Court rules interest on borrowings for setting up a factory not deductible as revenue expenditure

The High Court of Gujarat upheld the Tribunal's decision in a case involving the deductibility of interest paid on borrowings for setting up a factory for manufacturing dyes. The Court found the businesses of trading and manufacturing to be distinct, denying the deduction claimed by the assessee. Emphasizing the importance of common management and control, the Court referred to relevant precedents to support its decision. The judgment favored the Revenue, concluding that the interest expenditure was of a capital nature, not deductible as revenue expenditure.

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Issues Involved: The judgment involves determining whether the expenditure by way of interest paid on borrowings for constructing a factory for manufacturing dye-stuffs is a revenue expenditure or of capital nature.

Summary:
The High Court of Gujarat considered a case where the assessee, engaged in trading business, set up a factory for manufacturing dyes at different places, with borrowings on which interest was paid. The Income-tax Officer disallowed the interest payment as capital expenditure, but the Commissioner of Income-tax (Appeals) allowed it as deductible revenue expenditure, citing precedent. The Tribunal, however, found the businesses not the same and disallowed the deduction. The Court upheld the Tribunal's decision, stating that the businesses were distinct, in line with established legal principles and previous judgments.

The Court referred to the decision in CIT v. Alembic Glass Industries Ltd., emphasizing the interconnection between business units to determine if they constitute the "same business." Another case, B. R. Limited v. V. P. Gupta, CIT, was cited regarding set off of carried forward losses for businesses under section 24(2). The Court highlighted the importance of common management and control in allowing such set-offs.

In conclusion, the Court affirmed the Tribunal's decision, finding it consistent with the facts and legal principles. The judgment favored the Revenue and denied the deduction sought by the assessee. The reference was disposed of with no costs awarded.

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