Delhi High Court

Commissioner Of Income Tax, ... vs Monnet Industries Limited on 21 November, 2008

Author: Rajiv Shakdher

*             IN THE HIGH COURT OF DELHI : NEW DELHI

+                                 ITA No. 450/2008

%                                      Judgment reserved on : 03.09.2008
                                       Judgment delivered on : 21.11.2008


COMMISSIONER OF INCOME TAX
DELHI-II                                                          ..... Revenue

                                       versus

MONNET INDUSTRIES LTD                                             ..... Respondent


Advocates who appeared in this case:

For the Revenue            :     Mr R.D. Jolly
For the Respondent         :     Mr Ajay Vohra & Ms Kavita Jha



CORAM :

Hon'ble Mr.Justice Badar Durrez Ahmed
Hon'ble Mr. Justice Rajiv Shakdher

1. Whether the Reporters of local papers may
   be allowed to see the judgment ?                              Yes

2. To be referred to Reporters or not ?                          Yes
3. Whether the judgment should be reported
   in the Digest ?                                               Yes

Rajiv Shakdher, J.

1. This is an Appeal by the Revenue under Section 260A of the Income

Tax Act, 1961 (hereinafter referred to as the „Act‟) preferred against the

judgment of the Income Tax Appellate Tribunal (hereinafter referred to as the

„Tribunal‟) passed in ITA No. 4040/Del/2002 in respect of the assessment

year 1996-97.

2. The Revenue being aggrieved by the impugned judgment has preferred

an appeal to this court. The ground taken in the appeal by the Revenue before

the Tribunal was whether the Commissioner of Income Tax (Appeals)

[hereinafter referred in short as the „CIT(A)‟] erred in allowing the claim of

the assessee in the sum of Rs 5,66,79,270/- as revenue expenditure in

connection with setting up of the sugar plant at Muzaffarnagar in the State of

U.P.

2.1. In order to dispose of the appeal, the following facts require to be

noted:-

2.2 In 1991, the respondent/assessee had set up a Ferro Alloys

Manufacturing Plant, in Raipur, which was, engaged in both, the manufacture

of Ferro Alloys, as also, trading of Ferro Alloys.

2.3. In the year 1994-95 and 1995-96, the respondent/assessee set up a

sugar manufacturing plant at Muzaffarnagar in the State of U.P. The said

sugar plant had an installed capacity of 2500 TCD. The

respondent/assessee‟s trial run in respect of sugar plant commenced on

20.3.1996. The total project cost for setting up of the sugar plant was a sum

of Rs 56.74 crores. This amount was raised, inter-alia, by way of term

loans, rights and public issue. The assessee has admittedly spent a sum of

Rs 5,66,79,270/- as pre-operative expenses in respect of afore-mentioned

sugar plant at Muzaffarnagar, U.P. The break-up of the said expenses as set

out in the Assessment order is as follows:-

       Details                                            Amount in Rupees


       a) Material consumed in trial production           16,62,372

       b) Power and fuel                                  28,99,256

       c) Salary, wages and amenities                     70,02,410

       d) Admn. Expenses                                1,11,34,625

       e) Financial charges                             3,50,83,472


       Less closing stock of finished goods & w.i.p.      11,02,865

                                                    ___________________
               Total                                Rs 5,66,79,270/-
                                                    ___________________

2.4. As would be evident from the break-up given above, a sum of

Rs 3,50,83,472/- was spent by the respondent/assessee towards financial

charges i.e., as interest on monies borrowed for the purposes of setting up the

sugar plant.

2.5. On 29.11.1996, the respondent/assessee filed its return of income tax

for the assessment year 1996-97. In the return, the respondent/assessee

disclosed a loss of Rs 7,23,18,949/- . In computing its income, the

respondent/assessee had claimed the afore-mentioned sum of

Rs 5,66,79,270/- as revenue expenditure incurred in relation to a sugar plant,

for the relevant financial year 1995-96.

2.6. The respondent/assessee‟s return was processed under Section

143(1)(a) of the Act.

