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Issues: (i) whether interest on borrowed funds used in the assessee's business structure and advances to group companies was disallowable; (ii) whether licence fee paid on revenue-sharing basis was capital expenditure to be amortised under section 35ABB or revenue expenditure deductible under section 37(1); (iii) whether computer peripherals were entitled to depreciation at the higher rate applicable to computers; and (iv) whether the amount written off on amalgamation could be added back while computing book profit under section 115JB.
Issue (i): whether interest on borrowed funds used in the assessee's business structure and advances to group companies was disallowable.
Analysis: The assessee maintained mixed common funds, and the record did not establish a direct nexus between borrowed funds and the advances made to subsidiaries. Earlier years on the same facts had already been decided in the assessee's favour and the jurisdictional High Court had affirmed that, where adequate interest-free funds exist and advances are made out of commercial expediency, disallowance of interest cannot be sustained merely on general observations.
Conclusion: The disallowance of interest was not justified and the issue was decided in favour of the assessee.
Issue (ii): whether licence fee paid on revenue-sharing basis was capital expenditure to be amortised under section 35ABB or revenue expenditure deductible under section 37(1).
Analysis: The licence fee was calculated on annual revenue and represented a recurring business outgo rather than acquisition of a capital advantage of enduring nature. The issue had already been decided in the assessee's own case for earlier years, and no contrary authority was shown. The principle of consistency supported following the prior view.
Conclusion: The licence fee was held to be revenue expenditure deductible under section 37(1), and the issue was decided in favour of the assessee.
Issue (iii): whether computer peripherals were entitled to depreciation at the higher rate applicable to computers.
Analysis: Computer peripherals and accessories form an integral part of the computer system and cannot function independently of it. The jurisdictional High Court had held that such items are part of the computer system and qualify for the higher depreciation rate applicable to computers.
Conclusion: Higher depreciation on computer peripherals was allowed and the issue was decided in favour of the assessee.
Issue (iv): whether the amount written off on amalgamation could be added back while computing book profit under section 115JB.
Analysis: The write-off arose from amalgamation and reflected the difference between the investment value and the net assets taken over. The accounts were prepared in accordance with the Companies Act and applicable accounting standards, and the statutory adjustment mechanism under section 115JB did not authorise adding back such a write-off. The ruling in Apollo Tyres supported limited interference with audited accounts except for adjustments expressly permitted by the statute.
Conclusion: The addition to book profit was not sustainable and the issue was decided in favour of the assessee.
Final Conclusion: No infirmity was found in the appellate relief granted to the assessee on all the substantive grounds, and the Revenue's appeal failed in full.
Ratio Decidendi: Where borrowed funds are not shown to have a direct nexus with non-business advances and sufficient interest-free funds exist, interest disallowance is not warranted; licence fee paid on a revenue-sharing basis may be deductible as revenue expenditure; computer peripherals are part of the computer system for depreciation purposes; and book profit under section 115JB can be altered only by adjustments expressly authorised by the statute.
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