1984 (12) TMI 91 - AT - Income Tax

Summary

Issues:
- Claim for relief under section 80J of the Income-tax Act
- Deduction of interest and commitment charges for a new industrial unit
- Disallowance of deduction by the Commissioner (Appeals)
- Interpretation of section 36(1)(iii) and section 37(1) of the Income-tax Act
- Application of legal principles from previous judgments

Analysis:

The judgment pertains to an appeal by a Public Limited Company regarding the assessment year 1979-80, specifically concerning the deduction of interest and commitment charges related to the setting up of a new unit known as the 'Power Project Division.' The company had borrowed significant amounts for this purpose. The Income Tax Officer (ITO) disallowed the deduction, stating that since the new unit had not commenced production in the relevant year, the claim was not allowable. The Commissioner (Appeals) upheld the disallowance, citing that the interest paid did not qualify as interest on borrowed capital under section 36(1)(iii) and was not allowable under section 37(1) as revenue expenditure.

However, the Appellate Tribunal disagreed with the Commissioner's interpretation. They emphasized that the company was expanding its existing business by setting up a new unit, not starting a new business. Referring to precedents, the Tribunal highlighted the principle that if borrowed capital is used for business purposes, the interest paid is deductible, regardless of whether the asset acquired is revenue or capital in nature. They cited the decision in Calico Dyeing & Printing Works case and Aniline Dyestuffs & Pharmaceuticals case to support their stance that interest on borrowed capital for an expansion project is allowable even if production has not commenced.

The Tribunal also addressed the Commissioner's reliance on other judgments, such as India Cements Ltd. case, and clarified that the interest in question was indeed deductible under section 36(1)(iii). Additionally, they ruled that commitment charges on loans for business expansion qualified as revenue expenditure under section 37(1) and directed the ITO to allow the deduction for both interest and commitment charges. Ultimately, the appeal was partly allowed, overturning the disallowance by the Commissioner (Appeals) and granting the deduction sought by the assessee.