1984 (2) TMI 125 - AT - Income Tax

Summary

Issues:
- Appeal against disallowance of interest paid by the assessee to the Government of India on a loan obtained for the Orissa project for assessment years 1976-77 and 1977-78.

Analysis:
The appeals were filed by the assessee-company against the orders of the Commissioner (Appeals) disallowing the interest paid on a loan obtained for the Orissa project. The main contention was whether the interest was deductible under section 36(1)(iii) of the Income-tax Act, 1961. The assessee argued that the interest was paid in respect of capital borrowed for the business, relying on judicial decisions such as Calico Dyeing & Printing Works v. CIT and India Cements Ltd. v. CIT. The Commissioner (Appeals) held that the Orissa project was incomplete, and the interest amount was rightly capitalised by the assessee. The Tribunal considered the nature of the assessee's business, the purpose of the loan for setting up a new mineral separation unit in Orissa, and the applicability of the decision in Alembic Glass Industries Ltd. v. CIT. The Tribunal concluded that the funds obtained by the assessee from the Government for the Orissa project constituted capital borrowed for the running business, making the interest paid deductible under section 36(1)(iii) for the assessment years 1976-77 and 1977-78.

The Tribunal noted that the assessee had been operating mineral separation plants in Kerala and Tamil Nadu and needed to expand operations due to the depletion of mineral reserves. Setting up a new unit in Orissa was an extension of the current business, not a new undertaking. The Tribunal rejected the argument that the funds from the Government were not capital borrowed but capital 'provided', emphasizing that the loan was secured on the assets of the assessee-company. Relying on the decision in Alembic Glass Industries Ltd., the Tribunal held that the interest paid on the borrowed capital for the Orissa project was admissible as a deduction under section 36(1)(iii) for the assessment years in question.

The Tribunal's decision was based on the interpretation of relevant case law, the nature of the assessee's business, and the purpose of the loan obtained for the Orissa project. By analyzing the facts and circumstances, the Tribunal concluded that the interest paid on the capital borrowed for the extension of the business was allowable as a deduction under section 36(1)(iii). The Tribunal's ruling favored the assessee, allowing the appeal against the disallowance of interest for the assessment years 1976-77 and 1977-78.