Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessee had an overdraft account with a bank in which all receipts were deposited and from which payments on account of taxes and other expenses were made and incurred - There was a continuous debit balance in said account - Whether interest paid on that part of overdraft which had been utilised for payment of income-tax could be disallowed where net profit of assessee in relevant accounting year exceeded income-tax paid by assessee - Held, no Facts The assessee-corporation had an overdraft account with a bank in which all receipts were deposited and from which payments on account of taxes and other expenses including capital expenditure and dividends, etc., were made and incurred. There was a continuous debit balance in the account. The net profit of the assessee for the relevant accounting year exceeded the income-tax paid by the assessee. The ITO disallowed a part of the interest paid by the assessee on the said overdraft on the ground that a part of the overdraft had been utilised for the payment of income-tax. On appeal, the Tribunal also upheld the ITO's order. On reference: Held In the instant case, the net profit of the assessee in the relevant accounting year exceeded, the income-tax paid by the assessee. This was clear from the order of assessment itself. It was also undisputed that the entire profits of the assessee during the relevant accounting year was deposited in the overdraft account from which all expenditure of the assessee including that on account of payment of income-tax were incurred. Therefore, if money had been deposited by the assessee out of its profits in an overdraft account from which all payments including that of income-tax were made, the fact that the said overdraft had a continuous debit balance would make no difference to the presumption that the income-tax had in fact been paid out of the profits and not out of the borrowings. Accordingly, the tribunal, in the present case, was not right in disallowing the assessee's claim. Cases referred to CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.), Indian Leaf Tobacco Development…

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