2005 (7) TMI 577 - AT - Income Tax

Interest on borrowed capital Deductions - Profits and gains from newly established small scale industrial undertakings

Summary

Issues:
1. Disallowance of interest paid by the assessee to the bank due to advancing interest-free loan.
2. Disallowance of deductions claimed under sections 80HHA and 80-I for not being engaged in manufacturing or production of any articles.

Issue 1: Disallowance of Interest Paid:
The appeals involved the disallowance of interest paid by the assessee to the bank as the borrowed funds were allegedly diverted for non-business purposes. The assessee contended that the advances made to another entity were part of business transactions, and no interest-bearing borrowed funds were used for interest-free advances. The Tribunal directed the Assessing Officer to verify if borrowed funds were diverted for non-business purposes. The Assessing Officer was instructed to allow the assessee to establish the source of advances made and decide the issue after proper verification.

Issue 2: Disallowance of Deductions Under Sections 80HHA and 80-I:
The second ground of appeal focused on the disallowance of deductions claimed under sections 80HHA and 80-I. The revenue authorities contended that the assessee was not engaged in manufacturing or production of any articles. The assessee argued that the processes of warping and sizing of yarn constituted manufacturing, producing a different commercially marketable article. Detailed technical explanations were provided regarding the processes involved. The Tribunal noted that in previous years, the deductions claimed had been allowed, and cited a Mumbai ITAT decision supporting the assessee's position. The Tribunal held that the assessee was entitled to the deductions under sections 80HHA and 80-I, directing the Assessing Officer to allow the deductions as per the relevant provisions.

In conclusion, both appeals were allowed in favor of the assessee, emphasizing the entitlement to deductions and the need for proper verification in the case of interest disallowance.