COMMISSIONER OF INCOME TAX Vs. NANALAL MANSUKHRAM

JUDGEMENT

(1.) THE Tribunal Bench 'C' has referred the following two questions under S. 256(2) of the IT Act, 1961 (hereinafter referred to as 'the Act'), at the instance of the Revenue :

(2.) THE assessment years involved are 1980 81 and 1981 82. The relevant accounting periods are year 2035 and 2036. The assessee is a private firm and it was maintaining charity accounts known as 'Subh Accounts' in its books of accounts in relation to the amounts of money received from various persons who were related to the partners. Admittedly, the assessee was not required to return the funds received from such persons and in view of the said fact, the ITO treated the said amounts as capital receipts in hands of the assessee firm. However, in view of the fact that though these moneys were required to be utilised only for charitable purposes and yet were utilised for the purposes of business of the assessee firm, the ITO disallowed the interest paid on the balances standing in such accounts. The AAC confirmed the view adopted by the ITO.

(3.) MR . B.B. Naik, learned counsel appearing on behalf of the applicant Revenue, assailed the order of the Tribunal mainly on the ground that the funds in question were merely capital receipts in hands of the assessee and that there was no borrowing made by the assessee firm on which it was necessary to pay any interest and hence the assessee could not claim deduction of any such interest paid. It was further contended that in absence of two parties who could enter into a contract, it was a case of the firm paying interest to itself and such interest could not be permitted to be allowed as a deductible item against the taxable income of the firm. It was further contended that the funds in question were admittedly received for the purpose of being utilized for charitable purposes and in spite of that the firm had used the said funds for its own purposes and at the same time paid interest thereupon and claimed deduction of such interest paid which was not permissible.