Jagannatha Shetty, J.
1. The following question at the instance of the Revenue has been referred by the Income-tax Appellate Tribunal under s. 256(1) of the I.T. Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the amount of interest of Rs. 96,170 on money borrowed for the purpose of purchase of new machinery and land is allowable as a revenue expenditure ?'
2. The facts are correctly stated in the statement of the case and may now be briefly summarised as follows :
3. The assessee is a private limited company engaged in the manufacture of yellow oil dressed cotton cloth used by cable companies. Up to the accounting years relevant to assessment years 1974-75 and 1975-76, the assessee was carrying on its manufacturing operations with old machinery operated manually. During the assessment years 1974-75 and 1975-76 it imported automatic impregnating machine from foreign countries and also purchased land. Before the ITO, the assessee claimed the benefit of s. 36(1)(iii) of the Act which provides for deduction of the amount of interest paid in respect of capital borrowed for the purpose of purchasing the machinery and the land. The ITO disallowed the claim on the ground that the machinery purchased by the assessee was not used for production in the year of accounting. In reaching that conclusion, he relied upon the decision of the Supreme Court in Challapalli Sgars Ltd. v. CIT : 98ITR167(SC) .
4. Being aggrieved by the assessment order, the assessee went up in appeal to the AAC. The AAC relying upon the decision of the Bombay High Court in Calico Dyeing and Printing Works v. CIT : 34ITR265(Bom) allowed the claim of the assessee. He observed that it is not necessary that the capital borrowed should have been brought into use during the year of borrowal or the year of the payment of interest. The user that is required is the user of the capital sum borrowed and not the user of the capital assets acquired from the borrowing.
5. The Revenue challenged the order of the AAC in an appeal before the Income-tax Appellate Tribunal. It was urged before the Tribunal that the decision of the Supreme Court in Challapalli's case : 98ITR167(SC) , would be applicable to the facts of the case and not the decision of the Bombay High Court in Calico Dyeing and Printing Work's case : 34ITR265(Bom) . But the Tribunal did not agree with that contention. It observed that it was not the case of the Revenue that the assessee has started a new venture. It was admittedly a running concern and since the borrowed capital was used for the purpose of purchasing machinery and land, the assessee would be entitled to the benefit under s. 36(1)(iii) of the Act.
6. Before us, Sri Srinivasan submitted that the decision of the Bombay High Court in Calico's case : 34ITR265(Bom) , has been impliedly overruled by the Supreme Court in Challapalli's case : 98ITR167(SC) . According to the learned counsel, the Supreme Court was considering in that case the nature of pre-production expenses incurred by the assessee in the matter of purchasing machinery or land and the Supreme Court has held that such expenses should be regarded as a capital expenditure, in respect of which the assessee would be entitled to depreciation allowance out of the fixed assets and when once such investment is treated as capital expenditure, the interest on the amount borrowed shall not be allowed as deduction.
7. We do not think that Mr. Srinivasan is justified in depending upon the decision of the Supreme Court for denying relief to the assessee in the instant case. The Supreme Court was considering the case of an assessee whose business had not commenced and the question raised therein was as in the nature of the interest paid on the borrowed capital for purchasing fixed assets and whether it should form part of the cost incurred. The Supreme Court held that such interest paid should form part of the capital expenditure.
8. We do not think that that principle could be extended to the present case. The assessee herein had a running business. The capital borrowed by the assessee was admittedly used for purchasing new machinery and land. For giving the benefit of s. 36(1)(iii) to the assessee, what is necessary to examine is whether the assessee has used the borrowed capital for the purpose of business. If that is found (to be) true, then, one need not examine further as to whether the asset purchased from the borrowed capital has been in fact used by the assessee.
9. That is also the view taken by the Bombay High Court in Calico's case : 34ITR265(Bom) , wherein it was observed (p. 270) :
'In our opinion, there is no warrant for this suggestion. We are prepared to agree with Mr. Joshi that, looking to the whole scheme of sub-section (2) of the capital which is borrowed must be used in the year of account. If the capital is used in the year of account and the use is for the purpose of the business, then it is immaterial whether the user of capital actually yields profit or not. What sub-clause (iii) emphasises is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital.'
In the result, we answer the question in the affirmative and against the Revenue.
Parties will pay and bear their own costs.