1998 (9) TMI 28 - HC - Income Tax

Interest on borrowed funds for new plant qualifies as revenue expenditure under Income-tax Act

The High Court of Madras ruled in favor of the assessee, a publisher of a newspaper, allowing the interest on borrowed funds for the Hyderabad facsimile ... Business Expenditure, Capital Or Revenue Expenditure, Interest On Borrowed Capital Issues involved: Validity of treating interest on borrowed amount for Hyderabad facsimile project as revenue expenditure for deduction in computing income of the assessee for assessment year 1977-78.Summary:The High Court of Madras considered the question of whether the interest on the amount borrowed for the Hyderabad facsimile project should be treated as a revenue expenditure and allowed as a deduction in computing the income of the assessee for the assessment year 1977-78. The assessee, a publisher of the Hindu newspaper, established a printing facsimile unit in Hyderabad to print its paper locally and borrowed money for this purpose. Although the assessee had capitalized the interest paid on the borrowings in its accounts, it claimed the interest as a revenue expenditure. The Income-tax Officer disallowed this claim, but the Commissioner and the Tribunal allowed it.The Commissioner relied on the Supreme Court's decision in India Cements Ltd. v. CIT [1966] 60 ITR 52, which held that a loan obtained is not an enduring asset and interest paid on such loans is deductible as revenue expenditure. The Supreme Court in Addl. CIT v. Akkamamba Textiles Ltd. [1997] 227 ITR 464 also affirmed that certain expenditures related to obtaining loans are allowable deductions under section 37 of the Income-tax Act, 1961.The High Court noted that expenses incurred in connection with obtaining loans, such as stamp duty, registration fees, and lawyers' fees, were considered allowable in previous cases. Therefore, the interest paid on borrowed money for establishing a new plant to enhance business efficiency is also considered a deductible expenditure under section 37 of the Act. The Court ruled in favor of the assessee and against the Revenue, emphasizing that the interest on the borrowed amount for the Hyderabad project qualifies as a revenue expenditure.