PACKART PVT LTD vs. COMMISSIONER OF INCOME TAX

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ITR/74/1992HC GujaratGJHC24015422199220 November 2002Author: HONOURABLE MR. JUSTICE ANIL R. DAVE,HONOURABLE MR. JUSTICE K.M.MEHTA3 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the Tribunal was justified in upholding the disallowance of interest amounting to Rs. 40,352/-. The Court reasoned that interest paid on borrowed funds for the purpose of paying Income-tax does not constitute business expenditure. The Court relied on the principles laid down by the Hon'ble Supreme Court in the case of EAST INDIA PHARMACEUTICAL WORKS LTD. Vs. COMMISSIONER OF INCOME-TAX ([1997] 224 I.T.R. 627) and its own judgment in SARASPUR MILLS LTD Vs. COMMISSIONER OF INCOME-TAX ([1997] 226 I.T.R. 533). The ratio decidendi is that expenditure incurred for the purpose of discharging a statutory liability like payment of income-tax, even if financed by borrowed funds, is not an allowable business expense. The question referred to the Court was answered in the affirmative, in favour of the revenue and against the assessee. The reference was disposed of with no order as to costs.

What were the facts?

The assessee, Packart Pvt Ltd, is a limited company. The assessment year(s) are not specified. The order under challenge is the Income-tax Appellate Tribunal's (ITAT) decision upholding the disallowance of interest amounting to Rs. 40,352/-. This interest was paid on an amount borrowed by the assessee for the purpose of paying Income-tax. The Assessing Officer disallowed the claim, which was upheld by the CIT(Appeals) and subsequently by the ITAT. The assessee has referred a question of law to the High Court of Gujarat at Ahmedabad under Section 256(1) of the Income-tax Act, 1961.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the disallowance of interest amounting to Rs. 40,352/- claimed u/s. 28, 36(1)(iii) or Sec. 37 of the I.T. Act, 1961? Assessee's Contention: The assessee claimed the interest paid on borrowed funds used for payment of Income-tax as a deductible expenditure under Section 28, 36(1)(iii) or Section 37 of the Income-tax Act, 1961. Revenue's Contention: The revenue contended that interest paid on borrowed funds for the purpose of paying Income-tax is not a business expenditure and therefore cannot be allowed as a deduction. The revenue relied on the decisions in SARASPU R MILLS LTD Vs. COMMISSIONER OF INCOME-TAX ([1997] 226 I.T.R. 533) and EAST INDIA PHARMACEUTICAL WORKS LTD. Vs. COMMISSIONER OF INCOME-TAX ([1997] 224 I.T.R. 627) decided by the Supreme Court.

Which sections of the Income-tax Act were involved?

Section 256(1),Section 28,Section 36(1)(iii),Section 37

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 74 of 1992

For Approval and Signature:

Hon'ble MR.JUSTICE A.R.DAVE and Hon'ble MR.JUSTICE K.M.MEHTA

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals?

-------------------------------------------------------------- PACKART PVT LTD Versus COMMISSIONER OF INCOME TAX -------------------------------------------------------------- Appearance: 1. INCOME TAX REFERENCE No. 74 of 1992 NOTICE SERVED for Petitioner No. 1 MR MANISH R BHATT for Respondent No. 1

--------------------------------------------------------------

CORAM : MR.JUSTICE A.R.DAVE and MR.JUSTICE K.M.MEHTA

Date of decision: 20/11/2002

ORAL JUDGEMENT (Per : MR.JUSTICE A.R.DAVE)

At the instance of the applicant-assessee the following question has been referred to this Court for its opinion under the provisions of Section 256(1) of the Income-tax Act by the Income-tax Appellate Tribunal, Ahemdabad Bench-B.

"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the disallowance of interest amounting to Rs. 40,352/- claimed u/s. 28, 36(1)(iii) or Sec. 37 of the I.T. Act, 1961?"

Learned advocate Shri B.D. Karia has appeared for the applicant-assessee whereas learned Senior Central Government Standing Counsel Shri B.B.Naik has appeared for the revenue.

The assessee is a limited Company which had paid interest on the amount which was borrowed for the purpose of payment of Income-tax. The amount of interest paid by INCOME-TAX reported in [1997] 226 I.T.R. 533. Moreover, it has been submitted that in principle, the Hon'ble INCOME-TAX reported in [1997] 224 I.T.R. 627 that such interest paid by the assessee would not amount to business expenditure and, therefore, such an expenditure cannot be allowed.

Looking to the law laid down by the Hon'ble Supreme Court as well as by this Court, in our opinion, the Tribunal was not in error in confirming the views expressed by the revenue authorities.

In the circumstances, we are also of the opinion that the Tribunal was justified in disallowing the amount of expenditure which was in the nature of interest which was paid on the amount which was borrowed for the purpose of paying income-tax. We therefore answer the question in the affirmative i.e. in favour of the revenue and against the assessee.

The Reference thus stands disposed of with no order as to costs.

(A.R. DAVE,J.)

(K.M. MEHTA,J.)

siji

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