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Issues Involved:
1. Deductibility of interest paid by the assessee-company for the assessment years 1967-68, 1968-69, and 1969-70. 2. Determination of whether the metal business and electricity business constituted one business or two separate businesses. 3. Utilization of borrowed funds and their linkage to the compensation received from the Government after the takeover of the electricity business. 4. Allowability of interest deduction under the head "Other sources" after the takeover of the electricity business. Detailed Analysis: 1. Deductibility of Interest Paid by the Assessee-Company The primary issue revolves around whether the interest paid by the assessee-company to Upper India Sugar Mills Ltd. can be deducted for the assessment years 1967-68, 1968-69, and 1969-70. The assessee claimed these deductions, but the Income Tax Officer (ITO) allowed only a partial deduction, limiting it to Rs. 8,000 per year, disallowing the excess amounts. The ITO's rationale was that the interest expenses pertained to the electricity business, which had ceased to exist after being taken over by the Government on April 24, 1965. 2. Single Business vs. Separate Businesses The assessee argued that it was carrying on only one business, with the metal and electricity businesses being two divisions of the same entity. However, the Tribunal found that the metal business and the electricity business were two separate and independent businesses. This conclusion was based on the nature of the businesses, their historical context, and the fact that separate accounts were maintained for each. 3. Utilization of Borrowed Funds and Compensation The Tribunal agreed with the department that the borrowed funds were utilized for the electricity business. However, after the Government took over the electricity business, the compensation received was credited to the metal business accounts. The Tribunal noted that the compensation amounts were used to repay Upper India and to refund security deposits to consumers. The Tribunal concluded that the liability for the borrowed funds was transferred to the metal business, reflecting the reality that the metal business was revived using the compensation received. 4. Interest Deduction Under "Other Sources" The Tribunal allowed the deduction of interest under the head "Other sources," reasoning that the Government's liability to pay compensation constituted a fresh source of income. This source was linked to the borrowings, and the interest paid was inextricably linked to the emergence and continuance of this source. The Tribunal emphasized that it is not necessary for a source to yield income before related expenditure can be considered for deduction. The Tribunal held that the assessee was entitled to the deduction of the remaining amounts disallowed by the Appellate Assistant Commissioner (AAC). Conclusion: The High Court upheld the Tribunal's decision, agreeing that the compensation received from the Government represented a source of income against which the interest payments could be deducted. The Court emphasized that the borrowed funds, initially used for the electricity business, were effectively transferred to the metal business after the takeover. The Court concluded that the Tribunal's decision was correct and answered the referred question in the affirmative, allowing the interest deductions for the assessment years in question. The Court made no order as to costs.
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