2002 (12) TMI 204 - AT - Income Tax

Summary

Issues Involved:

1. Deduction of interest payable as revenue expenditure.
2. Tax exemption status of subsidy granted by the Central Government.
3. Nature of the subsidy as a waiver of interest.

Detailed Analysis:

1. Deduction of Interest Payable as Revenue Expenditure:

The assessee claimed a deduction of Rs. 97.07 lakhs as "Provision for Interest" on a government loan of Rs. 693.39 lakhs. The Assessing Officer disallowed this claim, stating that the assessee had not incurred any actual expenditure nor had any liability to pay interest, as the amount was treated as a capital subsidy. The CIT(A) upheld this disallowance. Upon appeal, it was argued that the liability to pay interest at 14% per annum was real, as evidenced by the agreement with the Government. The Tribunal agreed with the assessee, stating that the liability to pay interest existed and thus, the claim for deduction should not have been negated.

2. Tax Exemption Status of Subsidy Granted by the Central Government:

The assessee contended that the subsidy granted by the Government, equivalent to the interest payable, was capital in nature and thus exempt from tax. The CIT(A) had concluded that the subsidy was a waiver of interest and should be taxed. The Tribunal examined the purpose of the subsidy, which was to enable the assessee to modernize and expand its plant and machinery. Referring to precedents, it was established that subsidies aimed at capital expenditure are capital in nature and not taxable. The Tribunal concluded that the subsidy granted for modernization and expansion was indeed capital in nature and thus not taxable.

3. Nature of the Subsidy as a Waiver of Interest:

The CIT(A) had treated the subsidy as a waiver of interest, implying no liability for the assessee. The Tribunal disagreed, noting that the liability to pay interest was real and was merely adjusted through book entries as a subsidy. The Tribunal emphasized that the substance of the transaction, rather than its form, should be considered. The Tribunal concluded that the Government had not waived the interest liability but had converted it into a capital subsidy, thus maintaining the liability for interest while also granting a subsidy for a specific purpose.

Conclusion:

The Tribunal allowed the appeal, concluding that the interest payable was a legitimate revenue expenditure and the subsidy granted was capital in nature and thus exempt from tax. The decision of the CIT(A) was overturned, and the addition of Rs. 97.07 lakhs on account of interest was not justified.