2.7. On 7.11.1997, the Assessing Officer issued a notice under Section

143(2) of the Act. In the course of assessment proceedings, the Assessing

Officer raised queries with respect to the expenditure in issue, on receiving

replies to the queries raised and after hearing the authorised representatives

of the respondent/assessee, the Assessing Officer vide order dated 29.3.1999

disallowed the expenditure in issue, primarily on the ground, that the, sugar

plant constituted a new source of income as it was not the same business in

which the assessee was engaged, which was manufacture of ferro alloy or

trading of ferro alloy etc. The Assessing Officer was also of the view that

the respondent/assessee had made a case of interlacing and unity of business

in general terms and not with specificity as required by virtue of law laid

down by the Courts in India. The Assessing Officer was thus, of the view

that, the expenditure in issue related to a new project and hence, was not

liable as a deduction since different lines of business carried out by the

respondent/assessee did not constitute the same business.

2.8 It is also important to note at this juncture that the Assessing Officer

also disallowed the alternative claim of depreciation raised by the

respondent/assessee even though the expenditure in issue was held to be

capital in nature; on the ground that trial production did not amount to

commencement of commercial production.

3. Aggrieved by the same, the respondent/assessee filed the appeal with

the CIT(A).

3.1 The CIT(A), after a detailed examination of the issue, both on facts

and law, came to the conclusion that the expenditure in issue was in the

nature of revenue expenditure since the sugar plant project was in the same

business fold. The CIT(A) held as follows:-

".......In the light of these submissions and Delhi HC decision in 200 ITR 341 it is to be held that the sugar project was in the same business fold that of the business of manufacture as that of ferro chrome or the trading in it. Similarly it is to be held as per the submissions and case laws that it was a case of interlacing not in general terms but in specific terms......."

4. The Revenue, aggrieved by the order passed by the CIT(A), preferred

an appeal before the Tribunal. The Tribunal examined the matter at great

length. On examining the issue, it posed a question to itself, which was,

whether the sugar plant of the assessee constituted the „same business‟ as

against a different or a distinct business of the assessee. In other words,

whether the new line of business, i.e., setting up of the sugar plant when the

assessee was already in the field of manufacture and trading of ferro chrome,

would constitute a business in the same business fold. It is important to note

that the Tribunal flagged this issue to be one which was, essentially, a

question of fact.

4.1 The Tribunal in the impugned judgment, while deliberating on the case

set up by the assessee in the background of the question posed by it,

examined whether there was interlacing and unity of business in specific

terms as claimed by the assessee. Towards this end, the Tribunal examined

the financial statements of the sugar plant, as well as the minutes of the

Board of Directors‟ meetings of the respondent/assessee. The Tribunal noted

the fact that both the ferro alloys plant and the sugar plant were controlled by

the same Board of Directors who were stationed at the head office in Delhi.

They noted the fact that the respondent/assessee had drawn up a common

balance sheet which reflected the financial health of the entire business

comprising of the ferro chrome and sugar divisions. It also noted the fact

that the personnel engaged to look after the secretarial, financial and

administrative work and the human resources department were common to

both the divisions, even though, the divisions were located geographically at

different places. In the impugned order, it was, however, noted that the

marketing of the final product manufactured by the two divisions, were

supervised and controlled by the same set of executives who operated from

the head office, at Delhi. In view of the above, the Tribunal came to the

conclusion that the respondent/assessee had a common management to look

after the affairs of both the divisions. It also noted the fact that, in their day

to day working, both the divisions had access to a common pool of funds as

also the fact that the business being one, it had a common share capital and a

common set of shareholders. It specifically noted that the project cost of the

sugar plant was funded by a rights cum public issue, loans and internal cash

accruals of ferro chrome division, which were facts, not disputed by the

Revenue. In these circumstances, the Tribunal concluded that the source of

funds for both the divisions was common.

4.2 The Tribunal also applied the test of impact of closure of, one of the

two lines of business, on the other to ascertain whether the two divisions

were independent of each other. In applying this test, the Tribunal came to

the conclusion that closure of any of the two plants would surely affect the

working as also impact the remaining business, for the simple reason that a

larger liability in respect of the entire business would have to be borne by the

plant which remains functional. It thus concluded that the sugar plant was a

mere extension of the existing business of ferro alloys. According to the

Tribunal, the respondent/assessee was engaged in the same business as the

decisive test is unity of control and not same line of business.

