Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessee - Co-operative society received loan from Government at subsidised rate of interest - According to terms and conditions of loan, over and above liability to repay loan assessee was required to pay 25 per cent of gross profit towards loan charges to Government - Whether aforesaid amount payable to Government was allowable as revenue expenditure - Held, yes FACTS The assessee, co-operative society received certain amount from the State Government a loan on subsidised rate of interest i.e., at the rate of 2.5 per cent, per annum only. The loan was to be repaid by the assessee in five equal annual instalments. Over and above the liability to repay the loan, the assessee was required to make a provision at the rate of 25 per cent out of the gross profits towards loan charges which were payable by the assessee to the Government. In the previous year the assessee claimed deduction by way of overriding payment made to the Government. The ITO disallowed the said claim. On appeal to the AAC the said claim was allowed on the ground that as per the terms and conditions of the loan, there was overriding title to the income of the assessee to the above extent. The Tribunal confirmed the order of the AAC. On reference : HELD In view of the terms and conditions subject to which the loan was advanced to the assessee by the Government at a subsidised rate of interest, there was no room for doubt that the assessee was required to make a provision at the rate of 25 per cent out of the gross profits towards loan charges to the Government. The aforesaid amount was to be paid by the assessee to the Government over and above the repayment of the said loan in five equal annual instalments. It was, thus, clear that the charge was created in favour of the Government over the said amount and the assessee was liable to pay up the said amount to the Government. The said amount, in fact, did not belong to the assessee and by way of overriding title which was created in favour of the Government under the terms and conditions of loan, the amount was required to be passed over to the Government. This…

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