Tax deductions and section 80J relief: delayed-tax interest and surtax are non-deductible, while incidental old machinery does not bar relief.

Interest paid for delayed tax payment under section 220(2) is treated as tax-related outgo and not deductible as business expenditure under sections 28 and 37, while surtax paid under the Companies (Profits) Surtax Act is also not allowable under section 37 because it is an application of profits rather than business expenditure. Relief under section 80J may be available where a new undertaking is set up mainly with fresh assets and only incidental use of second-hand machinery does not amount to disqualifying formation by transfer of used assets. Borrowed money is excluded from capital employed for rule 19A read with section 80J where the governing computation rule so provides. An objection to interest computation under section 214 is required to be examined on merits where the point has not been dealt with by the appellate authority.

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Issues: (i) Whether interest paid under section 220(2) of the Income-tax Act, 1961 was allowable as business expenditure under sections 28 and 37 of the Income-tax Act, 1961; (ii) Whether surtax paid under the Companies (Profits) Surtax Act, 1964 was deductible under section 37 of the Income-tax Act, 1961; (iii) Whether the assessee was entitled to relief under section 80J of the Income-tax Act, 1961 in respect of the Mahuda Unit; (iv) Whether borrowed money could be included in capital employed for the purpose of rule 19A read with section 80J of the Income-tax Act, 1961; (v) Whether the assessee's objection to computation of interest under section 214 of the Income-tax Act, 1961 was required to be decided on merits.

Issue (i): Whether interest paid under section 220(2) of the Income-tax Act, 1961 was allowable as business expenditure under sections 28 and 37 of the Income-tax Act, 1961.

Analysis: Interest paid for delayed payment of tax partakes of the character of tax itself. Such payment is not expenditure incurred wholly and exclusively for business purposes and is hit by the statutory bar against deduction of tax-related payments.

Conclusion: The deduction was disallowed and the issue was decided against the assessee.

Issue (ii): Whether surtax paid under the Companies (Profits) Surtax Act, 1964 was deductible under section 37 of the Income-tax Act, 1961.

Analysis: Surtax is levied on chargeable profits computed with reference to total income under the Income-tax Act, 1961, but it is not an outgoing incurred for carrying on the business. It is an application of profits after they arise and is not shown to be expenditure necessary for the business to be carried on. Accordingly, it does not qualify as deductible business expenditure.

Conclusion: The deduction was disallowed and the issue was decided against the assessee.

Issue (iii): Whether the assessee was entitled to relief under section 80J of the Income-tax Act, 1961 in respect of the Mahuda Unit.

Analysis: The new unit was found to have been set up predominantly with fresh assets, while the value of old assets used was only a small fraction of the total cost. The use of a small amount of second-hand machinery did not amount to formation of the undertaking by transfer of previously used machinery so as to attract the disqualification.

Conclusion: The assessee was held entitled to relief under section 80J.

Issue (iv): Whether borrowed money could be included in capital employed for the purpose of rule 19A read with section 80J of the Income-tax Act, 1961.

Analysis: The question was governed by the controlling Supreme Court authority, which did not permit inclusion of borrowed money in capital employed for section 80J computation.

Conclusion: The inclusion was disallowed and the issue was decided against the assessee.

Issue (v): Whether the assessee's objection to computation of interest under section 214 of the Income-tax Act, 1961 was required to be decided on merits.

Analysis: The assessee's grievance against computation of interest was held to be appealable and, where the first appellate authority had not examined the point on merits, the matter had to be decided on merits according to law.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The reference was answered partly for the Department and partly for the assessee, with the surtax and interest-deduction issues going against the assessee, the section 80J relief being allowed, the capital-employed question going against the assessee, and the section 214 issue being decided in the assessee's favour.

Ratio Decidendi: Amounts paid as tax or surtax that are not expenditure incurred for the conduct of business are not deductible as business expenditure; for section 80J, a new undertaking is not disqualified by only incidental use of a small value of previously used machinery, but borrowed funds are not includible in capital employed where the controlling computation rule excludes them.

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