Interest paid on loan taken for the purpose of business is deductible as business expenditure under section 36(1)(iii) of the Income-tax Act, 1961, irrespective of whether the capital is invested in a revenue asset or a capital asset. Travelling expenses incurred for procuring the loan are also deductible as business expenditure.

1. In this reference, the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as " the Tribunal"), has referred the following questions for the opinion of this court:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing a sum of Rs. 34,072 being the amount of interest paid by the assessee on moneys borrowed for the purpose of constructing a new cinema building called Mayank which was not brought into use in the accounting year under reference ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 2,740 being the amount of travelling expenses incurred for procuring loan for construction of Mayank cinema is allowable as a deduction ? "

2. This reference relates to the assessment year 1976-77.

3. M/s. Shah Theatres Private Limited (hereinafter referred to as "the assessee ") is a private limited company incorporated in 1962. It carries on the business of exhibition of motion pictures. During the relevant previous year, the assessee started construction of a cinema building known as" Mayank "cinema at Jaipur and for that purpose, it borrowed money. A sum of Rs. 34,072 was paid by the assessee as interest on the said loan and it was claimed as business expense by the assessee. In addition to the said sum, the assessee claimed Rs. 1,748 and Rs. 922 as travelling expenses incurred by Gauri Shanker, Advocate, and Sah Anil Kumar, respectively. The Income-tax Officer, Central Circle-V, Jaipur (hereinafter referred to as" the Income-tax Officer "), disallowed the claim of interest of Rs. 34,072 on the ground that the expenditure on borrowing for construction of a new unit was of a capital nature. The Income-tax Officer also disallowed the travelling expenses claimed by the assessee on the ground that such expenses were not incurred wholly and exclusively for the purpose of business. On appeal, the Appellate Assistant Commissioner of Income-tax, Central Range, Jaipur (hereinafter referred to as " the Appellate Assistant Commissioner "), allowed the said interest of Rs. 34,072 as business expenses on the view that this was a case of extension of the existing business and not of setting up of a new business and, therefore, the interest on funds borrowed in the course of business is to be allowed as revenue expenditure. The Appellate Assistant Commissioner also allowed the claim for travelling expenses incurred by Gauri Shanker, Advocate, and Sah Anil Kumar. On further appeal, the Tribunal affirmed the order of the Appellate Assistant Commissioner. Thereafter, the Tribunal has referred these questions for the opinion of this court at the instance of the Revenue.

4. The relevant provision with regard to deduction from the income of the assessee relating to an amount of interest is contained in section 36(1)(iii) which provides for deduction of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. In the Indian Income-tax Act, 1922, the corresponding provision was contained in section 10(2)(iii). The aforesaid provision contained in section 10(2)(iii) came up for consideration before the Bombay High Court in Calico Dyeing and Printing Works v. CIT [1958] 34 ITR 265 (Bom) . In that case, the assessee-firm was carrying on the business of bleaching, dyeing and printing cloth and had borrowed money in order to extend its business and with that money it purchased land and erected an additional plant and machinery and claimed deduction of the interest paid on the borrowed capital as business expenses. The Bombay High Court held that the said interest was deductible as business expenses under section 10(2)(iii) of the Indian Income-tax Act, 1922, and that it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset and that if the capital was used in the year of account and the use is for the purpose of