1958 (3) TMI 59 - HC - Income Tax

Interest on Borrowed Capital Deductible Even If Asset Not Used in Account Year, Court Rules in Favor of Assessee.

CALICO DYEING AND PRINTING WORKS Versus COMMISSIONER OF INCOME-TAX, BOMBAY CITY II

The court determined that under SS10(2)(iii), an assessee can deduct interest on borrowed capital used for business purposes, even if the resultant asset ... - Issues Involved:1. Whether the interest on borrowed capital for extending business can be claimed as a permissible deduction under section 10(2)(iii) if the asset created by such capital is not used in the year of account.Issue-wise Detailed Analysis:Issue 1: Permissibility of Deduction under Section 10(2)(iii)The assessee firm, engaged in the business of bleaching, dyeing, and printing cloth, borrowed money to extend its business by purchasing land and erecting additional plant and machinery. The firm claimed the interest paid on this borrowed capital as a deduction under section 10(2)(iii). The claim was rejected on the grounds that the plant and machinery were not used in the year of account.The primary question was whether the asset created by the borrowed capital must be used in the year of account for the interest paid to be deductible. The court examined the language of section 10(2)(iii), which allows deduction for 'capital borrowed for the purposes of the business.' The section does not differentiate between capital borrowed for acquiring revenue assets and capital assets. The essential requirement is that the capital is borrowed for the business carried on by the assessee in the year of account.Legal Interpretation and AuthoritiesThe court emphasized that section 10(2)(iii) focuses on the use of the borrowed capital for business purposes, not the use of the asset created by such capital. The court rejected the respondent's contention that the asset must be used in the year of account for the interest to be deductible, stating that this interpretation would add words to the section that do not exist.The court referred to various authorities to support its interpretation. In Hughes (Inspector of Taxes) v. Bank of New Zealand, it was held that expenditure, even if unremunerative, is deductible if it is wholly and exclusively for the trade. Similarly, in Vallambrosa Rubber Co. Ltd. v. Farmer, the court allowed deduction for superintendence expenses of an estate, even though only a part of it was producing rubber, emphasizing that the rules should be seen as guides to ascertain profits and gains of the business.Supreme Court JudgmentThe court also referred to the Supreme Court judgment in Eastern Investments Ltd. v. Commissioner of Income-tax, which held that it is not necessary to show that the expenditure was profitable or that any profit was earned. It is sufficient to show that the expenditure was incurred for commercial expediency and to facilitate the business.Distinction from Other Sub-clausesThe court distinguished this case from Machinery Manufacturers Corporation v. Commissioner of Income-tax, which dealt with section 10(2)(vi) concerning depreciation on buildings, machinery, or plant used for business purposes. The language of section 10(2)(vi) explicitly requires the assets to be used in the year of account, unlike section 10(2)(iii).ConclusionThe court concluded that the assessee is entitled to claim the interest paid on borrowed capital as a permissible deduction under section 10(2)(iii), provided the capital is used for the business, irrespective of whether the asset created by the capital is used in the year of account. The court answered the question in the affirmative and ordered the Commissioner to pay the costs.Judgment Summary:The court ruled that under section 10(2)(iii), an assessee can claim interest on borrowed capital as a deduction if the capital is used for business purposes, regardless of whether the resulting asset is used in the year of account. This interpretation aligns with commercial principles and previous legal authorities, emphasizing the use of capital rather than the asset created by it. The question was answered in the affirmative, and costs were awarded to the assessee.