4.3 It is, however, important to note that while returning the aforesaid

findings of fact, in respect of the respondent/assessee, the Tribunal allowed

deduction of only that expenditure which was incurred towards financial

charges, being a sum of Rs 3,50,83,472/- incurred for the purposes of setting

up of sugar plant, as revenue expenditure under Section 36(1)(iii) of the Act.

In respect of the balance amount in the sum of Rs 2,15,95,798/-, out of total

expenditure amounting to Rs 5,66,79,270/-, the Tribunal restored the matter

back to the Assessing officer to ascertain whether the expenditure was of

capital or revenue nature.

5. The Revenue, being aggrieved by the impugned judgment, as

mentioned above, has preferred the present appeal.

5.1 Having heard the learned counsel for the Revenue, as well as, the

respondent/ assessee and upon perusal of the records of the authorities below,

we are of the view that financial charges, i.e., interest on borrowed capital to

the extent of Rs 3,50,83,472/-, as claimed by the assessee, ought to be

allowed as deduction under Section 36(1)(iii) of the Act for the reasons given

hereinafter. It is important to note, as mentioned hereinabove, that the

balance sum of money amounting to Rs 2,15,95,798/- out of a sum

of Rs 5,66,79,270/- is not raised as an issue before us in the present appeal

and hence, we need not express any view in respect of that part of the order

of the Tribunal.

5.2 Section 36(1)(iii) of the Act permits an assessee to claim interest paid,

as expenditure in respect of, borrowed capital in computing its income under

Section 28 of the Act in the event the loan taken i.e, "capital borrowed" and

the interest paid thereon is for the purposes of business. It is important to

note that we are not concerned with the proviso in the present case which

was inserted in Section 36(1)(iii) of the Act by the Finance Act, 2003 w.e.f.

01st April, 2004. The year under consideration in this appeal, is assessment

year 1996-97.

5.3 In ascertaining whether interest on borrowed capital is paid for the

purpose of businesses where an assessee has two lines of businesses, the

following well settled tests have been evolved over the years by the Courts in

India.

5.4 In Scales v. George Thompson & Co Ltd (1927) 13 TC 83 (KB ),

Rowlatt, J. formulated the following test:-

"I think the real question is was there any inter-

connection any interlacing any inter-dependence any unity at all embracing those two businesses.‟

5.5 In ascertaining whether there was unity of business and unity of

control and management, the Supreme Court in the cases of Setabganj Sugar

Mills Ltd v. Commissioner of Income Tax: (1961) 41 ITR 272 (SC) and

L.M.Chhabda and Sons v. Commissioner of Income Tax, Gujarat: (1967)

65 ITR 638, laid down the tests that the following will have to be borne in

mind, the inter-relation of the businesses, the employment of same capital,

the maintenance of common books of account, employment of same staff to

run the business, the nature of the different transactions, the possibility of

one being closed without affecting the texture of other.

5.6 This test was further refined by the Supreme Court in the case of

Commissioner of Income Tax v. Prithvi Insurance Co Ltd:

(1967) 63 ITR 632. In this case, while holding that life insurance business

and general insurance business were the "same business", it observed that in

determining whether two or more lines of businesses may be regarded as

"same business" or "different business", what has to be looked at is, the

nature of businesses, the nature of their organization, management,

source of capital fund utilized, method of book keeping used and other

related circumstances which stamp the businesses as the same or

distinct. The Supreme Court concluded that both life insurance and general

insurance came within the fold of "same business". It took into account the

fact that both businesses were attended by the Branch Managers and agents

without any distinction and there was one common administrative

organization, and the expenses incurred in connection with the business, both

for administration and for heads of expenditure such as salary of the staff,

postage, staff welfare fund and general charges, were common.

5.7 The Supreme Court, however, in this case explained the exact scope of

tests employed in the earlier cases in ascertaining whether two lines of

businesses were the same, which was, that closure of one business would

affect the conduct of the other business - by holding that this test by

itself was not a decisive test in determining whether or not two lines of

the businesses constitute the same business. The Supreme Court held

that the said test would stand fulfilled if one business cannot be

conveniently carried on after the closure of the other, there would be a

strong indication that the two businesses would constitute "the same

business", but no decisive inference can be drawn if after the closure of

one business the other may conveniently be carried on.

