2013 (7) TMI 764 - HC - Income Tax

Expenditure allowable under Section 37 of the IT Act - Assessee-respondent-Company was incorporated as a Company, which is a nodal agency for development of Information Technology in the State of Gujarat - When certain indents remains incomplete and money is unspent, the same is used by the respondent for the purpose of investment including parking such funds with the Gujarat State Financial Services Ltd - Two Government Resolutions, being dated 21/03/2004 and 14/03/2006 , were issued by the Department of Science and Technology, which required the respondent to pay the interest at the rate of 6% on the unspent amount Held that - Section 36(1)(iii) do not apply on these facts as the amount lying with the Assessee is not the borrowed fund. Held that - On one hand the assessee has earned interest income on investment of the surplus fund and on the other hand made the provisions of interest, hence such a claim does fall under the provisions of Section 37(1) of the IT Act - Provisions made by the assessee is, meant for the purpose of the business, hence qualify for claim under Section 37(1) of the IT Act Decided against the Revenue. Uncertain or Contingent liability Held that - The liability was necessarily ascertained for having come in a package, given to the assessee while disbursing the amount/grant as also by way of both Government Resolutions, therefore, by no stretch of imagination it can be said that there was uncertain or undetermined liability - Government Resolutions as mentioned hereinabove specify that the unspent amount of the grant shall bear the interest at the rate of 6% per annum and when appropriate provision had been made by the assessee making a request thereafter to treat the said amount as expenditure under Section 37(1) of the Income Tax Act Decided against the Revenue.

Summary

Issues:
1. Interpretation of Section 37(1) of the Income-tax Act, 1961 regarding allowance of interest expenses on unspent grants.
2. Determination of whether the interest expenses qualify as deductible under Section 37(1) for the purpose of business.

Analysis:

Issue 1:
The appellant challenged the orders of the Income Tax Appellate Tribunal regarding the allowance of interest expenses not payable on the last day of the financial year on unspent grants under Section 37(1) of the Income Tax Act, 1961. The appellant argued that neither Section 36(1)(iii) nor Section 37(1) would be applicable to the case, emphasizing that the amount specified for deduction was not actually expended but provisioned for future payment.

Issue 2:
The Tribunal considered the factual position where the assessee-company, a government undertaking, received grants and was required to pay interest on unspent amounts as per Government Resolutions. The Tribunal held that the expenses were not in the nature of borrowings or loans, thus Section 36(1)(iii) did not apply. It further analyzed that the provisions made by the assessee for interest expenses qualified for deduction under Section 37(1) as they were meant for the purpose of business, considering the interest earned and paid on surplus funds.

The Court referred to the Karnataka High Court's judgment in Micro Land Ltd., emphasizing that for deduction under Section 37, the expenditure must be actually incurred in the year under consideration and not contingent. Additionally, the Supreme Court's decision in Rotork Controls India Pvt. Ltd. highlighted the importance of historical trends and scientific methods in estimating contingent liabilities for deduction under Section 37.

In conclusion, the Court affirmed that the interest expenses on unspent grants were deductible under Section 37(1) as the liability was ascertained, not contingent, and meant for business purposes. Both revenue authorities correctly applied the law, and no substantial question of law arose, leading to the dismissal of the appeals.