1993-VIL-661-ALH-DT

Equivalent Citation: [1994] 205 ITR 421, 72 TAXMANN 153

ALLAHABAD HIGH COURT

Date: 16.08.1993

COMMISSIONER OF INCOME-TAX

Vs

TARAI DEVELOPMENT CORPORATION LIMITED

BENCH

Judge(s)  : A. P. MISHRA., A. N. GUPTA 

JUDGMENT

The judgment of the court was delivered by

A. P. MISHRA J.-Heard learned counsel for the parties.

The present reference arises under section 256(1) of the Income-tax Act, 1961, and the Tribunal has referred the following question to be answered by this court which is quoted as under :

"Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally justified in holding that the payment of interest amounting to Rs. 97,290 was allowable in terms of clause (iii) of sub-clause (1) of section 36 of the Act in the computation of the business income of the assessee ?

(Ritz Continental Hotels Ltd. v. CIT [1978] 114 ITR 554 (Cal))."

The assessee-company is wholly owned by the Government of Uttar Pradesh and has been carrying on the business of processing of seeds. For this purpose, it has set up a factory at village Nagla and obtained loans from the State Bank of India amounting to Rs. 1,32,77,660 whereon interest in question amounting to Rs. 97,289.52 was paid by the assessee. This interest was disallowed by the authorities below being of capital nature. The assessee's contention is that he has not acquired any enduring asset by borrowing money from the State Bank of India and that the said loan was taken for the purpose of carrying on the assessee's business and as such it was allowable in terms of clause (iii) of sub-section (1) of section 36 of the Income-tax Act, 1961. The assessee relied on the decision reported in the case of India Cements Ltd. [1966] 60 ITR 52 (SC), while the Revenue relied on the decision reported in the case of Ritz Continental Hotels Ltd. [1978] 114 ITR 554 (Cal).

The Tribunal, in this regard, has found that the interest was allowable to the assessee in terms of the aforesaid section. The actual finding recorded is quoted below :

"In our opinion, the assessee's contention is correct. The assessee is not setting up a new business. The new factory which was being set up by it during the previous year at Nagla was an extension of its existing business. Moneys borrowed for the purpose of carrying on the business could be spent by the assessee on any account, either capital or revenue. There is no distinction made in clause (iii) of sub-section (1) of section 36 of the Act of 1961, based on the purpose for which the capital borrowed is utilised. In this respect, the wording of clause (iii) of sub-section (1) of section 36 is significantly different from those of sub-section (1) of section 36 in that it has been carrying on the business and that it is for the purpose of business that it borrowed the capital in question. That the capital in the present case has been borrowed for its business is not in doubt. Accordingly, we feel that the assessee's contention is correct and the disallowance of interest on the facts of the present case was not justified."

Clause (iii) of sub-section (1) of section 36 is quoted as under:

"The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession."

We find that in the present case, the finding has been recorded that the assessee was setting up a new factory in the previous year and it was an extension of its existing business and moneys borrowed were for the purpose of carrying on the business and which could be spent by the assessee on any account, either capital or revenue. The aforesaid section 36(1)(iii) provides that the amount of interest paid in respect of capital borrowed for the purposes of the business could be covered under section 36 for deduction. We find that the principle for the grant of deduction under a similar situation has been laid down by the Supreme Court while interpreting the provisions of section 10(2)(xv) of the Indian Income-tax Act, 1922, in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC). On the other hand, the decision relied on behalf of the Revenue is reported in Ritz Continental Hotels Ltd. v. CIT [1978] 114 ITR 554 (Cal), but the same is not applicable to the facts and circumstances of the present case. We further find that the decision of this court in Prem Spinning and Weaving Mills Co. Ltd. v. CIT [1975] 98 ITR 20, is also to the same effect as we have held above.

In view of the aforesaid, we are answering the aforesaid reference against the Revenue and in favour of the assessee and hold that the Tribunal was legally justified in holding that the payment of interest amounting to Rs. 97,289.52 was allowable in terms of clause (iii) of sub-section (1) of section 36 of the Act in the computation of the business income of the assessee.

Accordingly, the reference is dismissed with costs.

 

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