2006 (2) TMI 649 - HC - Income Tax

Summary

Issues:
1. Deletion of addition towards customs duty on closing stock
2. Allowability of interest paid on borrowed capital as revenue expenditure

Analysis:

Issue 1: Deletion of addition towards customs duty on closing stock
The case involved an appeal by the Revenue against the Tribunal's order deleting the addition towards the element of customs duty on the closing stock. The Revenue contended that the customs duty should have been included in the value of the closing stock. However, the Tribunal ruled in favor of the assessee, citing the decision in CIT vs. English Electric Co. of India Ltd., where a similar issue was decided against the Revenue. The High Court upheld the Tribunal's decision, stating that the order was in conformity with the law, and no substantial questions of law arose for consideration.

Issue 2: Allowability of interest paid on borrowed capital as revenue expenditure
The second issue revolved around the allowability of interest paid on borrowed capital as revenue expenditure. The assessee had borrowed funds for the purpose of expanding projects and claimed deduction under section 36(1)(iii) of the Income Tax Act. The section allows deduction for interest paid on capital borrowed for business purposes. Both the CIT(A) and the Tribunal had found that the conditions specified under the section were met in this case - the money was borrowed for business expansion, and interest was paid on the borrowed capital. Therefore, the claim of the assessee under section 36(1)(iii) was deemed to be in conformity with the law. The High Court, based on this finding, upheld the Tribunal's decision and dismissed the tax cases, concluding that there was no error or infirmity in the Tribunal's order.

In summary, the High Court upheld the Tribunal's decision in favor of the assessee on both issues, stating that the orders were in conformity with the law. The appeal by the Revenue was dismissed, and no costs were awarded.