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Commissioner Of Income-Tax v. Tarai Development Corporation Ltd.
Judicial Summary — A.P. Misra, J.
Factual and Procedural Background
The present reference arises under section 256(1) of the Income-tax Act, 1961. The Tribunal referred the following question to this Court: whether the Tribunal was legally justified in holding that payment of interest amounting to Rs. 97,290 (specifically Rs. 97,289.52) was allowable under clause (iii) of sub-section (1) of section 36 in computing the assessee's business income. The assessee-company, wholly owned by the Government of Uttar-Pradesh, carries on the business of processing seeds and set up a factory at Nagla. It obtained loans from the State Bank of India amounting to Rs. 1,32,77,660, and interest of Rs. 97,289.52 was paid. The assessing authorities disallowed the interest as being of a capital nature. The Tribunal held the interest to be allowable under section 36(1)(iii), and this reference was made to the Court for determination.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally justified in holding that the payment of interest amounting to Rs. 97,290 (Rs. 97,289.52) was allowable in terms of clause (iii) of sub-clause (1) of section 36 of the Income-tax Act, 1961, in the computation of the assessee's business income?
Arguments of the Parties
Assessee's Arguments
- The loan taken from the State Bank of India did not result in acquisition of any enduring (capital) asset for the assessee.
- The loan was taken for the purpose of carrying on the assessee's business and therefore the interest paid was allowable under clause (iii) of sub-section (1) of section 36 of the Income-tax Act, 1961.
- The assessee relied on the decision India Cements Ltd., [1966] 60 ITR 52 (SC).
Revenue's Arguments
- The assessing authorities treated the interest as being of a capital nature and disallowed it.
- The Revenue relied on the decision Ritz Continental Hotels Ltd. v. CIT, [1978] 114 ITR 554 (Cal).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52 (SC) | The principle for the grant of deduction under a similar situation while interpreting the provisions of section 10(2)(xv) of the Indian Income-tax Act, 1922. | The Court regarded this decision as laying down a principle supportive of allowing interest where funds borrowed are for business purposes and applied it to support the Tribunal's conclusion. |
| Ritz Continental Hotels Ltd. v. CIT, [1978] 114 ITR 554 (Cal) | Decision relied upon by the Revenue (as authority for disallowance on capital nature grounds). | The Court found this decision not applicable to the facts and circumstances of the present case and therefore did not follow it. |
| Prem Spinning and Weaving Mills Co. Ltd. v. CIT, [1975] 98 ITR 20 | Authority bearing on the allowance of interest in similar circumstances. | The Court noted that this Court's decision is to the same effect as the Court's holding here and treated it as supportive of allowing the interest. |
Court's Reasoning and Analysis
The Court accepted the Tribunal's factual finding that the assessee was setting up a new factory at Nagla in the previous year and that this factory was an extension of its existing business. The Tribunal found, and the Court accepted, that moneys borrowed were for the purpose of carrying on the business and could be spent on any account, whether capital or revenue. The Court examined clause (iii) of sub-section (1) of section 36, which provides: "The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession."
On that statutory wording the Court reasoned that interest on capital borrowed for the purposes of business falls within the deduction permitted by section 36(1)(iii). The Court relied on the principle as laid down by the Supreme Court in India Cements Ltd. (interpreting a provision in the 1922 Act) and found that the decision in Ritz Continental Hotels Ltd. was not applicable to the facts before it. The Court also noted that the decision in Prem Spinning and Weaving Mills Co. Ltd. supported the same conclusion. On this basis the Court concluded that the Tribunal was legally justified in treating the interest as allowable under section 36(1)(iii).
Holding and Implications
The reference is answered against the Revenue and in favour of the assessee: the Tribunal was legally justified in holding that the payment of interest amounting to Rs. 97,289.52 was allowable under clause (iii) of sub-section (1) of section 36 of the Income-tax Act, 1961; the reference is dismissed with costs.
