COMMISSIONER OF INCOME TAX DELHI II NEW DELHI Vs. SARASWATI CHEMICALS AND ALLIED INDUSTRIES PRIVATE LIMITED

JUDGEMENT

(1.) These two cases involve identical disputes and shall be governed by the common judgment.

(2.) On being moved by Revenue, following questions have been referred for opinion of this Court by Income Tax Appellate Tribunal, New Delhi (in short, the Tribunal') under Section 256(1) of the Income Tax Act, 1961 (in short, the 'Act'):

(3.) Brief reference to the factual position, as indicated in the statement of case, would suffice: Assessee, a private limited company, credited interest totaling Rs. 4,905.00 and Rs. 5,866.00 for two assessment years, i.e., 1974-75 and 1975-1976, with which we are concerned, to the accounts of its Directors, which showed credit balances on account of salaries due to them but not paid. These interests in question were claimed as deduction under Section 36(1 )(iii) of the Act. Income Tax Officer disallowed the claim on the ground that the conditions required to bring in application of Section 36(1)(iii) were absent. Assessee filed appeals before Appellate Assistant Commissioner (in short, 'AAC') and contended that Income Tax Officer was wrong in disallowing the claim. AAC accepted the claims and held that Income Tax Officer erred in disallowing them. Matter was carried in appeal by Revenue before the Tribunal. It was contended that there was no capital borrowed, which was the fundamental requirement for bringing in application of Section 36(l)(iii) of the Act. The Tribunal did not accept the plea and held that had the payments been made to the Directors, assessee would have been required to borrow funds to pay interest. Therefore, the funds, which were utilised by assessee for the purpose of its business had clear link to the amounts which would, otherwise, have been required to be borrowed for the purpose to carry on its business. Accordingly, it was held that the amounts in question were allowable in terms of Section 36(l)(iii) of the Act.