2003 (1) TMI 93 - HC - Income Tax

Whether on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the interest claimed as revenue expenditure amounting to Rs. 14, 09, 942 cannot be treated as capital expenditure and added to work-in-progress in spite of the fact that other expenses on project were being capitalised by the assessee itself and holding that the Commissioner of Income-tax was wrong in directing the Assessing Officer to disallow the said interest and treat the same as capital expenditure as a part of work-in-progress thereby quashing the order under section 263 of the Act of the Commissioner of Income-tax? - we answer the above question in the affirmative i.e. in favour of the assessee and against the Department.

Summary

Issues:
- Interpretation of deduction under section 36(1)(iii) of the Income-tax Act, 1961 for interest claimed as revenue expenditure.
- Determination of whether interest incurred on a loan for acquiring development rights constitutes capital expenditure.
- Assessment of whether the loan obtained for a project should be considered as a capital asset.

Analysis:

The High Court of BOMBAY heard an appeal filed by the Department against a Tribunal order concerning the assessment year 1987-88 under section 260A of the Income-tax Act, 1961. The assessee, a construction company, followed a modified project completion method for profit computation. The issue revolved around the deduction of interest amounting to Rs. 14,09,942 paid on borrowed funds under section 36(1)(iii) of the Act. The Commissioner of Income-tax disallowed the deduction, considering the loan utilized for acquiring a capital asset. The Tribunal, however, held that the interest paid should be treated as revenue expenditure, not capital expenditure, and restored the assessment order. The Department appealed to the High Court.

The primary question before the Court was whether the interest claimed as revenue expenditure could be treated as capital expenditure. The Court analyzed the nature of the loan obtained by the assessee for the Kandivali project. It was established that the loan was utilized for obtaining stock-in-trade, which constituted the project for the assessee. The Court referred to the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, emphasizing that the purpose for which the loan was obtained was irrelevant for deduction under section 36(1)(iii). The Court concluded that since the loan was used for business purposes, specifically to acquire stock-in-trade, the assessee was entitled to the deduction under the Act.

The Court further clarified that the distinction between capital and revenue expenditure was immaterial for the purpose of adjudicating the claim under section 36(1)(iii). It highlighted that as long as the borrowed capital was used for business purposes, the nature of the asset acquired (revenue or capital) did not impact the eligibility for deduction. The Court relied on the precedent set by the Bombay High Court in a similar case to support its decision. Consequently, the Court ruled in favor of the assessee, upholding the treatment of interest as revenue expenditure and allowing the deduction under section 36(1)(iii). The appeal was disposed of with no costs awarded.