JUDGMENT
G.T. Nanavati, J.
1. The Income-tax Appellate Tribunal has referred the following seven questions for the opinion of this court under section 256(1) of the Income-tax Act, 1961 :
“1. Whether the Appellate Tribunal erred in law in holding that against the interest payment of Rs. 4,91,749 returned by the assessee, the claim of the assessee for exclusion of interest of Rs. 57,264 paid by the assessee because of late payments of hundi loans and because of late payments of amounts for the goods purchased by the assessee was justified?
2. Whether the Appellate Tribunal erred in law in modifying the order of the Commissioner of Income-tax directing the Income-tax Officer to enhance the assessment adding the amount of excess interest of Rs. 53,491?
3. Whether the Appellate Tribunal erred in law in directing the Income-tax Officer to enhance the assessment on a proportionate basis after allowing deduction of interest paid by the assessee on hundi loans and on account of late payments made of the purchase price of the goods purchased by the assessee from the interest income of the assessee?
4. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in directing the deletion of Rs. 4,670 directed to be added by the order of the Commissioner of Income-tax made under section 263 of the Act?
5. Whether when the interest is received by the firm from a partner and when interest is also paid to a partner by the firm, only the net amount must be added under the provisions of section 40(b) of the Income-tax Act, 1961?
6. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that additional payment of Rs. 70,337 under section 45 of the Gujarat Sales Tax Act had to be made for an infraction of the law?
7. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the excess payment of interest, if any, was disallowable ?”
2. As regards questions Nos. 4 and 5, the point which arises for consideration is covered by the decision of the Supreme Court in Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1. So also the point which arises for consideration because of question No. 6 is covered by the decision of this court in Income-tax Reference No. 73 of 1980 decided on 20/21 January, 1993 (Orient Trading Co. v. CIT [1993] 202 ITR 481). Therefore, the facts pertaining to those questions need not be stated.
3. The point involved in questions Nos. 1, 2, 3 and 7 is the same, viz., whether the claim of the assessee for exclusion of interest amount of Rs. 57,264 paid for late payment of hundi loans and goods purchased was justified. Questions Nos. 1, 2, 3 and 7 can be dealt with together as what is required to be considered as a result of those questions is whether the claim of the assessee for exclusion of interest amount of Rs. 57,264 paid for late payment of hundi loans and goods purchased was justified. During the accounting year relevant to the assessment year 1971-72, the assessee had borrowed money from banks and other depositors for which it paid interest of Rs. 4,91,749. Out of the borrowed money, it had advanced loans to outside parties and also to its partners. As against these advances, it earned interest of Rs. 2,57,193.
4. Before the Income-tax Officer, the assessee claimed deduction of the whole amount of interest. The Income-tax Officer accepted the same.
5. The Commissioner of Income-tax, in exercise of his powers under section 263, initiated proceedings and called upon the assess to show cause why the amount of Rs. 53,491 being the interest payment on borrowed capital used for purposes other than business should not be added to the total income of the assessee. The Commissioner of Income-tax worked out the figure of Rs. 53,491 as under :
——————————————————————-
Rs. Rs.
Loans from outside parties 28,06,027
Loans from banks 6,54,934
------------
Total 34,60,961
Loans advanced to third parties 22,51,577
Loans advanced to partners 3,00,000
-----------
25,51,577 25,51,577
------------
Loans used for business 9,09,384
Interest payments returned 4,91,749
Less : Sales tax penalty payment
debited to interest account 70,337
------
Interest paid on borrowed capital 4,21,412
Interest paid on capital borrowed for
purposes other than business, i.e.
Rs. 25,51,577 (on proportionate basis)
4,21,412 x 25,51,577 3,10,684
-----------
34,60,961
Less : Interest received from loans 2,57,193
advanced
-------------
Balance to be disallowed 53,491
-------------
-------------------------------------------------------------------
6. In its reply to the notice, the assessee contended that in the course of its business, it was usual for the assessee to borrow money and at the same time to give loans to third parties and to its partners for business consideration. It used to purchase and sell goods on credit. In any view of the matter, no portion of any capital borrowed could be said to have been utilised for purposes other than business and, therefore, the interest paid could not be disallowed. In the alternative, it was contended that Rs. 57,264 paid as interest to the principals on account of late payment of hundis and the purchase price of goods, in any case, will have to be excluded. It gave its own calculation and stated that only Rs. 10,807 at the highest could be disallowed. The figure of Rs. 10,807 was worked out as under :
———————————————————————-
Rs. Rs.
