1981 (8) TMI 32 - HC - Income Tax

Business Expenditure, Depreciation, Developement Rebate, Intercorporate Dividends, Interest On Borrowed Capital

Issues Involved:
1. Reduction of machinery cost by compensation amount for depreciation and development rebate.
2. Deductibility of interest paid on borrowings from business income.
3. Bifurcation of interest for business and dividend income.
4. Source of investment in shares (internal resources vs. borrowed funds).
5. Relief under sections 99(1)(iv)/85A and 80M based on net or gross dividend.
6. Nature of expenditure on the issue of new shares.
7. Deductibility of a specific sum (not pressed).

Issue-wise Detailed Analysis:

1. Reduction of Machinery Cost by Compensation Amount for Depreciation and Development Rebate:
The first issue concerns whether the compensation received for delayed shipment of machinery should reduce the actual cost of machinery for depreciation and development rebate purposes. The court analyzed the agreements between the assessee and the suppliers, concluding that the compensation for delay was not related to the cost of the machinery but was meant to offset the loss due to delayed delivery. The compensation was deemed a revenue receipt, not a reduction in machinery cost. Thus, the Tribunal erred in holding that the actual cost of machinery should be reduced by the compensation amount for depreciation and development rebate.

2. Deductibility of Interest Paid on Borrowings from Business Income:
The second issue involves whether the total interest paid on borrowings should be deductible from business income. The court noted that the assessee had sufficient internal resources for its investments in shares and that the borrowings were used for business purposes. The court held that the entire interest payment should be allowed as a deduction from business income, as no specific part of the borrowings was attributable to the investment in shares. The Tribunal's decision to disallow part of the interest was incorrect.

3. Bifurcation of Interest for Business and Dividend Income:
Related to the second issue, the third issue is whether the interest should be bifurcated between business income and dividend income. The court concluded that the entire interest payment should be deductible from business income, rejecting the Tribunal's bifurcation approach.

4. Source of Investment in Shares (Internal Resources vs. Borrowed Funds):
The fourth issue addresses whether the investment in shares came from internal resources or borrowed funds. The court found that the investments were made from the assessee's internal resources, as evidenced by the retained earnings and the lack of borrowings in the initial years. Therefore, the Tribunal was wrong in holding that the investment could not be said to have come from internal resources.

5. Relief Under Sections 99(1)(iv)/85A and 80M Based on Net or Gross Dividend:
The fifth issue pertains to whether relief under sections 99(1)(iv)/85A and 80M should be based on net or gross dividend. For assessment years 1963-64 to 1967-68, the court followed the Supreme Court's decision in Cloth Traders (P.) Ltd. v. Addl. CIT, holding that relief should be based on gross dividend. For assessment years 1968-69 to 1970-71, the court followed its own decision in Gaekwad Investment Corporation Ltd., holding that relief should be based on net dividend due to retrospective amendment.

6. Nature of Expenditure on the Issue of New Shares:
The sixth issue involves whether the expenditure incurred on the issue of new shares is revenue or capital expenditure. The court agreed with previous rulings that the expenditure was capital in nature, as it related to the company's permanent capital structure, not its working capital. Therefore, the expenditure could not be deducted from business income.

7. Deductibility of a Specific Sum (Not Pressed):
The seventh issue, concerning the deductibility of a specific sum of Rs. 38,158, was not pressed by the assessee's counsel and thus was not addressed by the court.

Conclusion:
The court answered the questions primarily in favor of the assessee, except for the issues concerning the nature of expenditure on the issue of new shares and the relief under sections 99(1)(iv)/85A and 80M for certain years. The reference was answered accordingly, with no order as to costs.

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