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Commissioner of Income-tax, Gujarat Iii Vs. Granulated Fertilizers and Feeds Pvt Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 336 of 1977
Reported in[1982]137ITR400(Guj)
AppellantCommissioner of Income-tax, Gujarat Iii
RespondentGranulated Fertilizers and Feeds Pvt Ltd.
Cases ReferredState of Madras v. G. J. Coelho
Excerpt:
- - we see no good reason to take a contrary view......of rs. 1,09,617 paid by the assessee-company on the amounts borrowed by it was allowable as revenue expenditure. the assessee-company claimed that the entire payment of interest was revenue expenditure. the ito found that a sum of rs. 5 lakhs out of the sums borrowed had been directly utilised for creation of capital assets. he was of the view that interest of rs. 50,000 attributable to the said sum of rs. 5 lakhs could not be allowed as business expenditure. the ito did not record a finding to the effect that the assessee-company had spent the said sum of rs. 5 lakhs in creating capital assets before the commencement of its business or production. he also did not find that the expenditure of rs. 5 lakhs in acquiring capital assets was not related to the business of the.....
Judgment:

MANKAD J. - The assessee, a private limited company, carries on business of manufacturing and selling fertilizers. In the course of assessment for the assessment year 1970-71, one of the questions which arose before the ITO was whether interest of Rs. 1,09,617 paid by the assessee-company on the amounts borrowed by it was allowable as revenue expenditure. The assessee-company claimed that the entire payment of interest was revenue expenditure. The ITO found that a sum of Rs. 5 lakhs out of the sums borrowed had been directly utilised for creation of capital assets. He was of the view that interest of Rs. 50,000 attributable to the said sum of Rs. 5 lakhs could not be allowed as business expenditure. The ITO did not record a finding to the effect that the assessee-company had spent the said sum of Rs. 5 lakhs in creating capital assets before the commencement of its business or production. He also did not find that the expenditure of Rs. 5 lakhs in acquiring capital assets was not related to the business of the assessee-company. The only ground on which he disallowed the interest to the extent of Rs. 50,000 was that this interest was attributable to Rs. 5 lakhs utilised in creating capital assets. In the appeal preferred by the assessee-company, the AAC, following the decisions of the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT : [1965]56ITR52(SC) and India Cements Ltd. v. CIT : [1966]60ITR52(SC) , and of the Allahabad High Court in Prem Spg. & Wvg. Mills Co. Ltd. v. CIT : [1975]98ITR20(All) , held that the ITO had erred in disallowing interest payment to the extent of Rs. 50,000 as revenue expenditure. In the result, he deleted the disallowance of Rs. 50,000. In the appeal preferred by the Revenue, the Income-tax Appellate Tribunal has confirmed the view taken by the AAC.

At the instance of the revenue, the Tribunal has referred the following two questions for our opinion under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act') :

'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the assessee was entitled to the allowance of Rs. 50,000, being the interest payment on the loan utilised by the assessee for acquiring a fixed asset, as a revenue deduction ?

2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that no potion of the interest paid on loans acquired after the setting up of the business was liable to be disallowed as attributable to the acquiring of fixed assets by the assessee-company during the relevant previous year ?'

The question which arises for our consideration is whether the ITO was justified in disallowing interest payment to the extent of Rs. 50,000. As laid down by the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT : [1965]56ITR52(SC) , whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances by the application of principles of commercial expediency. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure. The Supreme Court referred to an earlier judgment in State of Madras v. G. J. Coelho : [1964]53ITR186(SC) , and observed that the test laid down by the Supreme Court was that expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business. As pointed out above, in the instant case, material facts are not brought on record. We do not have details of the capital assets which are alleged to have been created out of the sum of Rs. 5 lakhs which form part of the borrowings. The only ground on which the ITO disallowed the interest payment of Rs. 50,000 attributable to the borrowings to the extent of Rs. 5 lakhs was that the Rs. 5 lakhs were utilised in creating capital assets. He has not recorded a finding that the acquisition of the capital assets was not related to the business of the assessee-company. As pointed out above, if the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset, the expenditure may be regarded as revenue expenditure. We do not find any material on record to show that acquisition of capital asset was not related to the carrying on or conduct of the business of the assessee-company. There is, therefore, no justification for disallowing interest payment to the extent of Rs. 50,000 on the ground that it is not revenue expenditure. The AAC and the Tribunal have disagreed with the ITO and allowed interest payment of Rs. 50,000 as revenue expenditure. We see no good reason to take a contrary view. The decision of the Supreme Court in Challapalli Sugars ltd. v. CIT : [1975]98ITR167(SC) , on which reliance was placed by the Revenue before the Tribunal, has no application to the facts of the present case. Had it been the Revenues case that the amount expended for acquiring capital asset was expended by the assessee-company prior to the commencement of the business, the matter would have stood on a different footing. The assessee-company had commenced business prior to the assessment years under consideration.

In the result, we answer both the questions referred to us in the affirmative and against the Revenue with no order as to costs.


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