TMI Blog1987 (7) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal as per order of this court dated October 13, 1980, in Misc. Civil Case No. 483 of 1975, referring the second question for the opinion of this court. The assessee is a registered partnership firm carrying on business in grains, oil-seeds, pulses, hemp, rice and dal mill, with its head office at Seoni and branches at Calcutta, Banaras and Kawlari. The firm wanted to expand its business by starting a factory to utilise the waste product of the rice and dal mill for manufacturing straw-boards and for that purpose took a loan from the M.P. State Finance Corporation. The factory actually started production in the assessment year 1971-72, which means, that in the assessment years in question, the factory had not commenced its production. This reference arises out of assessment for the assessment years 1968-69 and 1969-70 and the other reference arises out of assessment for the assessment year 1970-71, Deepawali year 2025-2026 (previous year ending on November 9, 1969). The Income-tax Officer, while completing the assessment of the assessee in the status of a registered firm under section 143(3) of the Income-tax Act, 1961, determined the total income at Rs. 91,690 and Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 263 of the Act, and negatived the plea of the assessee that the order of the Income-tax Officer had merged in the order of the Appellate Assistant Commissioner and as such could not be reviewed. The Commissioner held that since the question of disallowance of interest on borrowings from the M.P. State Finance Corporation was not considered in the appeal before the Appellate Assistant Commissioner, there was no question of merger of the Income-tax Officer's order on this point in the order of the Appellate Assistant Commissioner since the straw-board factory had commenced production only in the next assessment year, i.e., 1971-72. Interest paid could not be deducted under section 36(1)(iii) of the Act, as in the assessment year in question, the factory was still under construction, erection and installation and it cannot be said that interest was paid for the business of the assessee. The matter is concluded by recent Full Bench decision of this court in CIT v. K. L. Rajput [1987] 164 ITR 197, where it was held (headnote): "The doctrine of merger applies to income-tax proceedings but the extent of its application depends on the scope and subject-matter of the appeal and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and husk is the waste product of the mill which can be utilised as raw material in the manufacture of straw-boards. That is the reason for which the assessee decided to start a straw-board factory to utilise the waste material of the mill as a raw material for manufacturing straw-boards. For this purpose, the assessee borrowed capital from the M.P. State Finance Corporation and started constructing, erecting and installing the straw-board factory. In fact, this is only an expansion of the existing business of the assessee and it is not a case of starting altogether a new business for that purpose. Therefore, the assessee is entitled to deduct interest paid under section 36(1)(iii) of the Act from the total income. We are fortified in our view by a direct decision of the Allahabad High Court in Prem Spinning and Weaving Mills Co. Ltd. v. CIT [1975] 98 ITR 20, the facts of which were more or less similar to the facts of the present case. There, the assessee-company was running a spinning and weaving mill and had set up a straw-board manufacturing factory and for that purpose took a loan from the U.P. Financial Corporation. The assessee claimed deduction of the interest p aid towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowing transaction was not illusory or colourable and that the capital was borrowed by the assessee for the purposes of the business and the amount of interest was paid, then the claim made by the assessee for deduction on account of the interest paid on borrowed capital has to be allowed. The Supreme Court, in State of Madras v. G. J. Coelho [1964] 53 ITR 186, has held that there is no distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation. Both are for the purposes of the plantation. Therefore, the second question is answered in the negative, in favour of the assessee by holding that the Tribunal was not right in disallowing interest paid by the assessee to the M.P. State Finance Corporation for the assessment year in question. The cases referred by the Income-tax Appellate Tribunal, in support of its decision are clearly distinguishable. In CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC), the assessee was manufacturing absorbent cotton wool and resolved to establish a new spinning unit. The construction of the mill was started in 1956 and comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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