KASHIRAM RAMGOPAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This judgment will also dispose of Misc. Civil Case No. 216 of 1981 (M/s. Kashiram Ramgopal, Seoni, v. CIT, Jabalpur) as a common question is required to be answered by this Court. As per directions given by this Court in the order dated 13-10-1980 passed in Misc. Civil Case Nos. 113/1976 and 114/1976, the Tribunal has referred the following two questions for opinion of this court, in respect of the asst. yrs. 1968-69 and 1969-70.

(2.) The assessee is a registered partnership firm carrying on business in grains, oil seeds, pulses, hemp rice and dal mill, with its head officer at Seoni and branches at Calcutta, Benaras 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 asst. yr. 1971-72, which means, in the assessment years in question, the factory had not commenced its production. This reference arises out of assessment for the asst. yrs. 1968-69 and 1969-70 the other reference arises out of assessment for the asst. yr. 1970-71, Deepawali Year 2025-2026 (previous year ending on 9-11-1969).

(3.) The ITO, while completing the assessment of the assessee in the statute of a registered firm, under s. 143(3) of the IT Act, 1961, determined the total income at Rs. 91,690 and Rs. 84,803 respectively amongst others, allowing deduction of interest paid to the M.P. Finance Corporation for the loan taken for setting up the Kasturi Straw Board Factory by the assessee. The deduction allowed by the ITO under s. 36(1)(iii) was Rs. 6,352 for the asst. yr. 1968-69 and Rs. 19,934 for the asst. yr. 1969-70. Appeals were preferred by the assessee and the AAC deleted some of the additions made by the ITO, but did not consider allowance of deduction made by the ITO towards payment of interest to the M.P. State Finance Corporation. But, in the meanwhile, the Commissioner by invoking powers under s. 263 of the Act, reviewed the assessment, by disallowing interest paid to the M.P. State Finance Corporation, by saying that the deductions were not considered by the AAC and that the interest was not deductible as the straw board factory had not commenced production in those assessment years and actually started production in the year 1971-72. The order was affirmed in appeal by the Tribunal. For the asst. yr. 1970-71 the ITO did not allow deduction of Rs. 38,581 towards interest paid to the M.P. State Finance Corporation, in view of the orders passed in the previous assessment years, as the payment did not pertain to the existing business. But, in appeal, the AAC allowed deduction of interest, saying that the assessee will be entitled to the deduction claimed, even though the plant and machinery purchased for the new business were not used in the year of account, by relying on Calico Dyeing and Printing Works v. CIT, 1958 34 ITR 265. In appeal by the department, the Income Tax Appellate Tribunal restored the order of the ITO, holding that production started in the next assessment year, i.e. 1971-72, and, therefore, the amount cannot be deducted under s. 36(1)(iii), as no business was carried on by the straw board factory, which was still under construction, erection and installation. The Tribunal relied on the decision of the Supreme Court in CWT v. Rama Raju Surgical Cotton Mills Ltd., 1967 63 ITR 478.