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1995 DIGILAW 486 (MAD)

Commissioner of Income Tax v. S. S. Narayanan

1995-05-13

MISHRA, S.M.ALI MOHAMED

body1995
Judgment :- S. M. ALI MOHAMED J. As per the order of this court in T.C.P. No. 505 of 1977 under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), this court directed the Income-tax Appellate Tribunal to draw up a statement of the case and refer the question of law. Accordingly, the following question is referred to this court "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in allowing the deduction of a sum of Rs. 9, 148.50 representing interest paid to the Government of Tamil Nadu for allotment of an industrial unit under section 37 of the Income-tax Act, 1961, for the assessment year 1973-74 ?" * The facts of the case are as follows : The assessee is an individual and the matter relates to the assessment year 1973-74 the corresponding accounting year being the period from April 1, 1972 to March 31, 1973. The assessee carries on the business of manufacture and sale of industrial thermostats under the name and style, Labequip Instrument Corporation. He commenced the said business in 1968 and carried it on in a place in Triplicane High Road, Madras. The Government of Tamil Nadu formed a functional industrial estate for instruments, electronics at Adyar, Madras. The assessee applied for allotment of one unit therein to him. The assessee was allotted unit No. 1(5) in the first instance ; but the same was later changed to unit No. 11(4). The terms and conditions under which the allotment was made were set out in the letter issued by the Director of Industries and Commerce, to the assessee, according to which, the assessee was to pay Rs. 1, 02, 663 to the Government of Tamil Nadu in respect of the said allotment and of the said amount 10 per cent. was payable in advance and the balance was payable in 30 half-yearly instalments of Rs. 3, 080 each together with interest at 8 per cent. thereon. The assessee was placed in possession of the unit in December, 1971, whereupon he shifted his business to the said unit. The assessee also executed an agreement in favour of the Government of Tamil Nadu on April 20, 1973. 3, 080 each together with interest at 8 per cent. thereon. The assessee was placed in possession of the unit in December, 1971, whereupon he shifted his business to the said unit. The assessee also executed an agreement in favour of the Government of Tamil Nadu on April 20, 1973. It was mentioned therein that the State Government had thereunder transferred to the assessee, who was described as "lessee", the possession of the property fully described in the schedule thereto by way of lease for the time being with the ultimate object of selling the same. In accordance with the above agreement, the assessee had to pay Rs. 5, 058 on January 10, 1972 (made up of Rs. 3, 080 towards principal and Rs. 1, 978 towards interest) ; Rs. 8, 698.50 on July 10, 1972 (made up of Rs. 3, 080 towards principal and Rs. 5, 291 towards interest) ; and Rs. 6, 610 on January 10, 1973 (made up of Rs. 3, 080 towards principal and Rs. 3, 449 towards interest). The second and third instalments due on July 10, 1972 and January 10, 1973, were paid by the assessee on October 14, 1972, and March 31, 1973, respectively. Consequently, penal interest amounting to Rs. 327.50 and Rs. 81 was collected along with these two instalmentsFor the assessment year 1973-74, the assessee filed a return disclosing a business income of Rs. 20, 962. In doing so, he had deducted Rs. 11, 127 being the interest paid by him to the Government of Tamil Nadu. The Income-tax Officer held that the assessee could not be said to have borrowed capital for his business and hence the interest paid to the Government of Tamil Nadu was not allowable. By his order dated December 15, 1973, he determined the total income as Rs. 35, 420 Aggrieved by the same, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax, Madras. The Appellate Assistant Commissioner allowed the appeal of the assessee. He upheld the assessee's claim for allowance. By his order dated December 15, 1973, he determined the total income as Rs. 35, 420 Aggrieved by the same, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax, Madras. The Appellate Assistant Commissioner allowed the appeal of the assessee. He upheld the assessee's claim for allowance. Thereupon, the Department preferred an appeal to the Income-tax Appellate Tribunal With regard to the assessee's claim for depreciation, the Income-tax Appellate Tribunal remitted the matter to the Appellate Assistant Commissioner to consider whether the assessee is entitled to depreciation, in view of Circular No. 9 of 1943 dated March 23, 1943, issued by the Central Board of Direct Taxes, in the light of the above circular With regard to the payment of interest, whether the assessee is entitled to claim reduction of interest paid by him to the Government of Tamil Nadu in respect of the allotment of the unit in question, the Income-tax Appellate Tribunal, following the ruling of the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT 