High Court rules interest on capital for new project deductible despite existing business integration

The High Court of Bombay ruled in favor of the assessee in a case concerning the deduction of interest paid on capital borrowed for a new industrial undertaking, the "Thana project." The Court disagreed with the Income Tax Officer and the Appellate Authority Commissioner, holding that the new project was not entirely separate from the existing business of the assessee. The Court confirmed the Tribunal's decision to allow the deduction of Rs. 21,117 and directed each party to bear their own costs of the reference.

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Issues involved: Deduction of interest paid by the assessee on capital borrowed for a new industrial undertaking.

Summary:
The High Court of Bombay considered a reference made by the Income-tax Appellate Tribunal regarding the deduction of interest paid by an assessee on capital borrowed for a new industrial undertaking, known as the "Thana project." The assessee, a private limited company engaged in the manufacture of dyestuffs, had started the Thana project for the manufacture of dyes (intermediates). The Tribunal allowed the deduction of Rs. 21,117 as interest paid by the assessee, which was disputed by the Commissioner of Income-tax.

The Income Tax Officer (ITO) disallowed the interest paid by the assessee, stating that the Thana project had not yet gone into production. The assessee appealed to the Appellate Authority Commissioner (AAC) who upheld the ITO's decision, considering the new project as an independent venture separate from the original business. However, the Tribunal found that the facts of the case were similar to a previous decision and allowed the deduction.

The High Court agreed with the Tribunal, stating that the new project was not entirely separate from the existing business of the assessee. The Court held that the AAC had misunderstood the previous decision and confirmed the Tribunal's decision to allow the deduction of Rs. 21,117. The judgment favored the assessee, and it was decided that each party would bear their own costs of the reference.

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