Loans from outside parties 28,06,027
Loans from banks 6,54,934
------------
Total 34,60,961
Less : Loans advanced to third 22,51,577
parties
Loans advanced to partners 3,00,000 25,51,577
----------------------------
Loans used for business 9,09,384
-----------
Interest payments returned 4,91,749
Less : Sales tax penalty payment
debited to interest account 70,337
------------
4,21,412
Less : Interest paid to principals
on late payments of hundi amounts
and also on late payments made to
creditors for goods purchased 57,264
------------
Interest paid on borrowed capital 3,64,148
------------
Interest paid on capital borrowed
for purposes other than business,
i.e., on Rs. 25,51,577 on proportionate
basis, i.e.,
3,64,148 x 25,51,577
-----------
34,60,961 2,68,000
Less : Interest received from loans
and advances 2,57,193
-------------
Balance which may be disallowed 10,807
-------------
---------------------------------------------------------------------
7. The Commissioner of Income-tax was of the view that what was required to be worked out was the net amount of interest admissible as deduction under section 36(1)(iii) or section 37 of the Act. He then held as under :
“…. The loans used for business are Rs. 9,09,384 including hundi loans and the interest actually paid including interest for late payments of hundi loans and for late payments on creditors’ accounts is Rs. 4,21,212 and not Rs. 3,64,148, as worked out by the assessee after excluding interest for late payments of Rs. 57,264. Out of the total allowance of Rs. 34.6 lakhs, the loans not used for business purposes are Rs. 25.5 lakhs and on a proportionate basis the interest on loans not used for business purposes comes to Rs. 3.10 lakhs against which interest received for non-business loans are Rs. 2.57 lakhs only. Hence the correct amount to be disallowed in computing the assessee’s income from business is Rs. 53,491. The Income-tax Officer is directed to enhance the assessment adding the amount of excess interest of Rs. 53,491.”
8. Feeling aggrieved by this order, the assessee preferred an appeal to the Tribunal. The contention raised by the assessee before the Tribunal was that interest paid to principals for late payments of hundi amounts and to creditors for late payments of purchase price for the goods purchased could not be regarded as interest paid on borrowed capital. The Tribunal was of the view that the contention raised on behalf of the assessee deserved to be accepted and the claim of the assessee for exclusion of Rs. 57,264 from interest income was justified. The Tribunal, therefore, allowed the appeal on this point. The order passed by the Commissioner of Income-tax was modified and the Income-tax Officer was directed to enhance the assessment on a proportionate basis after allowing deduction of interest paid by the assessee on hundi amounts and on late payments of purchase price.
9. It was contended on behalf of the Revenue that the claim of the assessee for exclusion of the interest amount of Rs. 57,264 was not justified and, therefore, the Tribunal ought not to have modified the order passed by the Commissioner of Income-tax whereby he had directed the Income-tax Officer to enhance the assessment by adding the amount of excess interest of Rs. 53,491. It was submitted that but for the hundi loans and credit facility for late payment of purchase price, the assessee would have been required to borrow money. Therefore, the amounts of hundi loans and purchase price paid late were rightly treated by the Commissioner of Income-tax as borrowed capital and the amount of Rs. 57,264 paid by way of interest thereon was also rightly treated as interest paid on borrowed capital and on this basis the excess interest of Rs. 53,491 worked out by the Commissioner of Income-tax was rightly disallowed. In our opinion, the facility of drawing hundis and late payment of price of goods purchased by the assessee, cannot be equated with borrowing of capital. Learned counsel appearing for the assessee rightly drew our attention to the decision of the Supreme Court in Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52. The facts in that case were a little different but a contention similar to the one which is now raised before us by the Revenue, was raised on behalf of the assessee. The Supreme Court held that it was not correct to treat the transaction between the vendor and the vendee as a composite transaction consisting of : (1) transaction of borrowing and (2) transaction of payment. The Supreme Court therein pointed out that the loan of money undoubtedly results in a debt, but every does not involve a loan. Liability to pay a debt may arise from diverse sources, and a loan is only one of such sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender. In that case, the Supreme Court has referred with approval to the decision in V. Ramaswami Ayyangar v. CIT [1950] 18 ITR 150 (Mad), wherein it is held that the expression “capital borrowed” predicates the relation of a borrower and a lender and section 10(2)(iii) of the Income-tax Act contemplates lending of money and borrowing of the lender’s money by the borrower with a contractual stipulation for repayment with interest on the loan. It is, therefore, not possible for us to accept the contention raised on behalf of the Revenue that Rs. 57,264 paid as interest on hundi amounts and late payment of purchase price should be regarded as interest paid on borrowed capital.
10. It was next submitted that the Commissioner of Income-tax had taken all the relevant aspects into consideration and had found that the net borrowed amount was Rs. 9,09,384. He had worked out the interest paid on borrowed capital for purposes other than business purposes on proportionate basis. Therefore, the question of considering the interest paid by the assessee for late payment of hundi amounts and purchase price was not required to be considered separately. In our opinion, this submission suffers from a fallacy inasmuch as it is presumed that Rs. 57,264 paid as interest was interest paid on borrowed capital. The contention of the assessee before the Commissioner of Income-tax was that the said amount was not by way of interest on borrowed capital. It did contend that it was interest paid to the creditors towards its debts, but it was not interest paid on borrowed capital. As it was not interest paid for money lent, in our opinion, the whole approach of the Commissioner of Income-tax was wrong, when he observed that what was required to be done in this case was to find out the net amount of interest admissible as deduction under section 36(1)(iii) of the Act. He really failed to appreciate the contention raised on behalf of the assessee. The Tribunal was, therefore, right in modifying the order passed by the Commissioner of Income-tax. It rightly held that the claim of the assessee for exclusion of interest of Rs. 57,264 was justified and, therefore, it rightly directed the Income-tax Officer to enhance the assessment on a proportionate basis after allowing the interest paid by the assessee on hundi loans and late payment of purchase price from the interest income of the assessee.
11. For the reasons stated, we answer questions Nos. 1 to 5 in the affirmative, that is, against the Revenue and in favour of the assessee. Questions Nos. 6 and 7 are answered in the affirmative, that is, against the assessee and in favour of the Revenue. No order as to costs.
