Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961, read with rule 7 of the Income-tax Rules, 1962 – Interest on borrowed capital – Assessee was manufacturer of sugar – It owned agricultural land on which it grew sugar cane for purpose of manufacture of sugar – Cultivation of sugarcane and manufacture of sugar constituted one single and indivisible business of assessee – It borrowed certain amounts which was credited to agricultural section – assessee paid interest on such borrowings and claimed deduction – Whether assessee was entitled to a deduction of interest paid on borrowings through they were utilised for purpose of raising sugarcane – Held, yes FACTS The assessee was a public limited company carrying on business in the manufacture of sugar. It owned agricultural land on which it grew sugarcane for the purpose of manufacture of sugar. The company borrowed certain amounts. Those amounts were credited to the agricultural section, for which separate accounts were maintained. The interest that the company had to pay on the borrowings had been claimed as a deduction out of the business income. The ITO disallowed an amount towards proportionate interest attributable to the advances credited to agricultural section. On appeal by the assessee, the AAC upheld the disallowance made by the ITO. When the company went up in appeal, the Tribunal following its earlier decision, allowed the appeal, setting aside the disallowance made by the ITO. On reference: HELD It was not disputed that the cultivation of sugarcane and manufacture of sugar by the assessee-company constituted one single and indivisible business. Therefore, when it was not in dispute that cultivation of sugarcane and manufacture of sugar constituted one single and indivisible business, normally, the amount of interest in question paid by the assessee went as a deduction provided in section 36(1)(iii). But, this provision has to be read subject to rule 7(1). In the instant case the money borrowed might have been utilised by the assessee in cultivating and producing sugarcane, but at the same time, it could not be said that the expenditure incurred in payment of interest had any connection or was attributable…

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