Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1993-94 - Whether proviso to section 36(1)(iii) inserted by Finance Act, 2003 is applicable prospectively with effect from 1-4-2004 - Held, yes - Whether, therefore, for assessment year under consideration, revenue could not press into service proviso to section 36(1)(iii) - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1993-94 - Assessee was engaged in business of manufacturing and selling of ice-cream - About 200 to 250 kms away from existing unit, an additional unit for procurement of milk and production of milk products was set up - According to assessee, said unit was to be considered as an extension of same business and, therefore, expenditure incurred on setting up of unit was to be allowed as revenue expenditure - Revenue authorities as well as Tribunal rejected assessee's claim holding that expenditure in question had admittedly been incurred in capital field connected with setting up of new project for production/procurement of milk and milk products - Whether in view of concurrent findings recorded by authorities below, it was to held that assessee was not entitled to deduction under section 37(1) in respect of expenditure incurred on setting up of a new unit - Held, yes FACTS The assessee-company, filed a return showing nil income for the assessment year 1993-94. The assessee claimed deduction of a sum of Rs. 38.92 lakhs which included various expenses comprised of 20 items. The Assessing Officer disallowed the same. On appeal, the Commissioner (Appeals) confirmed the disallowance made by the Assessing Officer. On second appeal, the Tribunal allowed deduction of a sum of Rs. 6.36 lakhs towards the interest paid for the funds borrowed for setting up of a new business which was unconnected with the regular business of the assessee. The rest of the expenses had been held to be rightly disallowable by the Tribunal. On instant appeal, revenue contended that in view of proviso to section 36(1)(iii) interest paid on capital borrowed for acquisition of assets of new business was disallowable till…

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