5.8 In determining whether two lines of businesses constitute the same

business and to this end, whether nature of the two businesses has to be

looked at, was a proposition, the Supreme Court rejected in the case of a

Produce Exchange Corporation Ltd v. CIT: (1970) 77 ITR 739. In this case,

the assessee carried on business in diverse commodities as also in stocks and

shares. The issue was whether the losses suffered by the assessee in the sale

of shares of Public Limited Company could be set off against profits from

transactions in other commodities in the relevant year. In the said case the

Supreme Court noted that the Calcutta High Court had followed the test laid

down by it in Shree Ramesh Cotton Mills Ltd v. Commissioner of Income

Tax: (1967) 64 ITR 317, wherein in determining whether the two lines of

businesses constitute the same business, they had applied the yardstick,

whether the nature of the two businesses was the same. The Supreme Court,

however, reversed this view of the Calcutta High Court by holding as

follows:-

"We need not consider whether the ultimate decision of the High Court in Shree Ramesh Cotton Mills Ltd‟s case on which reliance was placed is correct, but we are unable to agree with the High Court that the decisive test for determining whether the two lines of businesses constitute the same business is the nature of the two businesses"

6. The aforesaid view taken by the Supreme Court was re-affirmed by it,

in the case of B.R.Ltd v. V.P.Gupta, Commissioner of Income Tax,

Bombay: (1978) 113 ITR 647. In B.R.Ltd (supra), the Supreme Court was

called upon to decide whether unabsorbed losses suffered in the business of

import of woolen fabrics could be set off from the profits earned in respect

of export of cotton textiles . The Supreme Court in the said case, approved

the ratio of the judgments of its own court in the case Prithvi Insurance

(supra), and Produce Exchange (supra). In doing so it also noted the

observations made in the decision of the Supreme Court in the case of

Standard Refinery and Distillery Ltd v. Commissioner of Income Tax:

(1971) 79 ITR 589 and finally concluded that, tests for ascertaining whether

the two lines of businesses were the same business was not dependent on

determination of the nature of goods dealt with. The decisive test according

to the Supreme Court was the unity of control and not the nature of two lines

of businesses. It further held that even though the fact that one business

cannot be conveniently carried on after the closure of the other business may

furnish a strong indication that the two businesses do not constitute the same

business, but as already held in Prithvi Insurance (supra) no decisive

inference can be drawn from the fact that after the closure of one business the

other cannot be conveniently carried on.

6.1 Based on the aforesaid tests, let us examine the findings returned by

Tribunal in coming to the conclusion that there is a unity of control and

management, interlacing and dovetelling of finances. The Tribunal in the

instant case found as a fact in paragraph 30-31 of the impugned judgment

that there was a common Board of Directors controlling the ferro alloys

plant, as well as, the sugar plant which, operated from the head office located

at Delhi, funds for the two plants were common and hence, there was inter-

mingling and interlacing of funds, as also the fact, that even though the two

divisions were geographically located at different sites, marketing of the final

products was carried out under the supervision and control of the same set of

executives at the head office. Applying the tests discussed hereinabove to

facts as determined by the Tribunal, we have no difficulty in holding that the

sugar plant and the ferro alloys plant were in the same fold of business.

6.2 This brings us to the other issue, which is, whether financial charges

i.e, interest paid on borrowed capital for the „purposes of business‟, in the

instant case, is allowable as a deduction in the circumstances that the

borrowed capital brought into existence a capital asset. To our mind the fact

that the loan or capital borrowed has been used for purchase or in connection

with bringing into existence a capital asset or not, has no impact in

determining whether the interest paid on borrowed capital ought to be

allowed under Section 36 (1)(iii) of the Act [see observation in India

Cement Ltd v. Commissioner of Income Tax: (1966) 60 ITR 52 at page 62-

63]. The determining factor is whether interest paid on borrowed capital

was used to set up a new business or was used to expand the existing

business or, as in the instant, case to set up a new division within the

same business fold. In the case of Commissioner of Income Tax v.

