Interest paid on a loan taken for setting up a new business unit is not allowable as a deduction against interest earned from another source.

( 1 ) THIS reference arises out of the income-tax assessment of New Central Jute Mills Co. Ltd. , the assessee, in the assessment year 1958-59, the relevant previous year being the one ended on the 31st March, 1958. On an application of the Commissioner of Income-tax (Central), Calcutta, under Section 66 (1) of the Indian I. T. Act, 1922, the Tribunal has referred for the opinion of this court the following questions as questions of law arising out of its order :"1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,46,875 spent on the purchase of loom hours was an allowable revenue expenditure under the Indian Income-tax Act, 1922 ?

( 2 ) WHETHER, on the facts and in the circumstances of the case, the sum of Rs. 7,79,117 (sic) paid to the U. P. Government as interest on moneys borrowed from it was allowable as a deduction against the interest income of Rs. 1,75,471 earned from the Central Bank of India Ltd. ? "2. The first question appears to be covered by a decision of this court in CIT v. Empire Jute Company Ltd. Following the same, we answer the said question in the negative and in favour of the revenue.

( 3 ) THE facts relating to the other question as has been found and/or admitted in the proceedings are shortly as follows : the assessee, at the material time, was setting up a heavy chemical plant at Varanasi and in the relevant assessment year the said plant was under erection. Earlier, in or about 1955, the assessee had successfully negotiated with the Government of Uttar Pradesh and had obtained a loan of Rs. 1. 45 crores for the purpose of setting up the said plant. Amounts received under the said loan had been kept in deposit with the Central Bank of India pursuant to the terms thereof till transfer or utilization thereof for the stipulated purpose.

( 4 ) DURING the year in question, the assessee earned a sum of Rs. 1,75,471 as interest from the amount received under this loan and kept in deposit with the Central Bank of India Ltd. In the same year the assessee paid to the Government of Uttar Pradesh a sum of Rs. 9,54,588 as interest. The difference between the interest earned and interest paid, viz. , Rs. 7,79,117, was claimed by the assessee to be a revenue expense. The ITO disallowed the claim on the ground that such expenses had nothing to do with the existing business of the assessee in jute and related to a separate unit, viz. , the chemical plant, which was still under erection and that business had not started till then.

( 5 ) BEING aggrieved, the assessee preferred an appeal to the AAC who found that this specifically earmarked loan has been actually utilized for the purchase of machinery. He held that the payment-was in the nature of capital expenditure and had been rightly disallowed by the ITO.

( 6 ) THE assessee preferred a further appeal to the Income-tax Appellate Tribunal. It was contended that though the money had been utilised for capital expenditure the same being for the purpose of business, the interest paid by the assessee should be allowed as a deduction. It was claimed, in the alternative, that the amount of interest paid should, in any event, be allowed against the receipt oi Rs. 1,75,471 from the Central Bank of India Ltd.

( 7 ) IT was contended on behalf of the revenue that the loan was for a new business and the assessee's claim for allowance against the interest earned did not arise as such interest was not separately taxed.

( 8 ) THE Tribunal did not accept the assessee's contention that the interest paid was deductible as a revenue expenditure, but it held that the amount paid by way of interest had to be allowed as a deduction as against interest earned from the Central Bank of India Ltd. in terms of the loan, the assessee had to keep the money in deposit in the said bank segregated from its other business assets. The interest earned from the said amount would be income from other sources. By adopting a different method of assessment the ITO co