COMMISSIONER OF INCOME TAX Vs. GOM INDUSTRIES LTD

JUDGEMENT

(1.) THIS is an appeal filed by the Revenue (IT Department) under Section 260a of the IT Act, against the orders dt. 27th May, 2003, passed by Tribunal in IT Appeal No. 235/ind/1998. This appeal was admitted for final hearing on the following substantial question of law: Whether, on the facts and in the circumstances of the case and in law the Tribunal was justified in deleting the addition of Rs. 1233625 on account of disallowance of interest under Section 36 (1) (iii) of the IT Act, especially when the interest-bearing fund was diverted for non-business purposes ?

(2.) IN short the question that arises for consideration in this appeal filed by the Revenue is whether Tribunal was justified in holding that assessee is entitled to get the benefit of Rs. 1233625 by way of interest accrued on a particular transaction which the AO had declined to grant to the assessee by adding the said amount in their total income in asst. yrs. 1995-96/1996-97.

(3.) THE assessee is a limited company engaged in the business of manufacture of resins and fatty acid. During the assessment year in question, it was noticed that assessee had advanced an amount of Rs. 6950000 to one Systematics Corporate Services Ltd. without charging any interest on the said amount. It is this transaction whose legality and genuineness was doubted by AO. In the opinion of AO, the transaction in question was not genuine and bona fide one and being bogus in nature, a sum of Rs. 12,33,625 was disallowed towards bank interest on account of interest-free advance to M/s Systematics Corporate Services. This finding of AO was challenged by assessee in appeal to CIT (A ). The CIT (A) upheld the finding of AO and dismissed the appeal. In further appeal by assessee to Tribunal, the same was allowed by the Tribunal. It was held on facts that transaction in question entered into by assessee with M/s Systematics Corporate Services Ltd. is genuine and proper. It was further held that once the transaction in question is held to be genuine, the same has got to be given effect to. As a consequence, the disallowance of interest to bank to the extent of Rs. 12,33,625 paid by assessee under Section 36 (1) (iii) ibid was set aside and instead the assessee was allowed to claim the benefit of Section 36 (1) (iii) for claiming deduction towards payment of interest in respect of capital borrowed for the purpose of business. It is against this finding of Tribunal, the Revenue has come up in appeal.