Alembic Glass Ltd: 103 ITR 715, the Gujarat High Court dealt with the

similar situation wherein the assessee company had an existing unit for

manufacture of glass at Baroda since 1947. During the relevant assessment

years 1965-66 and 1966-67, the assessee-company incurred expenditure for

establishing a new glass unit at Bangalore. The unit at Bangalore did not go

into production during the aforesaid two assessment years in question and,

therefore, during the course of assessment, the Income Tax Officer

disallowed the payment of interest on borrowings in respect of the aforesaid

two assessment years. The Income Tax Officer was also of the view that the

Bangalore unit was not a branch of the assessee factory at Baroda and was,

therefore, a new business and since, this new business had not started

production, the payment of interest could not be taken as revenue

expenditure. The Gujarat High Court was called upon to answer the

following questions:-

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Whitefield Factory at Bangalore did not constitute a separate undertaking but was only an establishment of a new unit of the existing factory at Baroda.

(ii) Whether, on the facts and in the circumstances of the case, the interest, miscellaneous expenses, and travelling expenses incurred by the assessee referable to the Bangalore unit are wholly and exclusively for the purpose of the assessee‟s business?"

6.3 In respect of the first question, the Gujarat High Court held that

whether the establishment of new unit at Bangalore can be treated as new or

separate business of assessee did not present much difficulty in view of the

test laid down by the Supreme Court as referred to hereinabove in the case of

Prithvi Insurance (supra) and Produce Exchange Corporation (supra), as

also, the test laid down by Rowlatt, J in Scales Vs. George Thompson & Co.

Ltd (supra). Applying the aforesaid test, the Gujarat High Court held that

the new factory at Bangalore did not constitute a new business, but was only

an establishment of a new unit of the existing business at Baroda and

accordingly answered the first question in the affirmative. As regards the

second question, the Gujarat High Court analysed the ratio of the decision of

the Supreme Court in Challapalli Sugars Ltd v. Commissioner of Income

Tax: (1975) 98 ITR 167 (SC) as follows:-

".........In order to understand the ratio of the decision in Challapalli Sugars Ltd's case, and with a view to see how far the said ratio is in harmony with the ratio of the above-referred decision of the Supreme Court in India Cements Ltd's case, it would be necessary to state shortly the facts relating to that decision. There the assessee was a public limited company engaged in the manufacture and sale of sugar. The company went into production on January 22, 1958. It had borrowed considerable sums of monies from the Industrial Finance Corporation of India for the installation of machinery and plants. During the accounting period, the company paid Rs 2,38,614 as interest and claimed that the said payment should be treated as part of the cost of the machinery and plant installed by it, and the depreciation should be calculated accordingly. The Income Tax Officer rejected this claim of the company and held that the interest paid by the company from year to year was revenue expenditure. The matter eventually went to the Andhra Pradesh High Court which held that where a plant is constructed out of borrowed money, the interest on loan upto the date of commencement of the business could not be capitalized or treated as part of the actual cost of the plant. The Supreme Court rejected this view of the High Court on consideration of the question as to what was the "actual cost" for the purpose of determining "written down value" of a plant. The Supreme Court

considered the principles of accountancy and held that the cost of fixed assets should include all expenditure necessary to bring such assets into existence and to put them in working condition and, therefore, in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of fixed assets which have been created as a result of such expenditure."

6.4 The Gujarat High Court, after analyzing the decision of the Bombay

High Court in Calico Dyeing and Printing Works v. Commissioner of

Income Tax: (1958) 34 ITR 265 and of the Supreme Court in India Cements

Ltd v. Commissioner of Income Tax: (1966) 60 ITR 52 and in Challapalli

Sugars Ltd v. Commissioner of Income Tax: (1975) 98 ITR 167, concluded

as follows:-

".... It is no doubt true that in the case of Challapalli Sugars Ltd the Supreme Court has unequivocally observed that interest paid on the borrowing utilised to bring into existence a fixed asset which has not gone into production goes to add to the cost of installation of that asset. But these observations have been made with reference to a situation wherein it was not possible to contend that the borrowing on which interest was paid was made for the purpose of any business. The company which had made the borrowing in that case had not yet started production, and hence had not commenced any business when it borrowed the amount in question. Therefore, it was not possible to say in that case that the borrowing was made "for the purposes of the business" to bring the case within the ambit of Section 10(2)(iii) of the Indian Income Tax Act, 1922 (which is equivalent to Section 36(1)(iii) of the Act of 1961). If the said borrowing was not "for the purpose of business" in as much as no business had come into existence, it must follow that it was made for the purpose of acquiring an asset which could be put

to use for doing business, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired.

