Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessee, running a spinning and weaving mill, wanted to set up straw-board manufacturing factory and for this purpose it secured a loan from State Financial Corporation - Expenditure incurred on account of said loan was disallowed on ground that loan was obtained for setting up new business - Whether in view of fact that assessee controlled both ventures of spinning and weaving mills as well as straw-board factory, moreover, management, trading organisation, administration, funds and place of business were also identical, it could not be said that setting up of a straw - board factory was initiation of a different business by assessee - Held, yes - Whether, therefore, on said ground expenditure could not be disallowed - Held, yes FACTS The assessee, running a spinning and weaving mill, wanted to set up a straw-board manufacturing factory. To that end, it secured a loan from the U.P. Financial Corporation. On account of this loan the assessee incurred certain expenditure which included interest, commitment levy, cost of stamps and registration charges. The assessee claimed deduction in respect of these expenses under section 37(1). The ITO disallowed the claim holding that this was an expenditure incurred for setting up a new business and not for one which was already in insistence, and hence, said expenditure could not be allowed out of the profits earned by the textile business of the assessee. This view was affirmed on appeal by the AAC. The Tribunal also disallowed the claim. On reference : HELD The admitted position was that the memorandum of association of the assessee-company specifically stated that one of the objects of the company was to manufacture straw-board, mill board, pulp board, coir-washers and to sell the same. The straw-board factory was set up by the assessee by utilising its existing surplus funds and borrowals from the Financial Corporation. The borrowings from the Financial Corporation were specifically for the purpose of setting up a new plant and machinery and for construction of a new factory building for straw-board factory. There was no denial that…

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