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The Commissioner of Income-tax, Ludhiana v. M/s Punjab Wool Combers Ltd., Ludhiana - ITA-71-2004 [2006] RD-P&H 1337 (2 March 2006)

I.T.A.No.71 of 2004 [1]


I.T.A.No.71 of 2004

Date of decision: 10.1.2006

The Commissioner of Income-tax, Ludhiana Appellant.


Mr.D.S.Patwalia, Advocate


M/s Punjab Wool Combers Ltd., Ludhiana


Through: Nemo

Hon'ble Mr.Justice D.K.Jain, Chief Justice Hon'ble Mr. Justice Surya Kant

1.Whether Reporters of local papers may be allowed to see the judgment ?

2. To be referred to the Reporters or not ?

3. Whether the judgment should be reported in the Digest? D.K.Jain, C.J. (Oral)

This appeal, by the Revenue, under Section 260-A of the Income-tax Act, 1961 (for short, `the Act') is directed against order, dated 16.6.2003, passed by the Income-tax Appellate Tribunal, Chandigarh Bench (for short, `the Tribunal') in I.T.A.Nos.1190/Chandi/97 in respect of assessment year 1994-95.

According to the Revenue, the order involves the following substantial question of law:

"Whether on the facts and in the circumstances of the case, the I.T.A.No.71 of 2004 [2]

Hon'ble Income Tax Appellate Tribunal was justified in deleting the addition of Rs.1,49,09,231/- made by the AO under Section 36(I) (iii) by holding that the deduction claimed by the assessee relates to the period prior to the commencement of the production of new unit by ignoring explanation 8 Section 43(1)?" 2- Briefly stated, the background facts are as follows: While computing total income for the relevant assessment year, the Assessing Officer disallowed interest amounting to Rs.1,49,09,231/-, claimed by the assessee, as interest payable on borrowings for establishing a new 672 spindle wool spinning unit for manufacture of lamb's wool yarn and for adding 400 spindles in the worsted unit. According to the Assessing Officer, the interest pertained to the period prior to the commencement of production and therefore, it had to be capitalised.

3- Aggrieved, the assessee preferred appeal to the Commissioner of Income-tax (Appeals). Relying on his decision in the case of Malwa Cotton Spinning Mills Ltd., the Commissioner allowed the claim made by the assessee in entirety.

4- The Revenue carried the matter in further appeal to the Tribunal.

By the impugned order, the Tribunal has dismissed the appeal. Hence, the present appeal.

I.T.A.No.71 of 2004 [3]

4- We have heard Mr. D.S.Patwalia, learned counsel for the Revenue. The assessee remains unrepresented.

5- Assailing the order, Mr. Patwalia has submitted that since interest on the capital borrowed by the assessee was for purchase of new machinery and plant, in view of the provisions of Section 43(1) read with Explanation 8 of the Act, it could not be allowed as revenue expenditure till the production had commenced.

6- We are of the view that the question proposed does not arise from the impugned order. While coming to the conclusion that the claim made by the assessee was allowable under Section 36(1)(iii) of the Act, the Tribunal has observed thus:

"The funds have been borrowed for the purposes of business. It is not the case of the revenue that the assessee has not utilized the funds for business and has not paid interest on such borrowings. We find from perusal of the provision of Section 36(1)(iii) that the amount of interest paid in respect of capital borrowed for the purposes of business or profession was allowable as deduction.

Section 36(1)(iii) no where states that the borrowing has to be on revenue account. For claiming deduction, it is essential that the assessee should have used borrowed capital for the purpose of business. AO has not disputed the fact that the capital borrowed was I.T.A.No.71 of 2004 [4]

not used for the purchase of machinery, i.e., for the purpose of business. Therefore, we feel that the interest paid on capital borrowed for the purposes of business cannot be disallowed and has to be allowed as deduction u/s 36(1)(iii)." 7- It is manifestly clear from the afore-extracted portion of Tribunal's order that insofar as the question of applicability of Explanation 8 of Section 43 (1) of the Act is concerned, the issue was not raised before it. The Revenue cannot, therefore, be permitted to urge such a contention at this stage.

8- However, it is also pertinent to note that proviso inserted in clause (iii) and before the Explanation in sub-section (1) of Section 36 of the Act, by the Finance Act, 2003, with effect from Ist day of April, 2004, makes it clear that prior to the said date, interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business for the period prior to the date on which the said asset was first put to use was to be allowed as deduction.

9- For the foregoing reasons, no question of law, much less a substantial question of law arises from the impugned order.

10- Accordingly, we decline to entertain the appeal. Dismissed.

( D. K. Jain )

Chief Justice

(Surya Kant)

10.1.2006 Judge



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