9911796707
|
Home
Issues involved: Interpretation of initial expenditure on construction and purchase of machinery, transfer of assets to another company without profit motive, and liability transfer in the course of promoting companies.
Summary: The High Court of Karnataka considered a case involving the initial expenditure incurred by a company for setting up an industrial undertaking, with the intention of transferring it to a newly incorporated company. The company, engaged in manufacturing electrical insulating products, had incurred significant expenditure for the new project, which was eventually transferred to the new company, Laxman Isola Ltd. The Revenue contested the deduction claim for interest on borrowings related to these assets, arguing that the assets were diverted as capital to the new company. However, the Appellate Tribunal disagreed with the Revenue's stance and allowed the deduction claim. The Tribunal found that the expenditure incurred by the company for setting up the new undertaking was part of its existing business operations, and there was no fiduciary relationship between the company and the new entity. The Tribunal concluded that the borrowed funds used for setting up the new undertaking were for the purpose of the company's own business, and the interest paid on these borrowings should be allowed as a deduction. The Court referenced a similar case from the Rajasthan High Court to support its decision, emphasizing the test of interconnection between different ventures to determine if they constitute the same business. The Court highlighted that if the assets created by the company could not be transferred to the new entity, they would have remained with the company and likely been utilized in its manufacturing activities. The Court also distinguished a case from the Madras High Court where the advance made by a company was unrelated to its core business activity. Additionally, the Court addressed the argument regarding the enduring nature of the assets and the distinction between capital and revenue expenditure. It emphasized that the test of enduring benefit is not the sole determinant of the nature of expenditure. The Court also discussed a Supreme Court case involving an advance made for purchasing shares, highlighting the difference in circumstances. Ultimately, the Court ruled in favor of the company, affirming that the interest paid on borrowings for the new project should be allowed as a deduction. The judgment provides a detailed analysis of the company's actions, the nature of the expenditure, and the legal principles governing the deduction of interest on borrowings in the context of business promotion activities.
|
