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1978 (8) TMI 52 - HC - Income Tax
Issues Involved:
1. Whether the sum of Rs. 1,46,875 spent on the purchase of loom hours was an allowable revenue expenditure u/s 66(1) of the Indian I.T. Act, 1922.
2. Whether the sum of Rs. 7,79,117 paid to the U.P. Government as interest on moneys borrowed was allowable as a deduction against the interest income of Rs. 1,75,471 earned from the Central Bank of India Ltd.
Summary:
Issue 1: Allowability of Rs. 1,46,875 spent on the purchase of loom hours as revenue expenditure
The first question was covered by the decision in CIT v. Empire Jute Company Ltd. [1974] 97 ITR 581 (Cal). Following this precedent, the court answered the question in the negative and in favor of the revenue.
Issue 2: Deduction of Rs. 7,79,117 paid as interest against interest income of Rs. 1,75,471
The assessee was setting up a heavy chemical plant and had obtained a loan of Rs. 1.45 crores from the Government of Uttar Pradesh. The loan amount was kept in deposit with the Central Bank of India until utilized for the plant. During the relevant year, the assessee earned Rs. 1,75,471 as interest from the deposit and paid Rs. 9,54,588 as interest to the U.P. Government, claiming the difference of Rs. 7,79,117 as a revenue expense. The ITO disallowed the claim, stating it related to a separate unit still under erection.
The AAC upheld the ITO's decision, categorizing the payment as capital expenditure. The Tribunal, however, allowed the deduction against the interest earned, treating the interest earned as income from other sources u/s 12 of the Indian I.T. Act, 1922.
The revenue contended that the loan was for a new business, and the interest paid should be capitalized as per the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The court agreed, stating that the interest paid had to be capitalized and added to the cost of the plant. The assessee failed to establish that the expenditure was incurred solely for earning interest from the Central Bank of India.
Thus, the court answered the second question in the negative and in favor of the revenue. There was no order as to costs.