2006 (9) TMI 168 - HC - Income Tax

Whether ITAT was right in concluding that the debt raised from the bank for the purchase of plant and machinery, which remained unpaid during the accounting period, was not deductible u/s 32AB Held, Yes Sec. 32AB is for deduction out of income generated during the year deduction will not available unless income during the year is utilised for the purpose - Investment made out of borrowed funds will not be utilisation of income during the year so it doesn t qualify for deduction u/s 32AB

Summary

Issues:
Interpretation of section 32AB of the Income-tax Act for deduction on investments made from borrowed funds.

Analysis:
The case involved a question regarding the interpretation of section 32AB of the Income-tax Act for allowing a deduction on investments made from borrowed funds for the purchase of plant and machinery. The assessee claimed a deduction for additions made to plant and machinery during the assessment year, but the Assessing Officer disallowed a part of the amount invested through loans. The Tribunal upheld the disallowance, stating that section 32AB did not permit deductions for investments made from borrowed funds.

The assessee argued that the requirement was to utilize the amount during the year out of profits or loans to encourage investment. They relied on judgments from the Bombay High Court to support their stance. However, the High Court noted that the provision of section 32AB clearly specifies that investments must be made from income chargeable to tax under the head "Profits and gains of business or profession." The purpose is to grant benefits on investments made from the income generated during the year, not from borrowed funds.

The High Court emphasized that each year must be assessed independently, and allowing deductions for investments made from borrowed funds would distort the income determination for the current year. They distinguished previous judgments where deductions were allowed for investments made from profits of the year, not borrowed funds. The Court concluded that investments made from borrowed funds do not qualify for a deduction under section 32AB of the Act.

Therefore, the question referred was answered against the assessee and in favor of the Revenue, affirming that deductions under section 32AB are only applicable to investments made from income generated during the year, not from borrowed funds.