1981 (4) TMI 43 - HC - Income Tax

Summary

Issues:
1. Allowability of interest paid on borrowed amounts as revenue expenditure.
2. Disallowance of interest payment attributable to creation of capital assets.
3. Determination of revenue expenditure based on business necessity and commercial expediency.

Analysis:
The judgment pertains to the assessment year 1970-71, where the issue before the Income Tax Officer (ITO) was the allowability of interest paid by a private limited company on borrowed amounts as revenue expenditure. The ITO disallowed a portion of the interest, specifically Rs. 50,000, as it was attributable to the creation of capital assets. The ITO did not establish that the capital assets were unrelated to the business of the company, leading to the disallowance based solely on the utilization of funds for creating assets. The Appellate Assistant Commissioner (AAC) and the Income-tax Appellate Tribunal disagreed with the ITO's decision and allowed the interest payment as revenue expenditure, citing precedents such as Bombay Steam Navigation Co. and India Cements Ltd.

The High Court analyzed the case based on the principles laid down by the Supreme Court regarding revenue expenditure. It was emphasized that expenditure must be integral to the profit-earning process and not for acquiring permanent assets to be considered revenue expenditure. The lack of details regarding the capital assets created from the borrowed amount of Rs. 5 lakhs was noted, with no evidence that the acquisition was unrelated to the business. The Court highlighted that if the expenditure is closely related to the business, it can be considered revenue expenditure. The decision in Challapalli Sugars Ltd. v. CIT was deemed inapplicable to the case at hand, as the company had already commenced business before the assessment years.

Ultimately, the High Court ruled in favor of the assessee, stating that there was no justification for disallowing the interest payment of Rs. 50,000 as revenue expenditure. Both questions referred to the Court were answered in the affirmative, against the Revenue, with no order as to costs. The judgment reaffirmed the importance of considering business necessity and commercial expediency in determining revenue expenditure, emphasizing the integral relationship between expenditure and the profit-earning process in business operations.