The judgment of the court was delivered by
V. RAMASWAMI J. - This is a reference under section 66(1) of the Income-tax Act, 1922, and the question that has been referred for our opinion is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that there was no justification for disallowing interest payment of Rs. 12,413 for the assessment year 1960-61 ?'
The assessee is a Private Limited Company carrying on money-lending business. For the assessment year 1960-61 the assessee returned an income of Rs. 1,68,567. The assessee paid a sum of Rs. 1,02,092 during the accounting year by way of interest on loans borrowed by it and claimed allowance of this amount under section 10(2) (iii) of the Act. The fact as found by the Income-tax Officer is while the company had paid interest on its borrowings at an average rate of 6.01 per cent., it had charged interest only at the 4.92 per cent. on its lendings. The Income-tax Officer sought to disallow the difference of interest between 6.01 per cent. and 4.92 per cent. The finding of the Income-tax Officer is that the capital was borrowed for the purpose of the business and if that finding is to stand the there is no reason why the interest should not deducted under section 10(2) (iii) of the Act. The reason given by the Income-tax Officer for disallowing this amount was that the interest charged on the lending was at a lower rate than that on the borrowing and that the lending was in favour of persons who were intimately connected with the assessee. This cannot be a ground for disallowing the interest. Once it is found that the capital was borrowed for the purpose of the business, the assessee is entitled to deduct the interest paid for that borrowed capital. It may also be mentioned that the Income-tax Officer himself accepted that the capital was borrowed for the purpose of the business because he has permitted a deduction of 4.92 per cent. though the borrowings was on 6.01 per cent. The scaling down of the interest is not permitted when once the Income-tax Officer accepts that the capital was borrowed for the purpose of the business. On almost identical facts, the Madhya Pradesh High Court in Birla Gwalior Private Ltd. v. Commissioner of Income-tax has also taken a similar view. The reference is, therefore, answered in favour of the assessee and against the revenue with costs. Counsels fee Rs. 250.