- (1.) This appeal relates to the assessment year 1983-84. The assessee is a public limited company engaged in the manufacture and sale of synthetic yarn and cement. It also has a subsidiary company under the name of J.K. Satoh Agricultural Machines Ltd. This subsidiary company availed of credit facilities/term loans as well as working capital from various financial institutions. This subsidiary company fared badly in its business and incurred heavy losses as a result, it became a defaulter in paying its debts. The assessee was also a guarantor to the loans taken by the subsidiary company for the purpose of protecting its own business interest. Since the subsidiary company could not adhere to the repayment of its liabilities, the assessee, in order to discharge its legal obligations repaid the instalments of loan to the financial institutions and banks on behalf of the subsidiary company and debited the same to their account. According to the assessee, such repayment of the loan instalment on behalf of the subsidiary company became necessary in order to protect the assessee's own business interest. As a result of making the payments, a debit balance of Rs. 61 lakhs stood in the name of the subsidiary company in the books of the account of the appellant; The debit balance was covered by the retained profits of the assessee during the period 1978-81. In the first round of the assessment proceedings, the Assessing Officer made a disallowance of interest and also disallowed the expenses claimed towards guarantee commission. This was set aside by the appellate authority in appeal filed by the assessee and the matter was remitted for reconsideration to the Assessing Officer.
(2.) The Assessing Officer, while completing the assessment, again made a disallowance of Rs. 9,54,000. The Assessing Officer found that out of Rs. 61 lakhs only Rs. 8 lakhs was paid by the company to the financial institution and, therefore, was eligible for deduction of interest on the amount of Rs. 8 lakhs under section 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The Assessing Officer held that the balance amount of Rs. 53 lakhs did not qualify for deduction of interest. The asses-see also claimed the expenses towards guarantee commission as a revenue expenditure. The assessee had to furnish bank guarantee for the purpose of carrying out its business activities. For issuing such bank guarantees the bank had charged a commission and such commission was claimed as a revenue expenditure. The Assessing Officer disallowed this expenditure towards revenue expenditure contending that it was a capital expenditure.
(3.) The assessee, being aggrieved, filed an appeal, which was allowed and the plea of the assessee was accepted. The appellate authority found that the assessee had funds of its own in addition to the borrowed funds from the bank and that the loans were given to the subsidiary company under compulsion to the financial institution in order to protect the assessee's own business interest. The appellate authority found that the retained profits of the company were to the tune of Rs. 1,362 lakhs till the accounting year 1983-84 which covered the amount advanced to the subsidiary company and, therefore, found that interest on the said loan was to be given the necessary deduction under section 36(1)(iii) of the Act. The appellate authority found that any expenditure incurred by the assessee in an earning concern on deferred payment of the assets acquired is a revenue expenditure and, therefore, necessary deductions have to be allowed.;