1987 (7) TMI 580 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Commissioner to revise assessment orders under section 263.
2. Legality of disallowing interest paid to the M.P. State Finance Corporation.

Detailed Analysis:

1. Jurisdiction of the Commissioner to Revise Assessment Orders under Section 263:

The first issue concerns whether the Commissioner had the jurisdiction to revise the assessment orders for the years 1968-69 and 1969-70 under section 263 of the Income-tax Act, 1961. The Commissioner reviewed the assessments and disallowed the interest paid to the M.P. State Finance Corporation, arguing that the Assessing Officer's (ITO) order had not merged with the Appellate Assistant Commissioner's (AAC) order since the AAC did not consider the disallowance of interest on borrowing. The court referenced the Full Bench decision in CIT v. K.L. Rajput [1987] 164 ITR 197, stating, "The doctrine of merger applies to income-tax proceedings but the extent of its application depends on the scope and subject-matter of the appeal and the decision rendered by the appellate authority." The court concluded that since the AAC did not address the interest disallowance, the ITO's order did not merge with the AAC's order, allowing the Commissioner to exercise revisional jurisdiction. Therefore, the first question was answered in the affirmative and in favor of the revenue.

2. Legality of Disallowing Interest Paid to the M.P. State Finance Corporation:

The second issue pertains to whether the Tribunal was right in law in disallowing the interest paid to the M.P. State Finance Corporation. The assessee, a registered partnership firm, borrowed capital to set up a straw board factory, which commenced production in the assessment year 1971-72. The ITO allowed the interest deduction under section 36(1)(iii) for the years 1968-69 and 1969-70, but the Commissioner and subsequently the Tribunal disallowed it, stating that the factory had not started production in those years. The court, however, opined that the interest paid was for the expansion of the existing business (rice and dal mill) and not for a new business. Citing Prem Spg. & Wvg. Mills Co. Ltd. v. CIT [1975] 98 ITR 20, the court emphasized that the "decisive test was unity of control and not the nature of the two lines of business." The court concluded that the interest paid was deductible under section 36(1)(iii) as it was for the purpose of the business. Thus, the second question was answered in the negative, in favor of the assessee.

Distinguishing Cases:

The court distinguished the cases cited by the Tribunal:
- Ramaraju Surgical Cotton Mills Ltd.: Concerned setting up a new spinning unit, not expanding an existing business.
- Challapalli Sugars Ltd.: Involved capitalizing interest for a new factory, not an expansion.
- Travancore-Cochin Chemicals Ltd.: Related to interest as part of the actual cost for a new project.
- L.G. Balakrishnan & Bros. (P.) Ltd.: Dealt with interest capitalization for a new business.

Conclusion:

The first question regarding the jurisdiction of the Commissioner was answered affirmatively in favor of the revenue. The second question concerning the disallowance of interest was answered negatively in favor of the assessee. No order as to costs was made.