Law: Income Tax Act, 1961

Section: 256(2)

(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…

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