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Issues involved: Interpretation of whether net interest income should be capitalized annually for tax purposes.
Summary: The judgment pertains to a case where the assessee-company borrowed funds for specific purposes and earned interest income on the excess money deposited in term deposits. The Income-tax Officer initially held that the gross interest payable should be capitalized without allowing deduction of the interest earned. The Appellate Assistant Commissioner allowed the interest earned as a deduction but disagreed on capitalizing net interest. The Tribunal, following a previous decision, held that the assessee should be taxed on net interest and that it should be capitalized annually. The main dispute before the court was whether net interest or gross interest should be capitalized. The Revenue contended that only gross interest should be capitalized, citing the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT. The court noted that interest paid on borrowings must be capitalized, but the treatment of interest earned was not addressed in that case. The assessee's representative justified the Tribunal's decision by stating that capitalizing net interest aligns with accounting principles. However, the court rejected this argument, emphasizing that interest income, whether from borrowed money or capital, is taxable under the Income-tax Act. The court clarified the wording of the question referred and concluded that gross interest, not net interest, should be capitalized annually. In conclusion, the court ruled against capitalizing net interest income annually, affirming that only gross interest should be capitalized for tax purposes.
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