1979 (6) TMI 28 - HC - Income Tax

Accounting Year Assessee Carrying On Business Business Expenditure Deduction Of Interest Income Tax Act Interest On Borrowed Capital

Issues Involved:

1. Whether the Tribunal was justified in disallowing the interest of Rs. 42,846 claimed by the assessee for the assessment year 1969-70.

Issue-wise Detailed Analysis:

1. Justification of Disallowing Interest Deduction:

The primary issue was whether the Tribunal was justified in disallowing the interest of Rs. 42,846 claimed by the assessee for the assessment year 1969-70. The assessee had borrowed money to secure a lease of a fully equipped cinema theatre and claimed the deduction of interest paid on the borrowed amount. The ITO disallowed the deduction on the grounds that the borrowed money was not for the purpose of the assessee's business, as the theatre came into existence only in February 1969. The AAC and the Tribunal upheld this view, stating that the capital borrowed was not for the appellant's business and the interest paid on such amount is not deductible under s. 36(1)(iii) of the Act.

2. Assessee's Contentions:

The assessee contended that:
(i) The capital borrowed was invested during the accounting year for acquiring a business asset, regardless of its availability for use during that year.
(ii) As the assessee was already carrying on film distribution and exhibition business on a percentage basis, the capital borrowed for securing a cinema theatre for his own exhibition business should be deductible under s. 36(1)(iii) of the Act.

3. Revenue's Contentions:

The revenue argued that:
(i) Since the exhibition of cinema commenced only on February 7, 1969, the deduction for the earlier period was not permissible as the theatre was not in use before that date.
(ii) The assessee had no exhibition business during the period in question, and the borrowed money was for exhibition business, not for distribution business, thus not qualifying for interest deduction.

4. Court's Analysis and Judgment:

The court examined s. 36(1)(iii) of the Act, which allows deductions for interest paid on capital borrowed for business purposes. The court found that the capital was indeed borrowed for securing a cinema theatre lease and paid under an agreement dated July 5, 1967. The court noted that the deduction of interest was allowed during the assessment year 1970-71 when the exhibition of films commenced on February 7, 1969.

The court held that under s. 36(1)(iii) of the Act, it is sufficient if the capital borrowed is spent for acquiring a business asset during the relevant accounting year, even if the asset was not used for business in that year. This view was supported by previous judgments, including Addl. CIT v. Southern Founders and Calico Dyeing and Printing Works v. CIT.

5. Business Purpose and Commercial Expediency:

The court rejected the revenue's argument that the borrowed capital was not for the assessee's business, stating that the assessee was engaged in both distribution and exhibition business during the relevant year. The court emphasized that the capital borrowed for extending the business to exhibition was for the purpose of the assessee's business. The court cited the Supreme Court's decision in State of Madras v. G. J. Coelho, which supported the view that interest on capital borrowed for acquiring a new business asset is deductible.

6. Relationship Between Assessee and Lessor:

The court dismissed the revenue's contention that the payment to the assessee's wife was not due to commercial expediency but due to their relationship. The court held that the capital borrowed was for acquiring a leasehold right in the new theatre, and the relationship between the lessor and lessee did not affect the commercial nature of the transaction.

Conclusion:

The court concluded that the Tribunal was not justified in disallowing the interest deduction claimed by the assessee. The question referred for the court's opinion was answered in the negative and in favor of the assessee.

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