2022 (8) TMI 969 - HC - Income Tax

Deduction u/s 57 (iii) - interest expenditure and public issue expenses incurred in respect of the funds which gave rise to interest income assessable u/s 56 - Whether the Tribunal was justified in law in upholding the taxation of interest received - HELD THAT - The interest earned on the deposits was at a time when commercial production had not yet commenced. Admittedly, the interest was from short term deposits made by the Assessee out of the borrowed capital. The question is no longer res integra. A similar question has in fact been answered in favour of the Assessee by this Court by its judgment in M/s. Neelachal Ispat Nigam Limited 2021 (11) TMI 685 - ORISSA HIGH COURT In the said decision, after considering the judgments in Tuticorin Alkali Chemicals Fertilizers Ltd., Madras 1997 (7) TMI 4 - SUPREME COURT ; Commissioner of Income Tax, Bihar II, Patna v. Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME COURT and Commissioner of Income Tax v. Karnal Co-operative Sugar Mills Ltd. 1999 (4) TMI 7 - SC ORDER , this Court held that interest earned on short term deposits from the borrowed capital would be capital and not revenue in nature. Consequently, Question (b) is answered in the negative in favour of the Assessee and against the Department. In view of the above decision of this Court holding the interest received on short term deposits from borrowed capital to be capital in nature, the question of treating it as income from other sources does not arise. Therefore, Question (a) need not be answered. Deduction u/s 35AB - Whether on a true and proper interpretation of Section 35AB commencement of manufacture is a condition for allowance of the deduction and the tribunal was justified in law in holding that deduction under the said section was not allowable since manufacture had not commenced even though the Assessee had commenced its business? - HELD THAT - The deduction is sought of 1/6th of the expenditure on acquiring the know-how. It has been disallowed only because in the previous year in question, the manufacturing activity of the Assessee had not commenced. As explained by the Madhya Pradesh High Court in the aforementioned decision, this is not one of the conditions on which the deduction is allowable. As long as the technical know-how is acquired and payment therefor is made in the same previous year, then irrespective of whether manufacturing commenced during the said previous year, the 1/6 th amount would be eligible to be claimed as deduction Consequently, Question (c) is answered in the negative i.e. in favour of the Assessee and against the Department.

Summary

Issues:
1. Entitlement to deduction under Section 57 (iii) of the Act for interest expenditure and public issue expenses.
2. Justification of taxation of interest received for the assessment year 1991-92.
3. Interpretation of Section 35AB regarding the allowance of deduction for expenditure on acquiring know-how.

Entitlement to deduction under Section 57 (iii) of the Act:
The appeal involved questions regarding the Assessee's entitlement to deduction under Section 57 (iii) of the Act for interest expenditure and public issue expenses incurred in relation to funds generating interest income assessable under Section 56. The interest earned on deposits before the commencement of commercial production from borrowed capital was a key point of contention. The Court referred to a previous judgment favoring the Assessee, where it was established that interest earned on short-term deposits from borrowed capital is capital, not revenue, in nature. Consequently, the Court ruled in favor of the Assessee against the Department on this issue.

Justification of taxation of interest received:
The Court addressed the issue of whether the Tribunal was correct in upholding the taxation of interest received for the assessment year 1991-92. It was established that interest earned on short-term deposits from borrowed capital is considered capital in nature based on previous judicial precedents. Therefore, the question of treating it as income from other sources did not arise, and this issue did not require a separate answer.

Interpretation of Section 35AB regarding deduction for acquiring know-how:
Regarding the interpretation of Section 35AB for the allowance of deduction for expenditure on acquiring know-how, the Assessee sought deduction of 1/6th of the expenditure on acquiring know-how, which was disallowed because manufacturing activity had not commenced in the previous year. The Court relied on a judgment of the Madhya Pradesh High Court to clarify that the deduction is allowable as long as technical know-how is acquired and payment is made in the same previous year, irrespective of whether manufacturing commenced during that year. The Court emphasized a liberal interpretation of the term "acquiring" in Section 35AB, stating that actual ownership of know-how is not necessary as long as the Assessee can effectively use the know-how for business purposes. Consequently, the Court ruled in favor of the Assessee against the Department on this issue.

In conclusion, the Court set aside the impugned order of the Tribunal, CIT(A), and the Assessing Officer to the extent related to the issues discussed above and disposed of the appeal accordingly.