Law: Income Tax Act, 1961

Section: 36,37

Income-tax---Interest on borrowed capital---Finding that capital had been used for purpose of business---Interest was deductible---Indian Income Tax Act, 1961, Ss. 36 & 37. In order to establish a forging plant at Hyderabad, the assessee ­company entered into an agreement with a French company for supply of the entire machinery and the technical know-how relating thereto. The total price of engineering, imported machinery and equipment and technical assistance had to be paid in transferable currency in 20 half-yearly instalments along with yearly interest at 6 per cent. on all amounts remaining due from the date of last shipment. The assessee-company accordingly paid the instalments including interest and the interest debited. As the profit and loss account for the assessment year 1976-77 was Rs.3,97,477 and for the assessment year 1977-78 it was Rs.1,04,474. The Income-tax Officer disallowed the amounts on the ground that the payment was not for purposes of business and it was for the acquisition of assets before the commencement of business and hence it was capital in nature. The Tribunal allowed the deduction. On a reference: Held, that it was not the case of the Department that the interest was paid by the assessee for its personal benefit. It was wholly paid for the purpose of business and under these circumstances the assessee was entitled for deduction of the interest in computing its income. JUDGMENT RAMESH MADHAV BAPAT, J.---This Court by order, dated June 2, 1986, passed an order in I.T.C. No.20 of 1985, directing the Tribunal to refer the following question for its opinion: "Whether, on the facts and in the circumstances of the case, the interest payable amounting to Rs.3,97,477 and Rs.1,04,474 for the assessment years 1976-77 and 1977-78, respectively, by the company is allowable as revenue expenditure?" Now the question is referred to this Court. The facts leading to this can be briefly stated as follows-- The assessee is a public limited company. The assessments involved are for 1976-77 and 1977-7R for which the previous years ended on March 31, 1976 and March 31, 1977, respectively. In order to establish the forging plant at Hyderabad, the…

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