Borrowed funds diverted to sister concerns and post-production sales tax subsidy treated as revenue receipt under tax law.

Interest on borrowings is disallowable under section 36(1)(iii) to the extent borrowed funds are diverted interest-free to sister concerns for non-business purposes; the assessee must show that the borrowing was used for business, and the disallowance was upheld. Sales tax subsidy received after commencement of production, where the scheme operated as an incentive for carrying on business and was not linked to setting up or acquiring capital assets, is a revenue receipt; the subsidy was therefore taxed as revenue and not as capital. The note states that both disputed additions were upheld and the Revenue succeeded.

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Issues: (i) Whether interest on borrowings was disallowable to the extent funds were advanced interest-free to sister concerns for non-business purposes. (ii) Whether sales tax subsidy received after commencement of production was capital receipt or revenue receipt.

Issue (i): Whether interest on borrowings was disallowable to the extent funds were advanced interest-free to sister concerns for non-business purposes.

Analysis: Deduction of interest under section 36(1)(iii) is allowable only for borrowings used for business purposes. The assessee had advanced substantial amounts to sister concerns without interest while incurring interest liability on borrowed funds. The Court held that the assessee bears the burden to show that borrowed money was used for business, and the source of advances is not ative where borrowings are diverted for non-business use. Where interest-bearing funds are diverted interest-free to sister concerns without business justification, the corresponding interest cannot be allowed as business expenditure.

Conclusion: The disallowance of interest was rightly made and the issue was decided in favour of the Revenue.

Issue (ii): Whether sales tax subsidy received after commencement of production was capital receipt or revenue receipt.

Analysis: The subsidy under Rule 4-A of the 1991 Rules operated after commencement of production and was linked to sales tax exemption for a specified period, not to setting up of the industry or acquisition of capital assets. Applying the principle that the character of a subsidy depends on its purpose, the Court held that the relevant scheme was an operational incentive intended to assist the industry in carrying on business more profitably and not a capital grant for establishing the unit.

Conclusion: The sales tax subsidy was held to be a revenue receipt and the issue was decided in favour of the Revenue.

Final Conclusion: The appeal succeeded, the Tribunal's order was set aside, and both disputed additions were upheld.

Ratio Decidendi: Interest on borrowings is disallowable to the extent the borrowed funds are diverted for non-business purposes, and a subsidy granted after commencement of production for running the business is a revenue receipt unless it is shown to be linked to setting up or expansion of capital assets.

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