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Section 28 of the Income-tax Act, 1961 - Business income - Assessment year 1961- 62 and calendar year as previous year - Debtor company became parent company of assessee-company on 1-09-1960 by acquiring most of its shares - Whether entire interest on debt during 1960 includible in assessment - Held, yes Facts The assessee-company had advanced Rs. 1,46,614 to another private limited company B on interest at 12 per cent per annum. It had adopted calendar year as its accounting year. On 31-08-1960, the debtor company B acquired 4,799 shares out of total of 4,950 shares of the assessee-company so that the assessee became its subsidiary from that date. For the assessment year 1961-62, the assessee included in its return interest from the above loan only up to 31-08-1960. The ITO, however, held that the entire interest on the outstandings till 31-12-1960 was assessable and accordingly added Rs. 6,000, being interest from 1-09-1960 to 31-12-1960. The AAC confirmed the ITO's action. The Tribunal, however, held (i) that with the company B becoming assessee's parent company, the relationship of debtor and creditor between them ceased from 31-08-1960 to the extent of shares held but the same relationship subsisted with reference to the balance; (ii) that the proportionate interest attributable to such shareholdings would not be includible as it could be a case of interest payment to itself but the proportionate interest on the balance of 151 shares, would be taxable in view of its finding that there was implied contract to pay interest taking into account the conduct of the parties prior to the assessee-company becoming a subsidiary of company B. On reference, the assessee raised new contentions (i ) that the debtor company had practically become the owner of assessee-company on 31-08-1960 giving rise to the inference about the variation in the terms of agreement between the two companies; and (ii ) that no interest at all accrued to the assessee-company after 31-08-1960 and the interest was a purely notional income. Held 1. The assessee-company and the company B were separate corporate entities even after it became subsidiary of company B. There was no legal warrant for…

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