Commissioner of Income Tax vs Abdul Gafoor

C.N. Ramachandran Nair, J.—The question raised in the appeal filed by the revenue is whether the Tribunal is justified in allowing deduction of loss claimed by the assessee by way of discount in bidding kuries against business income. We have heard standing counsel appearing for the appellant and counsel appearing for the respondent-assessee.

The assessee is engaged in business in iron and steel. During the previous year, the assessee bid various kuries to raise funds which led to loss to him. The loss arising in the bidding of kuries at discounted price was claimed as deduction in the computation of business income u/s 36(1)(iii) of the Act. The assessing officer held that loss not being interest on borrowed funds is not an allowable deduction u/s 36(1)(iii) of the I.T. Act.

Even though the first appellate authority rejected the claim, in second appeal, the Tribunal allowed it by holding that but for the amount raised from chitty, the assessee would have had borrowed funds leading to payment of interest. Therefore according to Tribunal, the loss suffered in chitty is equal to the interest which is eligible for deduction u/s 36(1)(iii) of the Act.

Standing counsel submitted that what is allowable u/s 36(1)(iii) is interest from funds borrowed for business and not kuri loss. The next contention raised is that loss in kuri cannot be set off against income from business. Counsel appearing for the assessee on the other hand contended that assessee utilised the funds for business and so much so loss sustained in the bidding of kuries is similar to interest payable on borrowed funds and so much so it is allowable. Alternatively he contended that loss is a business expenditure allowable u/s 37(1) of the Act.

After hearing both sides and after going through the Tribunal''s order, we are of the view that the Tribunal''s finding that claim is allowable u/s 36(1)(iii) is not sustainable because anything equivalent to interest is not allowable as a deduction u/s 36(1)(iii) of the Act. This provision specifically provides for deduction of interest paid for the funds borrowed for business purposes. Therefore, the order of the-Tribunal allowing the claim u/s 36(1)(iii) of the Income Tax Act is not tenable and we, therefore, allow the appeal by reversing the order of the Tribunal and by restoring the disallowance. Even though counsel for the assessee alternately contended that the claim is allowable u/s 37(1) of the Act, we do not think there is any scope for us to consider the issue in this appeal because such a contention was not raised or decided before any of the authorities below and so much so, the issue does not arise from the order of the Tribunal. If the claim is tenable u/s 37(1) of the Act, it is for the assessee to make the claim in accordance with law.

However, if funds required for business are raised through other means and the same led to an expenditure including loss to the assessee, then certainly the same is ah allowable deduction u/s 37(1) of the Act. There is nothing on record to show that funds raised by bidding kuries at discounted price are utilised for business purposes to consider assessee''s claim u/s 37(1) of the Act. However, in view of the contention of counsel for the respondent that funds are utilised only in business, we feel the assessee should be given an opportunity to establish his claim u/s 37(1) of the Act. We therefore allow the departmental appeal by setting aside the order of the Tribunal and that of the first appellate authority and remand the matter to the assessing officer for considering assessee''s claim u/s 37(1) after verifying utilisation of funds for business purposes and the actual expenditure by the assessee for raising the funds. The assessing officer will give an opportunity to the assessee to furnish details to substantiate his claim.