COMMISSIONER OF INCOME TAX Vs. L.K. TRUST

JUDGEMENT

(1.) THE appeal was admitted to answer the following substantial questions of law : "1. Whether the assessee who is carrying on film business is entitled to claim deduction under s. 36(1)(iii) of the Act in respect of interest of Rs. 21,74,234 on amount borrowed from Corporation Bank to purchase shares of Shaw Wallace & Company Ltd. on behalf of itself and other firm ?

(2.) WHETHER the assessee and its beneficiaries who borrowed a sum of Rs. 3,80,00,000 and transferred the same to M/s Gayathri Holding (P) Ltd. who in turn advanced this amount to G. Venkateshwaran to purchase shares on his behalf and on behalf of M/s Sujatha Films Ltd., Sujatha Productions (P) Ltd., Aruna International (P) Ltd. and Sujatha Estate (P) Ltd., from Shaw Wallace & Company Ltd. is nothing but a colourable devise adopted to seek benefit of interest allowance under s. 36(1)(iii) of the IT Act - The respondent assessee filed his return of income for the year 1989 -90 declaring the income of Rs. 7,55,67,530. The return was processed under s. 143(1)(a) of the Act. A notice was also issued under s. 143(2) of the Act. After hearing the matter, the AO noticed that the assessee had borrowed a loan from the bank. On the loan borrowed by it, it has paid interest to the bank and it was also noticed that a sum of Rs. 3,80,00,000 was given to M/s Gayathri Holdings (P) Ltd. and from M/s Gayathri Holdings (P) Ltd. certain shares were purchased from M/s Shaw Wallace & Company by the assessee, after giving deductions to the value of the shares purchased by it, the major portion of the amount was left with M/s Gayathri Holdings (P) Ltd., for which no interest was collected by the assessee. Therefore, the AO disallowed the claim to the said extent in respect of the interest claimed by the assessee for having paid the same to the bank. Being aggrieved by the same, an appeal was preferred by the assessee before the CIT(A), which appeal came to be rejected. While dismissing, the CIT(A) also set aside the relief granted by the AO. Being aggrieved by the same, the assessee filed an appeal before the Tribunal, Bangalore Bench in ITA No. 2032/Bang/1992, which appeal came to be appeal. We have heard the learned counsel for the parties.

(3.) THE main contention of the Revenue before us is that when the assessee has raised a loan from the bank and has paid interest on the loan borrowed by it, the assessee was required to utilize the borrowed funds for the purpose for which it was raised from the bank. According to the Revenue, the assessee instead of utilizing the money borrowed from the bank has passed on the same to its sister concern, M/s Gayathri Holdings (P) Ltd. which company has retained the amount of the assessee, thereby the assessee is made to pay interest on the entire borrowings even though the amount borrowed by it has not been utilized for the purpose for which it was raised. Therefore, he contends in such circumstances, the Tribunal was not justified in granting the relief to the assessee. In the circumstances, he requests the Court to answer both the questions of law in favour of the Revenue.