2015 (1) TMI 822

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....sent Tax Appeal. 1.1 This appeal was admitted by this Court on 20.09.2007 for consideration of the following substantial question of law:     "Whether the Appellate Tribunal is right in law and on facts in holding that the assessee was entitled to deduction of interest amounting to Rs. 26,02,575/- made u/s 36(1)(iii) of the Act, incurred by the assessee in respect of funds borrowed for the purpose of setting up new units for the manufacturing of corrugated boxes?" 2. The assessee firm is engaged in the business of leasing and finance. During the course of assessment proceedings, the assessing officer the Assessing Officer rejected the claim of the assessee to allow deduction in respect of interest paid on capital bor....

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....d to insertion of a sub-section after Section 90(2) and before the Explanation. This insertion also operates w.e.f. 1.4.04. In short, the above amendments have been made by Finance Act, 2003 and all the said amendments have been made operational w.e.f. 1.4.04. Therefore, the proviso inserted in Section 36(1)(iii) has to be read as prospectively and w.e.f. 1.4.04. In this case, we are concerned with the law as it existed prior to 1.4.2004. As stated above, we are not concerned with the interpretation or applicability of the said proviso to Section 36(1)(iii) w.e.f. 1.4.04 in the present case.     In the case of Challapalli Sugars Ltd. (supra) this Court observed that interest paid on the borrowing utilized to bring into exi....

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....ss. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself bring any new asset of enduring nature into existence, and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing is not the same as the transaction of investment. If this dichotomy is kept in mind it becomes clear that the transaction of borrowing attracts the provisions of Section 36(1)(iii). Thus, the decision of the Bombay High Court in Calico Dyeing & Printing Works (supra) and the judgment of the Supreme Court India Cements L....