds that in fact all that has been paid is not 'interest'.‑
It was further observed:
" 'Interest' is the return or compensation for the retention by one person of a sum of money belonging to or owed to another. As the essence of interest is that it is payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had use of the money, or, conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. (Per. Lord Wright in Riches v. Westminster Bank Ltd. (1947 AC 390 at pages 396, 398 (HL). It is only interest in the above sense which is deductible under section 36(1)(iii) of the Act. If in the garb of interest, something more is paid over and above 'interest', that something cannot be allowed as deduction under this section. It will not be correct to say that once a claim is made for deduction of any amount by way of interest on the amount borrowed for the purpose of business, the Income‑tax Officer has no power even to examine whether the amount claimed as 'interest' is really an interest, wholly or in part, and if he finds that it is not wholly interest to ascertain that part of it which is interest and restrict the allowance of deduction under section 36(1)(iii) only to that part which represents interest and to disallow the balance. In our opinion, under section 36(1)(iii) of the Act, the assessee is entitled , to deduction only of that part of the amount paid by him for money borrowed which can genuinely be regarded as interest. Any and every payment in the garb of interest in excess of what can really be termed as 'interest' cannot be allowed as a deduction under that section."
In the present reference, the facts are different. During the previous year relevant to the assessment year under reference, the assessee modified the original memorandum of agreement. In clause (3) thereof, the following proviso was added:
"Provided further that with effect from May 1, 1976, the amount payable by way of dues to financiers by the company for any year ending April 30 shall not exceed 15 per cent. calculated on the total of the amount outstanding as loan and unpaid amount of finance charges. "
With effect from May 1, 1976, 9s a result of the proviso, the payment of finance charges was restricted to 15 per cent. of the outstanding amount of loan. In fact, by addition of the proviso, the assessee accepted the finding of the Income‑tax Officer in the earlier assessment years that the interest, in the facts and circumstances, was only an amount calculated at the rate of 15 per cent. per annum of the amount borrowed and excess thereof was not interest but payment for extra‑commercial considerations. In the previous year relevant to, the assessment year under consideration, the credit balance in the account of the trust was Rs.7,51,238, which represented the amount of original loan plus accrued interest over the years. The assessee claimed a sum of Rs.1,34,045 as deduction on account of finance charges calculated at the rate of 15 per cent. on the total outstanding amount of Rs.9,51,238. The Income‑tax Officer, however, restricted the claim to 15 per cent. on the amount of Rs.2,00,000 plus the accumulated outstanding finance charges, which were allowed by him in the past. He, therefore, allowed a sum of Rs.48,000 and disallowed the balance. The above order of the Income‑tax Officer was reversed by the Commissioner of Income‑tax (Appeals). The appeal of the Revenue was also dismissed by the Tribunal. Hence, this reference.
We have heard Mr. R.V. Desai, learned counsel for the Revenue, and also Mr. S.J., Mehta, learned counsel for the assessee.
The controversy in this case is very limited. The maximum rate of finance charges payable in terms of the agreement as amended with effect from May 1,1976, has been restricted to 15 per cent. per annum of the amount of outstanding loan including unpaid amount of finance charges. There is no dispute about the outstanding amount. What the Income‑tax Officer did was that he restricted the outstanding amount of finance charges to the amount allowed by him as a deduction in the computation of the income of the assessee in the earlier year. This, in our opinion, the Income- tax Officer could not have done. Disallowance of any part of the finance charges in any of the earlier assessment years by the Income‑tax Officer did not mean that the amount ceased to be payable to the trust under the agreement. In the instant case, the amount credited to the account of the trust. No amount was paid to the trust in the past. It could have been paid. There was no legal bar on that. In any event, the amount of loan with accumulated finance charges was the amount due to the trust which the trust was free to withdraw at any time and invest in whatever manner it thought fit. The trust was, therefore, entitled to interest on the amount outstanding to its credit in the accounts of the assessee. That being so, the finance charges should have been calculated on the outstanding amount of loan with accrued finance charges. The Tribunal, in our ‑opinion, was justified in saying so. We do not find any infirmity in the finding of the Tribunal.
We, therefore, answer the question referred to us in the affirmative, 'i.e., in favour of the assessee and against the Revenue. The reference stands disposed of accordingly with no order as to costs.
M.B.A./288/FCReference answered.