Implications: The direct effect is that the disputed interest of Rs. 97,289.52 is allowable in computing the assessee's business income for the year in question. The opinion does not state that it establishes any broader new legal precedent beyond applying existing authority to the facts before the Court.
A.P Misra, J.:— Heard learned counsel for the parties.
2. The present reference arises under section 256(1) of the Income-tax Act, 1961, and the Tribunal has referred the following question to be answered by this court which is quoted as under:
“Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally justified in holding that the payment of interest amounting to Rs. 97,290 was allowable in terms of clause (iii) of sub-clause (1) of section 36 of the Act in the computation of the business income of the assessee?
(Ritz Continental Hotels Ltd. v. CIT, [1978] 114 ITR 554 (Cal)).”
3. The assessee-company is wholly owned by the Government of Uttar-Pradesh and has been carrying on the business of processing of seeds. For this purpose, it has set up a factory at village Nagla and obtained loans from the State Bank of India amounting to Rs. 1,32,77,660 whereon interest in question amounting to Rs. 97,289.52 was paid by the assessee. This interest was disallowed by the authorities below being of capital nature.
4. The assessee's contention is that he has not acquired any enduring asset by borrowing money from the State Bank of India and that the said loan was taken for the purpose of carrying on the assessee's business and as such it was allowable in terms of clause (iii) of sub-section (1) of section 36 of the Income-tax Act, 1961. The assessee relied on the decision reported in the case of India Cements Ltd., [1966] 60 ITR 52 (SC), while the Revenue relied on the decision reported in the case of Ritz Continental Hotels Ltd., [1978] 114 ITR 554 (Cal).
5. The Tribunal, in this regard, has found that the interest was allowable to the assessee in terms of the aforesaid section. The actual finding recorded is quoted below:
“In our opinion, the assessee's contention is correct. The assessee is not setting up a new business. The new factory which was being set up by it during the previous year at Nagla was an extension of its existing business. Moneys borrowed for the purpose of carrying on the business could be spent by the assessee on any account, either capital or revenue. There is no distinction made in clause (iii) of sub-section (1) of section 36 of the Act of 1961, based on the purpose for which the capital borrowed is utilised. In this respect, the wording of clause (iii) of sub-section (1) of section 36 is significantly different from those of sub-section (1) of section 36 in that it has been carrying on the business and that it is for the purpose of business that it borrowed the capital in question. That the capital in the present case has been borrowed for its business is not in doubt. Accordingly, we feel that the assessee's contention is correct and the disallowance of interest on the facts of the present case was not justified.”
6. clause (iii) of sub-section (1) of section 36 is quoted as under:
“The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession.”
7. We find that in the present case, the finding has been recorded that the assessee was setting up a new factory in the previous year and it was an extension of its existing business and moneys borrowed were for the purpose of carrying on the business and which could be spent by the assessee on any account, either capital or revenue. The aforesaid section 36(1)(iii) provides that the amount of interest paid in respect of capital borrowed for the purposes of the business could be covered under section 36 for deduction. We find that the principle for the grant of deduction under a similar situation has been laid down by the Supreme Court while interpreting the provisions of section 10(2)(xv) of the Indian Income-tax Act, 1922, in the case of India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52 (SC). On the other hand, the decision relied on on behalf of the Revenue is reported in Ritz Continental Hotels Ltd. v. CIT, [1978] 114 ITR 554(Cal), but the same is not applicable to the facts and circumstances of the present case. We further find that the decision of this court in Prem Spinning and Weaving Mills Co. Ltd. v. CIT, [1975] 98 ITR 20, is also to the same effect as we have held above.
8. In view of the aforesaid, we are answering the aforesaid reference against the Revenue and in favour of the assessee and hold that the Tribunal was legally justified in holding that the payment of interest amounting to Rs. 97,289.52 was allowable in terms of clause (iii) of sub-section (1) of section 36 of the Act in the computation of the business income of the assessee.
9. Accordingly, the reference is dismissed with costs.
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