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- Allowance of deduction for interest paid to the Government of Tamil Nadu under section 37 of the Income-tax Act, 1961 for the assessment year 1973-74. Detailed Analysis: The case involved a dispute regarding the deduction of interest paid by the assessee to the Government of Tamil Nadu for the allotment of an industrial unit under section 37 of the Income-tax Act, 1961 for the assessment year 1973-74. The assessee, an individual carrying on the business of manufacturing and selling industrial thermostats, applied for and was allotted an industrial unit by the Government of Tamil Nadu. The terms of allotment required the assessee to pay a specified amount in instalments along with interest. The Income-tax Officer disallowed the deduction of interest paid by the assessee, stating that the assessee did not borrow capital for the business. The Appellate Assistant Commissioner allowed the deduction, leading to an appeal by the Department to the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal considered the issue of whether the interest paid to the Government of Tamil Nadu could be claimed as a deduction under section 37(1) of the Act. The Tribunal referred to the Supreme Court's ruling in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52, where it was held that interest paid in respect of capital borrowed for the business is a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Tribunal concluded that the interest paid by the assessee to the Government of Tamil Nadu should be allowed as a business expenditure under section 37(1) of the Act. The Tribunal further analyzed the timing of the instalment payments made by the assessee and allowed the deduction for the aggregate of the second and third instalments paid during the relevant previous years. The Tribunal held that the payment of interest by the assessee to the Government of Tamil Nadu in respect of the allotment of the industrial unit should be allowed as a business expenditure under section 37(1) of the Act. The Tribunal's decision was in line with the principles established in the Bombay Steam Navigation Co. case. The High Court upheld the decision of the Income-tax Appellate Tribunal, stating that there was no error of law in allowing the deduction of interest paid by the assessee to the Government of Tamil Nadu. The High Court referred to the provisions of section 37(1) of the Income-tax Act, highlighting that any expenditure laid out wholly and exclusively for the business purposes shall be allowed. The court affirmed that the assessee's payment of interest to the Government of Tamil Nadu in relation to the industrial unit allotment was a permissible deduction under section 37(1) of the Act. Consequently, the court answered the question referred in favor of the assessee and against the Revenue.
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