1981 (11) TMI 50 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of extra expenditure due to devaluation of Indian rupee u/s 35A of the Income-tax Act, 1961.
2. Treatment of interest receipts from bank deposits as business receipts for the purpose of section 80J of the Income-tax Act, 1961.

Summary:

Issue 1: Deduction of Extra Expenditure Due to Devaluation of Indian Rupee u/s 35A

The primary question was whether the Income-tax Appellate Tribunal was right in allowing the extra expenditure of Rs. 1,32,702 towards process royalties, on account of devaluation of Indian rupee, as a deduction u/s 35A of the Income-tax Act, 1961. The assessee, a public limited company engaged in refining crude mineral oils, had entered into agreements with a foreign company for patent rights and had paid royalties in dollars. Due to the devaluation of the Indian rupee, an additional liability of Rs. 1,32,702 was recorded. The Tribunal allowed this as a deduction, but the High Court found that this amount was not an actual expenditure incurred by the assessee but a notional liability. The court held that the conditions for deduction u/s 35A were not met, as the expenditure was incurred before the commencement of the business and was not directly related to the acquisition of patent rights. Therefore, the court answered the question in the negative, in favor of the revenue and against the assessee.

Issue 2: Treatment of Interest Receipts from Bank Deposits as Business Receipts for the Purpose of Section 80J

The second question concerned whether the interest receipts of Rs. 14,09,802 from bank deposits could be treated as business receipts for the purpose of section 80J. The assessee had deposited surplus cash generated from its business in short-term bank deposits, earning interest income. The Tribunal treated this interest as business income, allowing relief u/s 80J. However, the High Court found that the interest income was not directly derived from the business activity of the industrial undertaking but from the business activity of depositing surplus cash in banks. The court emphasized that the term "derived from" in section 80J has a narrower import and requires a direct connection with the business. Consequently, the court held that the interest income did not qualify for deduction u/s 80J and answered the question against the assessee and in favor of the revenue.

Conclusion:

The High Court ruled against the assessee on both issues, denying the deduction of extra expenditure due to devaluation u/s 35A and the treatment of interest receipts as business income for the purpose of section 80J.