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of <h1>Interest deductions on fertiliser unit borrowings, tax-free bond investments and guest house spend upheld; capitalised interest issue not considered.</h1> The HC held that it could not examine whether interest already capitalised in the accounts could nonetheless be claimed as revenue expenditure, as the ... - Issues: (i) Whether interest on capital borrowed for a unit (fertilizer unit at Babrala) is deductible under Section 36(1)(iii) of the Income-tax Act, 1961 where the units operate at different places but share administrative and financial control; (ii) Whether interest attributable to borrowings made for investments in tax-free bonds is allowable under Section 36(1)(iii) of the Income-tax Act, 1961.Issue (i): Whether interest on borrowings for the fertilizer unit at Babrala is attributable to the business of the respondent and deductible under Section 36(1)(iii) despite geographic separation of units.Analysis: The Tribunal applied established tests for unity of business emphasising unity of control indicated by interlacing, interdependence and interconnection such as common management, common administration, common fund and common accounting. The Tribunal recorded findings of fact that administration and fund management were common and there was functional integrity between the units. The High Court accepted that these findings were based on appreciation of evidence and that Section 36(1)(iii) permits interest deduction for borrowings made for the purposes of the company's business, including borrowings for a unit of the company where unity of control and interdependence exist.Conclusion: The deduction of interest under Section 36(1)(iii) in respect of borrowings for the Babrala unit is allowable. This conclusion is in favour of the assessee.Issue (ii): Whether interest on borrowings used to make investments in tax-free bonds is deductible under Section 36(1)(iii).Analysis: The Tribunal found on evidence that the investments in tax-free bonds were made in the course of business and that parking of funds in investments can be a business necessity. The Tribunal relied on precedents recognising that non-banking entities may at times legitimately invest funds as part of business operations. The High Court treated the Tribunal's conclusion as a factual finding and declined to re-open the factual assessment.Conclusion: Interest attributable to borrowings for investments in tax-free bonds is allowable under Section 36(1)(iii) where the investment is held to be in the course of business. This conclusion is in favour of the assessee.Final Conclusion: The questions of law pressed by the Revenue do not warrant interference with the Tribunal's fact-based findings; the Revenue's appeal is dismissed.Ratio Decidendi: Section 36(1)(iii) allows deduction of interest on borrowings where the borrowings are for the purposes of the business, and where units of a company exhibit unity of control (interlacing, interdependence, common management/fund/accounting) interest on borrowings for a unit is deductible; further, where investments (including tax-free bonds) are made in the course of business as a prudent parking of funds, interest on borrowings attributable to such investments can be allowable as business expenditure.
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