9911796707
TMI Blog1987 (7) TMI 580X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1975, referring the second question for opinion of this Court. 2. The assessee is a registered partnership firm carrying on business in grains, oil-seeds, pulses, hemp, rice and dal mill, with its head office at Seoni and branches at Calcutta, Benaras and Kawlari. The firm wanted to expand its business by starting a factory to utilise the waste product of the rice and dal mill for manufacturing straw boards and for that purpose took a loan from the M.P. State Finance Corporation. The factory actually started production in the assessment year 1971-72, which means, in the assessment years in question, the factory had not commenced its production. This reference arises out of assessment for the assessment years 1968-69 and 1969-70, the other reference arises out of assessment for the assessment year 1970-71, Deepawali year 2025-2026 (previous year ending on 9-11-1969). 3. The ITO, while completing the assessment of the assessee in the status of a registered firm, under section 143(3) of the Income-tax Act, 1961 ('the Act') determined the total income at ₹ 91,690 and ₹ 84,803 respectively amongst others, allowing deduction of interest paid to the M.P. State Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was not considered in appeal before the AAC, there was no question of merger of the ITO's order on this point in the order of the AAC since the straw board factory had commenced production only in the next assessment year 1971-72. Interest paid could not be deducted under section 36(1)(iii), as in the assessment year in question, the factory was still under construction, erection and installation and it cannot be said that interests were paid for the business of the assessee. The matter is concluded by a recent Full Bench decision of this Court in CIT v. K.L. Rajput [1987] 164 ITR 197 where it was held: "The doctrine of merger applies to income-tax proceedings but the extent of its application depends on the scope and subject-matter of the appeal and the decision rendered by the appellate authority. Where an appeal has been preferred by the assessee to the Appellate Assistant Commissioner from an order of assessment made by the Income-tax Officer in respect of only some of the items covered by the Income-tax Officer's order and the remaining items, forming part of the Income-tax Officer's assessment order, were not agitated or the Appellate Assistant Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted constructing, erecting and installing the straw board factory. In fact, this is only expansion of the existing business of the assessee and it is not a case of starting altogether a new business for that purpose. Therefore, the assessee is entitled to deduct interest paid under section 36(1)(iii) from the total income. We are fortified in our view by a direct decision of the Allahabad High Court in Prem Spg. & Wvg. Mills Co. Ltd. v. CIT [1975] 98 ITR 20 the facts of which were more or less similar to the facts of the present case. There, the assessee-company was running a spinning and weaving mill and had set up a straw board manufacturing factory and for that purpose took a loan from the U.P. Financial Corporation. The assessee claimed deduction for the interest paid towards the loan, but the same was disallowed by the Tribunal holding that the straw board factory was altogether a fresh undertaking set up with the help of surplus funds and also of borrowed fund and could not be identified with the existing business and the business for which capital was borrowed had not yet started production. It was held: "the memorandum of association of the assessee-company specifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation. Both are for the purposes of the plantation. Therefore, the second question is answered in the negative, in favour of the assessee by holding that the Tribunal was not right in disallowing interest paid by the assessee to the M.P. State Finance Corporation for the assessment year in question. 8. The cases referred by the Tribunal, in support of its decision, are clearly distinguishable. In Ramaraju Surgical Cotton Mills Ltd.'s case (supra), the assessee was manufacturing absorbent cotton wool and resolved to establish a new spinning unit. The construction of the mill started in 1956 and completed in 1957. In the assessment of wealth-tax, the assessee claimed deduction of the amount which was laid out in setting up the new unit, under section 5(1)(xxi) of the Wealth-tax Act, 1957 ('the 1957 Act'). The Supreme Court held that a unit cannot be said to have been set up, unless it is ready to discharge the function for which it is being set up and it is only when the unit has been put into such a shape that it can start functioning as a bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
