Law: Income Tax Act, 1961

Section: 36,36(1)(iii)

Indian Income Tax Act, 1961-Section 36 (1)(iii)-Deduction and allowances-Business income-Deduction of interest-Business carried on in India-Branch in Pakistan-Bank overdraft and debenture loan in Pakistan-Interest paid thereon-Whether deductible from the income of the company-Held yes. The assessee was an Indian company with its registered office in Calcutta. The control and management over all its branches were exercised from the head office of the assessee at Calcutta. All the directors of the assessee resided at Calcutta and the factories were run by managers who periodically sent their reports to the directors in Calcutta and tool instructions from them. The entire financial arrangements of the assessee were made at the head office at Calcutta where the accounts of the company as a whole were consolidated. Before the partition of India, the assessee had raised two mortgage debentures in 1938 and 1941. The funds raised by the debenture in 1938 were utilised for building the factory at Darsana. After the partition, the factory at Darsana fell within the territory of East Pakistan. The assessee had overdraft accounts with the State Bank of India, both in India and Pakistan. The overdraft arrangements in Calcutta were utilised by the head office of the assessee for financing the transactions of the assessee. In the Pakistan branch of the State Bank of India, an overdraft had been sanctioned in favour of the assess sees Dacca branch to the limit of Rs. 5 lakhs. The interest payable on the aforesaid overdrafts and debenture loans every year were allocated by the assessee between its businesses in India and businesses in Pakistan. The amount which was allocated to Pakistan was being debited to the Pakistan branch. In the assessment years 1960-61, 1961-62 and 1962-63, the assessee claimed deduction of three amounts, namely, Rs. 3,32,158,Rs. 3.79,290 and Rs. 3,64,760, being interest debited to its Pakistan branch, in the computation of its total income including income in India. The Appellate Tribunal held that in order to circumvent the provisions of the agreement for avoidance of double taxation, the assessee had proceeded on the theory of a single business, that…

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