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Issues Involved:
1. Whether a sum of Rs. 7,005 paid by the company as interest on instalments of the incremental contribution to the Municipal Corporation is an allowable deduction in computing the taxable profits of the assessee-company? Issue-wise Detailed Analysis: 1. Allowability of Interest on Instalments of Incremental Contribution: The primary issue is whether the interest amounting to Rs. 7,005 paid by the assessee-company on instalments of betterment charges to the Ahmedabad Municipal Corporation can be considered an allowable deduction when computing taxable profits. Facts Recapitulation: The assessee claimed an allowance of Rs. 72,014, which included a betterment charge of Rs. 65,009 and interest of Rs. 7,005. The Tribunal was only asked to consider the interest portion for deduction under section 256(1) of the Income-tax Act, 1961. Revenue's Argument: The Revenue contended that the Tribunal's approach was flawed as it overlooked section 74(1) of the Bombay Town Planning Act, 1954. The Legislature intended that interest on instalments be part of the net amount payable, thus making it a capital expenditure. Consequently, the interest payment should not be an allowable deduction for computing taxable profits. Assessee's Argument: The assessee argued that the interest payment did not increase the land value and was incidental to trade, making it an allowable deduction. The interest rate of 4 1/2 percent was lower than the market rate, suggesting the option to pay in instalments was chosen for commercial expediency. Legal Precedents: - Addl. CIT v. Rohit Mills Ltd. [1976] 104 ITR 132: This case established that betterment charges were capital expenditures as they were levied against the increased potential value of the land and not the running business of the assessee. - Arvind Mills Ltd. v. CIT [1992] 197 ITR 422: The Supreme Court held that betterment charges were capital expenditures since they increased the land's value and had no direct nexus with the day-to-day business operations. - India Cements Ltd. v. CIT [1966] 60 ITR 52: The Supreme Court ruled that borrowing money was incidental to business and not a capital expenditure. However, this principle was deemed inapplicable to the present case as betterment charges differ from obtaining a loan. Court's Analysis: The court noted that the payment of betterment charges is capital expenditure, as established by previous judgments. The interest on these instalments is part of the net amount payable under section 74(1) of the Bombay Town Planning Act, 1954. The court found no evidence that the assessee opted for instalments due to a shortage of funds or commercial expediency. Conclusion: The court concluded that the payment of interest on instalments of betterment charges is capital expenditure and not an allowable deduction for computing taxable profits. The Tribunal erred in treating the interest payment as an allowable deduction. Judgment: Question No. 1 was answered in the negative, in favor of the Revenue and against the assessee. The payment of Rs. 7,005 as interest on instalments of betterment charges was not an allowable deduction. Order accordingly.
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