1965 AIR(SC) 1201, 1965 (56) ITR 52, 1965 (1) SCR 770 was of the view that it cannot be said that the assessee had borrowed capital from the Government of Tamil Nadu for the purpose of its business by reason of its having undertaken to pay the consideration for the allotment of a unit in the industrial estate in future instalments. With regard to the contention of the assessee that in any event, interest should be allowed under section 37(1) of the Act as expenditure paid out or expended wholly and exclusively for the purpose of the business, the Appellate Tribunal was of the following view "It has, therefore, to be considered firstly whether the payment of interest by the assessee to the Tamil Nadu Government in respect of the unit allotted to him in an industrial estate was a capital expenditure and, secondly, whether it could be said to have been laid out wholly and exclusively for the purpose of the business. Here again, we are of the opinion that the case is governed by the principle laid down by the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT 1965 AIR(SC) 1201, 1965 (56) ITR 52, 1965 (1) SCR 770 . Here again, we are of the opinion that the case is governed by the principle laid down by the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT 1965 AIR(SC) 1201, 1965 (56) ITR 52, 1965 (1) SCR 770 . As already stated, the alternate claim of the assessee in the said case was that the interest paid by it in respect of the unpaid purchase money for the acquisition of the capital asset was expenditure laid out wholly and exclusively for the purpose of the business under section 10(2)(xv) of the Indian Income-tax Act, 1922. The contention of the Revenue was that the expenditure, having been incurred in respect of acquisition of a capital asset, could not be considered as revenue expenditure. The Supreme Court did not accept the contention. The court pointed out that the expenditure in question had been incurred by the assessee therein after the commencement of the business. The court observed that the source of liability could not be said to have arisen prior to the date on which the business of the assessee-company had commenced. The position is exactly the same in the instant case also. Here also the assessee had commenced the business in the industrial unit in question in December, 1971. Consequently, the payment of interest by the assessee to the Tamil Nadu Government in respect of the allotment of the unit in question has to be allowed as a business expenditure under section 37(1) The ratio of the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT 1975 AIR(SC) 97, 1975 (98) ITR 167, 1975 (3) SCC 572 , 1975 (2) SCR 538 , 1975 TaxLR 40, 1974 CTR(SC) 309, was that the interest paid in respect of the capital borrowed for acquisition of a capital asset but prior to the commencement of the business formed part of the cost of such asset for the purpose of allowing depreciation and development rebateBut, as already stated, only the second and third instalments payable on July 10, 1972, and January 10, 1973, were paid by the assessee during the relevant previous years, viz., on October 14, 1972, and March 31, 1973, respectively. The first instalment payable on January 10, 1972, was paid on August 24, 1972, which date does not fall within the previous year relevant to the assessment year under consideration. Consequently, Rs. The first instalment payable on January 10, 1972, was paid on August 24, 1972, which date does not fall within the previous year relevant to the assessment year under consideration. Consequently, Rs. 9, 148.50 being the aggregate of the second and third instalments could be allowed." * It is contended by Mr. N. V. Balasubramaniam, learned counsel appearing for the Revenue, that the Appellate Tribunal erred in law in allowing the deduction of a sum of Rs. 9, 148, 50 representing the interest paid to the Government of Tamil Nadu for allotment of an industrial unit under section 37 of the Act. No one appeared on behalf of the respondent/assessee. In the instant case, we are of the opinion that there is no error of law in the above view expressed by the Income-tax Appellate Tribunal. The Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd . v. CIT 1965 AIR(SC) 1201, 1965 (56) ITR 52, 1965 (1) SCR 770 , with reference to section 10(1) of the Indian Income-tax Act, 1922, has observed as follows (at page 56) "Tax is payable under section 10(1) by an assessee on its profits or gains earned in the business, profession or vocation carried on by him in the year of account. If no business at all is carried on in that year, liability to tax does not arise under section 10(1) Clause (iii) of sub-section (2) of section 10 provides 'Such profits or gains shall be computed after making the following allowances, namely (iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of interest paid.' The proviso and the Explanation with which we are not concerned in these appeals need not be set outThe expression, 'such profits or gains' in sub-section (2), on the plain language used by the Legislature, means profits