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Issues involved: Interpretation of u/s 256(1) of the Income-tax Act, 1961 regarding the allowability of interest as business expenditure.
Summary: The High Court of ALLAHABAD addressed the issue raised by the Revenue regarding the allowability of interest amounting to Rs. 15,642 as business expenditure for a registered firm engaged in the business of expanding iron metal and manufacturing rubber products. The firm had raised a loan for the new business but the rubber factory did not operate during the relevant accounting year. The Income-tax Officer disallowed the deduction for interest paid on the loan, which was later allowed by the Appellate Assistant Commissioner and upheld in appeal. The Department argued that the interest should be considered part of capital expenditure and form the "actual cost" for development expenditure, contending that it cannot be deducted from income derived from a different unit. However, the Court disagreed, emphasizing that the assessee is one entity and not assessed unit-wise. There is no requirement to include the interest in capital expenditure, allowing the deduction from income. The Court cited a previous case where a similar view was taken, supporting the assessee's entitlement to deduct interest expenses for setting up a new business unit. In conclusion, the Court answered the question in favor of the assessee, stating that there is no legal objection to the chosen course of deducting interest expenses from income. The judgment highlights the assessee's right to deduct such expenses and affirms the decision of the Appellate Assistant Commissioner.
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