TMI Blog1958 (3) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... however, sought to get the said previous year altered to the period November 10, 1950, to December 31, 1951, so that, in future assessments, the previous year would have been the calendar year instead of Samvat year. The Income-tax Officer refused to grant his consent to this change in the previous year in regard to the said source of income and completed the assessment for the assessment year 1952-53 in respect of the business source of income by taking the previous year to mean Samvat year 2007. The matter of the previous year was no longer in dispute before the Tribunal. As that fact has some bearing on the issue under consideration, that fact had to be stated. 3. The assessee firm carried on the said business of bleaching, dyeing and printing cloth in a factory at Tardeo. Screen printing business, which is said to be a process of printing textiles, was never done in Tardeo factory. The factory at Tardeo was found too small for the needs of expanding business and hence in April 1950, which falls in S.Y. 2006 (October 22, 1949 to November 9, 1950), the assessee firm acquired by lease a plot of land at Lal Baug and commenced erecting another factory there with a view to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss account of that factory. It was admitted before the Income-tax Officer that the said amount of interest was mostly on loans taken for the purposes of erection of the factory at Lal Baug . The Income-tax Officer disallowed an amount of ₹ 66,000 by observing as follows: Only such interest may be allowed which is entirely for the purposes of carrying on of the assessee's business. Besides the assessee's factory did not start working fully from October 20, 1951 (sic). As the amounts borrowed were entirely for the purpose of constructing the factory building and purchasing and installing the new machinery, the interest on these amounts cannot be a revenue expenditure. It is a capital expense and as such it cannot be allowed. The assessee's capital expenses for the erection of the building and the purchase and installation of the machinery comes to about ₹ 11,00,000. Taking the rate of interest at 6% I disallow ₹ 66,000 out of ₹ 72,000 claimed. The Appellate Assistant Commissioner rejected the view taken by the Income-tax Officer and he in his turn observed as follows: The balance (i.e., ₹ 66,000) was di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney borrowed for the purpose of that business and that that sub-section did not draw any distinction between the application of the borrowed capital either for running the business or for acquiring capital assets for that business. He further urged that whereas section 10(2)(xv) specifically referred to an expenditure not being in the nature of capital expenditure , there was no such distinction drawn in respect of an allowance that fell to be considered under section 10(2)(iii). For reasons given in paragraphs 5 to 7, both inclusive, the Tribunal rejected all these contentions. A copy of the Tribunal's order is marked annexure 'A' and forms part of the case. The Tribunal held that the assessee's claim to deduct ₹ 42,000 under section 10(2)(iii) failed. 7. On these facts the following question of law arises: Whether in computing the profits of S.Y. 2007 arising from the assessee's bleaching, dyeing and printing of cloth business, it is entitled to claim a deduction of ₹ 42,000 under section 10(2)(iii) of the Income-tax Act on account of interest paid on money borrowed and used in acquiring new fixed assets which were not brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achinery were not used for the business in the year of account. The question that arises for our consideration is whether, in order to entitle an assessee to claim interest paid on borrowed capital, it is necessary that the asset which comes into existence by reason of the use of the capital must be used in the year of account. Before we look at the authorities, it would perhaps be best to turn to the section itself, and the deduction which is permissible under section 10(2)(iii) is in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid. Now it will be noticed that the sub-section makes no distinction between capital borrowed in order to acquire a revenue asset and capital borrowed to acquire a capital asset. All that the section requires is that the assessee must borrow the capital and the purpose of the borrowing must be for the business which is carried on by the assessee in the year of account. The capital must be borrowed for the purpose of no other business except the business which is being assessed. Now, when we look at the other sub-clauses of section 10(2), it is clear that the underlying idea of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count he would pay interest and the stock-in-trade would not be used, and in the next year the stock-in-trade would be used but the had paid no interest which he can claim in that year. Now the answer which Mr. Joshi givens is rather ingenious. He suggests that, if the capital is used for the purpose of acquiring a stock-in-trade or a revenue asset, then interest paid on the capital may be a permissible deduction although the revenue asset may not be used in the year of account. But, according to him, the position is different if the capital is used for the purchase of a capital asset. In the case of a purchase of a capital asset, the capital asset must be used before interest can be allowed on the borrowed capital. Here again Mr. Joshi is adding words to the section which the section does not contain. Mr. Joshi draws a distinction between capital borrowed for the purpose of acquiring a capital asset and capital borrowed for acquiring a revenue asset. There is no warrant for drawing this distinction. Unlike section 10(2)(xv) which expressly excludes an expense of a capital nature, the Legislature has made no distinction in section 10(2)(iii) between capital borrowed for a revenue a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital in putting up plant and machinery, the plant and machinery is not working, and, therefore, no profit is received from the plant and machinery. The second English case is also instructive and that is Vallambrosa Rubber Co. Ltd. v. Farmer [1938] 6 I.T.R. 636. There a rubber company had an estate oneseventh of which only produced rubber in the year of account and the other six-sevenths was in process of cultivation. The company claimed expenditure for superintendence of the whole estate as a permissible deduction, and the Court of Session. Scotland, considered this question and the Lord President (who ultimately became Lord Justice) in a forceful judgment points out at page 534 that the argument advanced by counsel for the Crown that nothing ever could be deducted as an expense unless that expense was purely and solely referable to a profit which was reaped within the year was a startling proposition and that proposition was only to be stated to be defeated by its own absurdity ; and the learned Lord President rightly poses the question in all these cases of deductions that the rules framed in England , and the sections in our Act, are only guides because the real point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see cannot claim depreciation in respect of buildings, etc., which were not actually used for the business in the year of account. Now it is true that in this case we did consider the scheme of section 10(2), and this is what we say at page 211: Therefore, the scheme of section 10(1) and (2) is clear. To start with there must be a business which is being carried on for the purpose of earning profits and those profits are being assessed to tax. It is in respect of that business that the assessee claims various allowances under section 10(2) and one of the allowances is depreciation, whether normal or initial. Therefore, all that we emphasized was that every allowance which can be permitted to the assessee must be in relation to a business which is being carried on for the purpose of earning profits and those profits are being assessed to tax. Now the assessee in this case is not claiming any allowance in respect of any other business than the business which is being assessed to tax. Mr. Joshi put forward a contention which it is extremely difficult to accept, that the extension which was intended and for which the plant and machinery were erected could not be considered as the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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