1. By this reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), the I.T. Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its opinion:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in disallowing a part of the interest as not being deductible under Section 36(1)(iii) of the Income-tax Act, 1961, out of interest paid by the assessee-company on its borrowings ?'
2. The material facts giving rise to this reference briefly are as follows :
The assessee is a company engaged in the manufacture of electrodes and various other goods. For the assessment year 1972-73, the assessee filed a return of income of Rs. 18,65,021. The ITO, however, assessed the income of the assessee at Rs. 20,22,218. The ITO disallowed certain deductions claimed by the assessee. One of the items so disallowed by the ITO was a part of the interest paid in respect of capital borrowed by the assessee for the purpose of the business of the assessee. The ITO held that though the assessee paid interest on the money borrowed by it, yet no interest was charged by the assessee on the advances to three sister concerns made by the assessee and hence the assessee was not entitled to claim a deduction of a part of the interest. On appeal, the AAC upheld the order passed by the ITO. On further appeal, the Tribunal held that disallowance of interest by the ITO to the extent of the amount advanced by the assessee to the three concerns was justified. Aggrieved by the order passed by the Tribunal, the assessee sought a reference and it is at the instance of the assessee that the aforesaid question has been referred to this court for its opinion.
3. Shri Chaphekar, learned counsel for the assessee, contended that under Section 36(1)(iii) of the Act, all that was necessary to sustain a claim for deduction of interest under that provision was that capital must have been borrowed by the assessee, that it must have been borrowed for the purpose of the business or profession of the assessee and that the assessee should have paid that amount. It was urged that the Tribunal had not found that the assessee had not borrowed the amount in question or that it was not for the purpose of the business of the assessee or that the assessee had not paid the amount of interest. It was urged that, in thesecircumstances, the Tribunal was not justified in disallowing part of the interest paid by the assessee on the ground that the assessee had made advances to three concerns without charging any interest. In reply, Shri Mukati, learned counsel for the Department, contended that a part of the interest was disallowed because a part of the amount borrowed by the assessee was not for the purpose of the business of the assessee.
4. Now, under Section 36(1)(iii) of the Act, to sustain a claim for deduction of the amount of interest, all that is necessary is that the capital must have been borrowed by the assessee ; secondly, it must have been borrowed for the purpose of the business or profession of the assessee and, thirdly, that the assessee should have paid that amount by way of interest. In the instant case, the Tribunal has not given any finding holding that the conditions required to be satisfied under Section 36(1)(iii) of the Act were not fulfilled. The only ground, for disallowing a part of the interest, given by the Tribunal was that the assessee had not chosen to charge interest on advances made to the three concerns. The contention urged on behalf of the Department, in the instant case, that a part of the capital borrowed by the assessee was not for the purpose of the business, cannot be considered because that is not the finding of the Tribunal. All that the Tribunal has found is that the assessee was not entitled to claim deduction in respect of a part of the interest, as the assessee had not charged interest to the three sister concerns, to whom advances were made. This ground cannot justify disallowance of interest.
5. For all these reasons, our answer to the question referred to this court is in the negative and against the Revenue. In the circumstances of the case, parties shall bear their own costs of this reference.