....... The question is, is this line of reasoning inconsistent with the view taken by the Bombay High Court in Calico Dyeing and Printing Works, or by the Supreme Court in India Cements Ltd ? On proper analysis the reasoning on which the view taken by the High Court of Bombay and the Supreme Court in the above- referred cases rests is as under:

Section 10(2)(iii) of the Act of 1922 allows deduction of interest on all borrowings which are made "for the purposes of business". The expression "purposes of business" is comprehensive enough to cover expenditure of revenue nature as well as of capital nature because both the types of expenditures can be incurred for business purposes. Therefore, even if a borrowing is made for incurring an expenditure of capital nature, it remains the borrowing for a business purpose. If that is so, the requirements of Section 10(2)(iii) of the Act of 1922 are fully satisfied and interest paid on such borrowing is entitled to deduction as revenue expenditure. The High Court of Bombay has unequivocally stated in Callico Dyeing and Printing Works that in order to attract the provisions of Section 10(2)(iii) it does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because all that the Section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan an actual application thereof in the purchase of a capital asset, seems to be on the ground 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 the investment of the borrowed capital in the purchase of the new asset which brings that asset into existence. Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd vs Commissioner of Income Tax that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. Thus, the decisions of the Bombay High Court in Callico Dyeing and Printing Works and of the Supreme Court in India Cements Ltd were given with reference to the borrowings made for the purposes of running businesses, while the decision of the Supreme Court

in Challapalli Sugars Ltd was given with reference to the borrowings which could not be treated as made for the purposes of business, as no business had yet been commenced. Thus, there is no incompatibility between these decisions. The Supreme Court itself had distinguished its earlier decision in India Cements Ltd in the following terms in Challapalli Sugars Ltd:

"This case too is of no assistance to the revenue. The appellant- company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of plant did not arise in that case."

In view of this, we conclude that the decisions of the Bombay High Court in Callico Dyeing and Printing Works and of the Supreme Court in India Cements Ltd, hold the field with equal force, even after the decision in Challapalli Sugars Ltd. ....."

7. The upshot of the aforesaid decisions as applied by the Tribunal in

instant case is that:-

(i) a loan taken or capital borrowed is, by itself, not a capital asset,

nor does it give an advantage of an enduring nature;

(ii) as long as a loan was taken or capital was borrowed for the

purposes of business, the assessee is entitled to claim interest

paid thereon as deduction under Section 36(1)(iii) of the Act;

(iii) interest may have to be capitalized after the borrowed capital or

loan taken is utilized in bringing into existence an asset at the

stage of commencement of business. In other words, after the

assessee‟s business had already commenced then the interest

paid on capital borrowed or loan taken can be claimed as

deduction under Section 36 (1)(iii) of the Act.

(iv) in coming to the conclusion whether the interest paid on capital

borrowed or loan taken in setting up a new line of business

ought to be capitalized or treated as revenue expenditure, the

test as laid down by the Supreme Court in the case of Produce

Exchange Corporation (supra) and Prithvi Insurance

Company (supra) would be relevant and;

(v) lastly, as long as interest is paid on capital borrowed or loan

taken in respect of new line of business which is in the same

business fold for the purposes of ascertaining income under

Section 28 of the Act, it can be claimed as a deduction under

Section 36(1)(iii) of the Act.

8. In the instant case, the Tribunal has returned the finding that there is a

unity of control and management, in respect of the ferro alloys plant as well

as the sugar plant and there is also intermingling of funds and dove-tailing of

businesses. In these circumstances it cannot be said that the

respondent/assessee had not commenced its business and hence, interest

would have to be capitalized in terms of the ratio of the judgment in the case

of Challapalli Sugars Ltd (supra). If that is not so then, the only other

conclusion that is possible on these facts, is that, the interest was paid by the

respondent/assessee on borrowed capital for the purposes of business. That

being the case, in our view, the Tribunal correctly allowed the financial

charges i.e., interest paid to the extent of Rs 3,50,83,472/- as deduction under

Section 36(1)(iii) of the Act.