ADARSH KUMAR GOEL, J. - (1.) THE Revenue has preferred this appeal under s. 260A of the IT Act, 1961 (the Act) against the order of the Tribunal, proposing to raise the following substantial questions of law : "(i) Whether on the facts and law, the Hon'ble Tribunal was legally justified to allow interest on capital borrowed for construction of building during the pre -operative period within the meaning of Expln. 8 to s. 43 of IT Act ? (ii) Whether on the facts and law, the Hon'ble Tribunal was legally justified to allow interest @ 18 per cent to close relatives and associated persons covered under s. 40A(2)(b) as compared to the rate of 15 per cent paid to other creditors -
(2.) THE AO has disallowed the claim for deduction under s. 36(1)(iii) of the Act on account of interest paid on the capital borrowed for establishing a new unit. It was held that as per Expln. 8 to s. 43 of the Act, the interest paid for pre - operative expenses was not admissible. The AO also disallowed interest amount of Rs. 1,66,229 to persons covered under s. 40A(2)(b) of the Act on the ground that the same was excessive.
(3.) THE CIT(A) allowed the claim of the assessee which order has been confirmed by the Tribunal. The Tribunal held : "The AO, however, failed to take into consideration that the aforesaid proviso to s. 36(1)(iii) was introduced on the 2004. It is not applicable to the assessment year under consideration, which happens to be asst. yr. 2001 -02. This point has been well considered by the learned CIT(A) and having done so, the learned CIT(A) has deleted the addition in question. For this reason, no fault can be found with the order of the CIT(A). In Dy. CIT vs. Core Healthcare Ltd. (2001) 169 CTR (Guj) 416 : (2001) 251 ITR 61 (Guj) it has been held that apropos s. 36(1)(iii) of the IT Act, borrowing on capital or revenue account is not relevant. Where the capital was borrowed for purchase of machinery to increase production in the existing business but the machinery was not put to use in the accounting year such fact was not relevant and the interest on borrowed capital was held deductible. It was held that the assessee was under no obligation to capitalize such interest. No decision to the contrary has been cited on behalf of the Department..... We are in agreement with the learned CIT(A). As pointed out by the learned counsel for the assessee, the AO was incorrect in making the observations which she did. The assessee did in fact pay interest @ 18 per cent to outside parties. It is also not disputed that brokerage had to be paid in advance, including which, the interest rate came to over 18 per cent per annum, i.e. 18.02 per cent, to be exact. The contention of the learned Departmental Representative that interest and brokerage are to be considered separately, does not hold water. The brokerage had to be paid on the date of receipt of loan i.e. in advance. It was, therefore, inextricably linked with the rate of interest emanating from the loan. Also, it is a matter of record that for the immediately preceding year, interest @ 18 per cent paid to the partners stands allowed by the AO. Moreover, it cannot be gainsaid, as held by the Hon'ble Madras High Court in the case of CIT vs. Raman & Raman Ltd. (1969) 71 ITR 345 (Mad) as rightly followed by the learned CIT(A), that while allowing a particular expenditure, the Revenue cannot act as a businessman.";