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The Pune Bench in the case of Chintamani Hatcheries (P.) Ltd. vs. Deputy Commissioner of Income-tax (75ITD116) held that if the business is started, interest on loan borrowed by the assessee is allowable irrespective of the purpose of the loan, that is to say, even if the loan is obtained for acquisition of capital asset, interest is still allowable. As per the Bombay High Court decision in the case of Calico Dyeing & Printing Works v. CIT (34 ITR 265) all that the assessee has to show is that the capital which was borrowed was used for the purposes of business of the assessee in the relevant year of account. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset. A step further to this decision is the Supreme Court ruling in the case of CIT v. Associated Fibre & Rubber Industries (P.) Ltd. (236 ITR 471) where the Apex Court held that even though the purpose of the loan was to acquire machinery, deduction was still held allowable even though the machinery is not actually been used in the case of a business already set up or in running.

Before the Pune Bench in this case the assessee poultry farm company approached Allahabad Bank for a loan and incurred evaluation fee of RS. 80930. Relying on the decision of the Supreme Court in the case of India Cements Ltd. v. CIT (60 ITR 552), the assessee-company claimed that the loan is a liability and it could not be treated as an asset or advantage of enduring benefit. Both the Assessing Officer and Commissioner (A) held that the term loan is obtained for purchase of capital assets, any expenditure incurred in connection with the said loan will go to increase the actual cost of the assets. They tried to distinguish the case of India Cements Ltd. (supra) and observed that in that case, the loan was utilised to pay off prior debt of Rs. 25 lakhs of two companies and balance amount of Rs. 15 lakhs was utilised for working fund. Following the Bombay High Court decision in the case of CIT v. Gwalior Rayon Silk Mfg. (Weaving) Co. Ltd. (237 ITR 253) the Bench held that it is irrelevant to consider the object with which the loan was obtained.

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