Interest payable on borrowed capital used for advancing loans is allowable as a deduction, even if the loans are written off as bad debts.

AJIT K. SENGUPTA, J.

( 1 ) IN this reference under Section 256 (2) of the Income-tax Act, 1961, the Tribunal has prepared the statement of case with the following questions of law relating to the assessment years 1981-82 and 1982-83 :"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that part of the interest amounting to Rs. 1,87,618 paid on moneys borrowed to advance loans amounting to Rs. 42,08,459 and Rs. 3,55,021 to Messrs. East India Electricals and Messrs. New India Electricals (Cal) Pvt. Ltd. should be disallowed ? whether the Tribunal was justified in holding that the interest payable by the assessee to its creditors and the interest received by him from his debtors were not interrelated so as to justify the exclusion of interest payable by him on the ground of non-receipt of interest receivable by him ? whether the Tribunal was justified in holding that the nature of income receivable from the advance made was not material in deciding the issue of the admissibility of interest on monies borrowed to support the above advances"

( 2 ) THE additional question of law for the assessment year 1981-82 is as follows :"whether the Tribunal was justified in upholding the order of the Commissioner of Income-tax (Appeals) directing the Income-tax Officer while deciding the appeal for the assessment year 1980-81 to set off against the income for the assessment year 1981-82 when the Income-tax Officer did not carry forward the loss"

( 3 ) THE facts pertaining to all the questions are that the assessee paid interest of Rs. 11,36,592 and Rs. 15,41,844 in the assessment years 1981-82 and 1982-83, respectively, on the amounts borrowed by him earlier. The Income-tax Officer found that at the same time he had a good number of loan accounts as well as investment accounts by way of loans and others. The investment in the form of loans were always shown as a part of investment under the head "loans". During the year 1979-80 relevant to the assessment year 1980-81, the assessee wrote off the loans of Rs. 12,08,459. 78 due from Messrs. East India Electricals and Rs. 3,55,217. 47 due from Messrs. New India Electricals (Cal) Pvt. Ltd. on the ground that the debtor-companies went into liquidation under order dated January 18, 1979, of this court. This act of writing off of the loans was upheld by the Commissioner of Income-tax (Appeals) in the quantum appeals.

( 4 ) THE Income-tax Officer was of the opinion that the interest income under other sources was shown by the assessee in the assessment year 1977-78 and thus the amounts lost their capacity of fetching or earning any income at all during the year being written off in the preceding year. So, he was of the opinion that "the interest payable on the borrowed sum to support the above advance is not allowable in view of the provisions of Section 67. The Income-tax Officer also found that the assessee had debited interest at 12 per cent, on the supporting borrowed capital of the above sum. Therefore, a sum of Rs. 1,87,618 (Rs. 15,63,481 at 12 per cent.) is disallowed. In view of the above, the payments of interest of Rs. 9,48,974 (Rs. 11,36,692 less Rs. 1,87,618) in the assessment year 1981-82 and Rs. 13,54,226 (Rs. 15,41,844 less Rs. 1,77,618) in the assessment year 1982-83 were only allowed by the Income-tax Officer. The assessee, being aggrieved by the order of the Income-tax Officer, agitated the action of the Income-tax Officer before the Commissioner of Income-tax (Appeals ).

( 5 ) THE Commissioner of Income-tax (Appeals) held that the activity of the assessee of advancing loans to various parties out of moneys borrowed was an organised activity undertaken by the assessee and, therefore, its income or loss is liable to be taxed as profits and gains of business and not as income from other sources. In his opinion, the bad debt of Rs. 15,63,481 was a business debt which became irrecoverable in the course of the money-lending business carr

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