1999 INSC 0084
                                                      CIT, Kerala

                                                           Vs

                                 Associated Fibre & Rubber Industries (P) Ltd.

                                          Civil Appeal No. 3428 of 1991

                                        (M. Srinivasan, V. C. Banerjee JJ)

                                                      03.02.1999

                                                        ORDER

1. The respondent-assessee is a private limited company. The original assessment for the years
1972-73 was made on 28-2-1973 determining the loss at Rs. 78,823. A sum of Rs. 78,500 claimed
as interest paid by the assessee on amounts borrowed for purchase of machinery was allowed as a
deduction. Similarly, for the year 1973-74, in the original assessment, deduction was allowed for
similar interest paid by the assessee. While making the assessment for Assessment Year 1974-75,
the Income Tax Officer noticed that the assessee had included a note in the schedule of fixed assets
appended to its balance-sheet as on 31-3-1973 and that no depreciation had been made for unused
rubberised machinery valued at Rs. 4,80,000. Hence the Income Tax Officer held that such
machinery had not been used for the business of the assessee. Consequently, the ITO took the view
that the assessee was not entitled to claim deduction for the interest paid by him in all the three
assessment years. The assessment was reopened and fresh assessment orders were passe by the ITO
rejecting the claim of deduction made by the assessee. That order was confirmed on appeal by the
Appellate Assistant Commissioner and when the matter was taken to the Tribunal, the latter took the
view that the machinery being business asset, the interest paid on the amount borrowed for the
purchase of such machinery would certainly be an allowable deduction. Consequently, the Tribunal
upheld the claim of the assessee and permitted the deduction being made.

2. The Revenue applied to the High Court under Section 256(2) for directing the Tribunal to make a
reference to it on the following question :

                  "Whether on the facts and in the circumstances of the case, the Tribunal is justified in
                  law in holding that the interest paid by the assessee on loans taken from the bank for
                  the purchase of machinery, which was never used in the assessee's business, is an
                  allowable deduction in computing the total income of the assessee for Assessment
                  Year 1972-73 and 1973-74 ?"

3. A similar application was filed for the year 1974-75. The High Court dismissed the applications
by two separate orders. Both the orders are challenged in this appeal.

4. We do not find any merit in this appeal. We find that the reasoning of the Tribunal is correct.
Even though the machinery has not been actually used in the business at the time when the
assessment was made, the same had been treated as a business asset and it was purchased only for
the purposes of the business. In the circumstances, the interest paid on the amount borrowed for
purchase of such machinery is certainly a deductible amount. Consequently, the view taken by the
Tribunal is correct.
5. The appeal is dismissed. There will be no order as to costs.