1966 (3) TMI 14 - HC - Income Tax

Interest - land was acquired for the assessee-company by the Govt. under the Land Acquisition Act, it can be safely presumed that the acquisition was for the purpose of the business of the company - payment of interest under consideration was in relation thereto - interest was not paid on any capital borrowed for the purposes of the business - not permissible deduction u/s 10(2)(iii).

Summary

Issues:
Deduction of interest payment under section 10 of the Income-tax Act for an assessee-company in relation to compensation paid for acquired land.

Analysis:
The judgment pertains to a reference under section 66(1) of the Income-tax Act concerning the deduction claimed by an assessee-company for interest paid under the Land Acquisition Act in relation to acquired land. The assessee paid Rs. 22,438 as interest under section 34 of the Land Acquisition Act before the total compensation was fully determined and claimed it as an expenditure deductible from total income under section 10 of the Income-tax Act. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the deduction, considering the interest payment as part of the compensation for the land acquired, i.e., capital expenditure. However, the Tribunal allowed the deduction, stating that the interest payment was akin to interest payable on trade debts and could be considered under section 10(2)(xv) as an admissible deduction.

The Tribunal's decision was challenged by the revenue, contending that the interest payment was part of the capital expenditure and not deductible from total income. The counsel for the assessee argued that the interest payment did not constitute capital expenditure as it was not part of the price of the acquired land, citing the decision in Dr. Shamlal Narula v. Commissioner of Income-tax. The counsel relied on section 10(2)(xv) of the Income-tax Act, which allows deductions for expenditures laid out exclusively for business purposes. The judgment further delves into the conditions specified under section 10(2)(xv) to determine the eligibility of the interest payment for deduction, emphasizing the purpose for which the land was acquired by the Government for the company.

The judgment discusses the provisions of the Land Acquisition Act regarding land acquisition for companies, highlighting the necessity of government consent and agreements in such acquisitions. It presumes that land acquired for a company is for the purposes mentioned in the Act, especially related to the company's business. Referring to the Bombay Steam Navigation Co. (1953) Private Ltd. v. Commissioner of Income-tax case, the judgment emphasizes that revenue expenditure for business purposes is integral to profit earning and not for acquiring permanent assets. Consequently, the interest payment in this case is deemed a revenue expenditure necessary for the business, justifying its deduction under section 10(2)(xv) of the Income-tax Act.

In conclusion, the judgment affirms that the interest payment was rightly allowed as a deduction, answering the reference question in the affirmative. It declines to award any costs against the department, considering the circumstances of the case.