Commissioner of Income Tax vs Bhilai Iron Foundry P. Ltd.

A.K. Mathur, C.J.—This is a reference u/s 256(1) of the Income Tax Act, 1961, referred by the Tribunal at the instance of the Revenue and the following question of law has been referred for answer of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 15,15,544 being interest on the loans from ICICI and IFCI utilised for setting up a new project, namely, ''Neco Valves and Pumps'' was an allowable deduction under the provisions of the Income Tax Act, 1961 ?"

The brief facts giving rise to this reference are that the assessee is a private limited company. The assessee besides engaging in carrying out job work of breaking skull lumps (belonging to other parties) into smaller sizes, purchased skull lumps and sold the same after converting it into smaller sizes. The assessee claimed deduction u/s 32AB at Rs. 13,67,535. The Assessing Officer, however, allowed the deduction u/s 32AB at Rs. 9,02,543. The Assessing Officer, however, only disallowed the interest payment amounting to Rs. 15,15,544 holding that the funds borrowed from ICICI were utilised for setting up and acquiring plant and machinery of a new project "Neco Valves and Pumps", which was not an expansion of the assessee''s existing business.

Aggrieved against the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) and the Commissioner of Income Tax (Appeals) allowed the assessee''s claim. Then the Department went in appeal before the Tribunal and the Tribunal after following the findings of its order passed in ITA Nos. 648 and 649/Nag.1990, for the assessment years 1987-88 and 1988-89, dated December 6, 1991, upheld the order of the Commissioner of Income Tax (Appeals). Thereafter, the Department approached the Tribunal for making reference before this court and, accordingly, the aforesaid question of law has been referred by the Tribunal for answer of this court.

We have heard learned counsel for the parties and perused the records. The deduction is permissible u/s 36(1)(iii) of the Act of the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession. In the present case, the finding has been given by the Tribunal that the Department does not dispute that this project is an expansion of old business. In view of this categorical finding that the said capital was borrowed for expansion of the old business, the assessee is entitled for deduction u/s 36(1)(iii) of the Income Tax Act. But the Assessing Officer has gone wrong by holding that the extended unit has not gone into operation. That is not decisive of the matter. The question decisive of the matter is whether this is an expansion of the old business or not. Once it is found by the Tribunal and not disputed by the Department that the new unit is nothing but an expansion of the old business, then in that case, the assessee will be entitled to deduction of the interest on the capital borrowed for the business. Whether the unit has gone into production or not, that is not decisive of the matter. Therefore, the Tribunal has rightly decided the matter on the admission of the Department that this expansion is but an expansion of the old business. In this connection, reference may be made to Kanhiram Ramgopal Vs. Commissioner of Income Tax, and Commissioner of Income Tax Vs. Malwa Vanaspati and Chemicals Co. Ltd., . Therefore, we are of the opinion that the view taken by the Tribunal is justified and we answer the aforesaid question in favour of the assessee and against the Revenue.