1992 (11) TMI 80 - HC - Income Tax

Court ruling: Interest not deductible as business expenditure, surtax non-deductible, relief under section 80J allowed.

The court ruled in favor of the Department on the deductibility of interest paid under section 220(2) of the Income-tax Act, 1961, citing that such ... Appeal To AAC, Business Expenditure, Capital Employed, Delay In Paying Tax, Interest On Tax, New Industrial Undertaking, Relief, Surtax, Tax Demand Issues Involved:1. Deductibility of interest paid under section 220(2) of the Income-tax Act, 1961.2. Deductibility of surtax levied under the Companies (Profits) Surtax Act, 1964.3. Allowance of relief under section 80J of the Income-tax Act, 1961, for the Mahuda Unit.4. Computation of capital employed under rule 19A of the Income-tax Rules, 1962, read with section 80J.5. Objections against the computation of interest under section 214.Detailed Analysis:1. Deductibility of Interest Paid under Section 220(2)The court addressed whether the interest paid by the assessee under section 220(2) of the Income-tax Act, 1961, is allowable as business expenditure under sections 28 and 37. The assessee's claim for deduction of Rs. 91,477 as interest was disallowed by the Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal. The court referred to the case of Modi Spinning and Weaving Mills Ltd. v. CIT, which concluded that interest on delayed payment of tax partakes the character of the tax itself and is not deductible due to section 40(a)(ii). This view was supported by earlier decisions in CIT v. Dalmia Dadri Cement Ltd. and Bharat Commerce Industries Ltd. Consequently, the court answered the first question in the affirmative, favoring the Department.2. Deductibility of Surtax Levied under the Companies (Profits) Surtax Act, 1964The court examined whether the surtax levied for the assessment year 1972-73 is deductible under section 37 of the Income-tax Act. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal had rejected the assessee's claim. The court noted that various High Courts, except the Gauhati High Court, have consistently held surtax as non-deductible under section 37 and within the ambit of section 40(a)(ii). The court distinguished the Supreme Court's decision in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT, noting that the surtax under the 1964 Act is computed on profits as determined under the Income-tax Act, unlike the cesses in Jaipuria Samla's case. The court found no provision suggesting that surtax payment was compulsory for running the business. Thus, the second question was answered in the affirmative, favoring the Department.3. Allowance of Relief under Section 80J for Mahuda UnitThe court evaluated whether the Tribunal was justified in directing the Income-tax Officer to allow relief under section 80J for the Mahuda Unit. The Tribunal had found that new assets worth Rs. 4,65,160 were purchased against old assets worth Rs. 74,580, making the new-to-old assets ratio 86%:14%. The court referred to the decision in CIT v. Ganga Sugar Corporation Ltd., which emphasized evaluating the value of transferred assets relative to the total cost of the new unit. The court concluded that the Tribunal rightly allowed the relief, as the old assets constituted a small fraction of the total cost. Thus, the first question at the instance of the Department was answered in the affirmative, favoring the assessee.4. Computation of Capital Employed under Rule 19A and Section 80JThe court addressed whether the Tribunal was justified in directing the Income-tax Officer to compute capital employed under rule 19A, including borrowed money. The court referred to the Supreme Court's decision in Lohia Machines Ltd., which influenced its decision. Consequently, the second question was answered in the negative, favoring the Department.5. Objections Against Computation of Interest under Section 214The court considered whether the Tribunal was correct in directing the Appellate Assistant Commissioner to decide on the merits of the assessee's objections against the computation of interest under section 214. The Tribunal's decision was based on the judgment in CIT v. Mahabir Parshad and Sons, which allowed challenging the interest computation in an appeal. The court found the Tribunal's direction consistent with the observations in Mahabir Parshad's case. Therefore, the third question was answered in the affirmative, favoring the assessee.Conclusion:- Questions at the instance of the assessee were decided in favor of the Department.- Questions at the instance of the Department: Questions 1 and 3 were decided in favor of the assessee, and Question 2 was decided in favor of the Department.- No order as to costs.