1977 (9) TMI 10

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....n business in the manufacture of sugar. It owns about 2,000 acres of agricultural land on which it grows sugarcane for the purpose of manufacture of sugar. The company borrowed certain amounts. Those amounts are credited to the agricultural section, for which separate accounts are maintained. The interest that the company had to pay on the borrowings has been claimed as a deduction out of the business income. The ITO disallowed an amount of Rs. 2,03,750 towards proportionate interest attributable to the advances credited to agricultural section. On appeal by the assessee, the AAC upheld the disallowance made by the ITO. When the company went up in appeal, the Tribunal following its decision in I.T.A. Nos. 828 and 965 dated August 24, 1972, ....

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....nts of the business shall be deducted, and no further deductions shall be made in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent-in- kind. " Admittedly, the market value of the sugarcane raised by the assessee was deducted from the income. After deducting the market value of the sugarcane, the question is whether the assessee is also entitled to deduct interest paid by it on the borrowings made and utilised for the purposes of expenditure in raising the sugarcane. What is prohibited from further deduction under r. 7 is any deduction in respect of any expenditure incurred by the assessee as a cultivator. Therefore, question arises whether interest paid by the assessee can be said to be an expenditu....

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.... of rent stand together as causae sine quibus non. The source from which the interest is derived has not thereby been ascertained ...... There is no commercial connection between the interest and the rented land and an effective source-not land-has become apparent." In the present case also the money borrowed might have been utilised by the assessee in cultivating and producing sugarcane, but at the same time, it cannot be said that the expenditure incurred in payment of interest had any connection or was attributable directly to the agricultural operation. Borrowing money and payment of interest is a mere commercial transaction. In CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452, decided by the Supreme Court, the assessee-compa....