SARAYA SUGAR MILLS (P) LTD. vs COMMISSIONER OF INCOME TAX

At the instance of the assessee, the Income Tax Appellate Tribunal, Allahabad, has referred the following question stated to be of law and to arise out of its order dated 28-9-1981, passed in ITA No. 924 (All) of 1980 for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the interest on the amount of Rs. 2,80,000 at the same rate at which interest was paid by the assessee-company on the loans taken by it cannot be allowed as a deduction in working out the business income of the assessee-company ?"

We have heard Sri Shambhu Chopra, learned counsel for the assessee, and Sri A. N. Mahajan, learned standing counsel for the revenue.

The facts of the case are that the assessee had borrowed funds from the banks and had made interest-free advances to its directors. The finding was that the borrowed funds were diverted in making advances to the directors to the extent of Rs. 2,80,000. This finding of fact is not under challenge in the present reference. In making the assessment the assessing officer disallowed interest proportionate to the aforesaid advances. The matter came to the Tribunal which held that the disallowce has to be of the proportionate interest calculated at the same rate at which the moneys had been borrowed from the banks and to determine this the Tribunal remitted the matter back to the Commissioner (Appeals). In the question as aforesaid, it is not in dispute that the interest proportionate to the interest-free advances made to the directors is disallowable. In fact it has been so held by this court in the assessee''s own cases in COMMISSIONER OF Income Tax Vs. SARAYA SUGAR MILLS (P.) LTD., and Commissioner of Income Tax Vs. Saraya Sugar Mills (P) Ltd., that part of the interest paid to the bank can be disallowed to the extent to which the money has not been utilised for the purposes of the business. The Tribunal''s direction that the disallowance be made by calculating the amount of interest at the same rate at which interest was paid by the assessee-company on the loans taken by it, is in accordance with law and we answer the aforesaid question in the affirmative, i.e., against the assessee and in favour of the revenue.