or gains of a business carried on in the year of account. In the computation of profits and gains of a business carried on in the year of account, allowances set out in clauses (i) to (xv) are permissible : some of these permissible allowances are of the nature of revenue outgoings, and others are of the nature of capital outgoings. Gross profits or gains must undoubtedly be of the nature of revenue receipts. Gross profits or gains must undoubtedly be of the nature of revenue receipts. But in the computation of taxable profits from the receipts of the business, not only revenue deductions but certain capital deductions are permitted to be made, e.g., depreciation, sums paid to scientific research associations, expenditure of a capital nature on scientific research and other expenditure of a capital nature. By clause (iii) of sub-section (2), interest paid in respect of capital borrowed for the purpose of the business, profession or vocation is a permissible allowance in the computation of the profits or gains. The expression 'capital' used in clause (iii) in the context in which it occurs means money and not any other asset, for interest is payable on capital borrowed and interest becomes payable on a loan of money and not on any other asset acquired under a contract. Interest paid need not however bear the character of a revenue outgoing. To be admissible as an allowance under clause (iii), interest must be paid in respect of capital borrowed : interest paid, but not in respect of capital borrowed, cannot be allowed." * However, the Supreme Court upon the facts of the case held that the allowance claimed by the assessee is a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, and observed as follows (at page 61) "Section 10(2) requires that in computing the taxable profits or gains of a business which is carried on in the year of account allowances of the nature described in clauses (i) to (xv) should be made. If no business was carried on in that year, the allowances are not permissible. If no business was carried on in that year, the allowances are not permissible. But interest in respect of which allowance is claimed was paid at a time when the business was carried on, and the source of liability to pay interest was also incurred within the period in which the business was carried on We are, therefore, of the view that the allowance claimed is a permissible deduction under section 10(2)(xv)." Section 37(1) of the Income-tax Act, 1961, reads as follows " Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, 'Profits and gains of business or profession." * From a reading of the above section, it is clear that section 37(1) of the Act provides that any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". In the instant case, the assessee had already commenced his business in 1971 and later acquired the industrial unit from the Government of Tamil Nadu in 1973. The interest payable to the Government of Tamil Nadu by the assessee is not on a loan of money borrowed. To be admissible as an allowance, interest must be paid in respect of capital borrowed ; interest paid, but not in respect of capital borrowed cannot be allowed. However, the assessee is entitled to the benefit under section 37(1) of the Act for the interest paid in respect of the assessment years when the business was carried on as the source of liability to pay interest is incurred within a period in which the business was carried on. Accordingly, payment of interest by the assessee to the Tamil Nadu Government in respect of allotment of the unit in question has to be allowed as a business expenditure under section 37(1) of the Act. Accordingly, payment of interest by the assessee to the Tamil Nadu Government in respect of allotment of the unit in question has to be allowed as a business expenditure under section 37(1) of the Act. Upon the facts of the instant case, the assessee had commenced his business in December 1971, at Triplicane and subsequently applied for allotment of the industrial unit in the year 1973. In this connection, the Income-tax Appellate Tribunal, upon the facts of the case, held as follows "But, as already stated, only the second and third instalments payable on July 10, 1972, and January 10, 1973, were paid by the assessee during the relevant previous years, viz., on October 14, 1972, and March 31, 1973, respectively. The first instalment payable on January 10, 1972 was paid on August 24, 1972, which date does not fall within the previous year relevant to the assessment year under consideration. Consequently, Rs. 9, 148.50 being the aggregate of the second and third instalments could be allowed." * Accordingly, we are of the considered opinion that there is no error of law in the view expressed by the Appellate Tribunal, as the same is in conformity with the ratio of the Supreme Court ruling in Bombay Steam Navigation Co. (1953) P. Ltd.'s case 1965 AIR(SC) 1201, 1965 (56) ITR 52, 1965 (1) SCR 770 . Accordingly, we answer the question referred to us in the affirmative in favour of the assessee and against the Revenue. There shall be no order as to costs.