Important Point
Merely because the machinery pur­chased out of borrowed amount is not actually used for business, though treated as business asset by the assessee, deduction of interest paid on the borrowed amount could not be disallowed.

Order

The respondent-assessee is a private limited company. The original assessment for the years 1972-73 was made on 28.2.1973 determining the loss as Rs. 78,823/-. A sum of Rs. 78,500/- claimed as interest paid by the assessee on amounts borrowed for purchase of machinery was allowed as a deduction. Similarly, for the year 1973-74, in the origi­nal assessment deduction was allowed for similar interest paid by the assessee. While making the assessment for the assessment year 1974-75, the Income Tax Officer noticed that the assessee had included a note in the schedule of fixed assets appended to its balance sheet as on 31.3.1973 and that no depreciation had been made for unused rubberised machinery valued at Rs. 4,80,000/-. Hence the Income Tax Officer held that such machinery had not been used for the business of the asses­see. Consequently, the I.T.O. took the view that the assessee was not entitled to claim deduction for the interest paid by him in all the three assessment years. The assessment was re-opened and fresh assess­ment orders were passed by the I.T.O. rejecting the claim of deduction made by the assessee. That order was confirmed on appeal by the Appel­late Assistant Commissioner and when the matter was taken to the Tribunal, the latter took the view that the machinery being business asset, the interest paid on the amount borrowed for the purchase of such machinery would certainly be an allowable deduction. Consequently, the Tribunal upheld the claim of the assessee and per­mitted the deduction being made.

2. The Revenue applied to the High Court under Section 256(2) for directing the Tribunal to make a reference to it on the following question:

“Whether on the facts and in the circumstances of the case the Tribu­nal is justified in law in holding that the interest paid by the assessee on loans taken from the bank for the purchase of machinery, which was never used in the assessee’s business, is an allowable deduction in computing the total income of the assessee for the as­sessment year 1972-73 and 1973-74.”

Similar application was filed for the year 1974-75. The High Court dismissed the applications by two separate orders. Both the orders are challenged in this appeal.

3. We do not find any merit in this appeal. We find that the reasoning of the Tribunal is correct. Even though the machinery has not been actually used in the business at the time when the assessment was made, the same had been treated as business asset and it was purchased only for the purposes of the business. In the circumstances, the interest paid on the amount borrowed for purchase of such machinery is certainly a deductible amount. Consequently, the view taken by the Tribunal is correct.

4. The appeal is dismissed. There will be no order as to costs.

(C.R.) Appeal dismissed.

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