Section 36(1)(iii) interest deduction upheld for intercompany loan; investment allowance denied for alcohol plants, telephone exchange qualifies

HC upheld the Tribunal: the assessee was entitled to full deduction of interest on borrowed capital under section 36(1)(iii) since sufficient non-borrowed funds supported the intercompany loan and the AO had not apportioned interest earlier. Investment allowance was disallowed for plant/machinery used to manufacture items in the Eleventh Schedule (alcoholic products) but granted for a telephone exchange in the fertilizer unit as it qualifies as "plant." Interest received on loans/advances was held to be income from other sources, not business income.

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Issues Involved:
1. Deletion of interest disallowed on loan given by the assessee to its sister concern for non-business purposes.
2. Allowance of investment allowance on telephone exchange installed in fertilizer unit and distillery unit.
3. Allowability of ex gratia bonus payments made by the assessee over and above the bonus payable under the Bonus Act, 1965.
4. Classification of interest and dividend income as business income versus income from other sources.

Issue-wise Detailed Analysis:

1. Deletion of Interest Disallowed on Loan Given to Sister Concern:
The Tribunal deleted the disallowance of Rs. 2,83,635 interest on the loan given to M/s. Rampur International Private Limited. The Tribunal found that the assessee-company had sufficient funds from share capital, share application money, reserve, and surplus, which could cover the loan amount of Rs. 17.19 lakhs. The principle of consistency was applied, referencing CIT v. Sridev Enterprises, indicating that if no disallowance was made in previous years, it should not be made in subsequent years. The Tribunal's finding that the funds were not borrowed for the loan was upheld, as it was not specifically challenged in the appeal. The court confirmed that the conditions under section 36(1)(iii) of the Act were met, allowing the interest deduction.

2. Allowance of Investment Allowance on Telephone Exchange:
The Tribunal allowed the investment allowance for the telephone exchange, treating it as a plant. However, the court noted that the assessee was engaged in manufacturing items listed in the Eleventh Schedule, which disqualifies it from investment allowance under section 32A(2A) of the Act. Despite this, the telephone exchange in the fertilizer unit was deemed eligible for investment allowance, as it was considered a plant, not an office appliance, aligning with the Karnataka High Court's decision in Electronics Research Industries Pvt. Ltd.

3. Allowability of Ex Gratia Bonus Payments:
The Tribunal held that the ex gratia payment of Rs. 45,927 was an allowable deduction. The court confirmed this, noting that the proviso to section 36(1)(ii) of the Act, which restricted such deductions, was omitted effective April 1, 1989. Thus, for the assessment year 1990-91, the ex gratia bonus was deemed an allowable deduction.

4. Classification of Interest and Dividend Income:
The Tribunal directed the interest and dividend income to be treated as business income, based on past treatment of similar income. However, the court disagreed, stating that under section 14 and section 56 of the Act, such income should be classified under "Income from other sources" unless it directly relates to the business. The court referenced the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd., which held that interest on surplus funds not used in business operations should be taxed as income from other sources. Consequently, the court directed that the interest and dividend income be classified under "Income from other sources."

Conclusion:
The court affirmed the Tribunal's decisions on the first and third issues, partially agreed on the second issue, and reversed the decision on the fourth issue. The appeal was partly allowed, with each party bearing its own costs.

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