1987 (7) TMI 40 - HC - Income Tax

Court upholds Income-tax Commissioner's jurisdiction under section 263. Interest paid to State Finance Corp deductible.

The court held that the Commissioner of Income-tax had jurisdiction to revise the assessment orders under section 263, as the doctrine of merger did not ... Business Expenditure, Interest On Borrowed Capital, Revision Issues Involved:1. Jurisdiction of the Commissioner of Income-tax to revise the orders of assessment u/s 263.2. Disallowance of interest paid to the M.P. State Finance Corporation.Summary:Issue 1: Jurisdiction of the Commissioner of Income-tax to Revise Orders u/s 263The Commissioner of Income-tax reviewed the assessment for the years 1968-69 and 1969-70 u/s 263, disallowing interest paid to the M.P. State Finance Corporation. The assessee contended that the order of the Income-tax Officer had merged with the Appellate Assistant Commissioner's order and thus could not be reviewed. However, the Commissioner held that since the disallowance of interest was not considered in the appeal, there was no merger. The court referred to the Full Bench decision in CIT v. K. L. Rajput, which states that the doctrine of merger applies only to the extent considered by the appellate authority. Therefore, the first question was answered in the affirmative, in favor of the Revenue.Issue 2: Disallowance of Interest Paid to the M.P. State Finance CorporationThe Tribunal disallowed the interest paid to the M.P. State Finance Corporation for the assessment years 1968-69, 1969-70, and 1970-71, stating that the straw-board factory had not commenced production and was still under construction. The court, however, opined that the assessee was entitled to deduct the interest paid u/s 36(1)(iii) as the factory was an expansion of the existing business, not a new business. The court cited Prem Spinning and Weaving Mills Co. Ltd. v. CIT and other relevant cases to support its view. The second question was answered in the negative, in favor of the assessee, holding that the Tribunal was not right in disallowing the interest paid.Conclusion:The first question was answered in the affirmative, favoring the Revenue, and the second question was answered in the negative, favoring the assessee. There was no order as to costs.