Business expenditure deduction allowed for municipal tax on expansion plot held by a running concern before construction begins.

Municipal tax paid on a purchased plot held by a running business for expansion of its premises was treated as a deductible business expenditure under section 37 of the Income-tax Act, 1961. The expenditure was not regarded as part of the cost of acquiring a new capital asset; instead, it was considered incidental to retaining property used for business expansion. The Court distinguished outlays incurred to set up a business for the first time and held that tax on land owned by an existing concern can be allowable even before the proposed building is constructed or the asset is brought into use.

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Issues: Whether municipal tax paid on a purchased plot, acquired by a running concern for setting up an additional business building but not yet put to use, is allowable as business expenditure under section 37 of the Income-tax Act, 1961.

Analysis: The plot was acquired by an existing business for expansion of its business premises. The municipal tax was not incurred for acquiring any business asset but for retaining the property, and such expenditure was treated as incidental to the business. The Court distinguished the case from expenditure of a capital nature incurred in setting up a new business for the first time, and relied on the principle that taxes paid on an asset held by a running concern for business expansion can be deductible even before the asset is actually brought into use.

Conclusion: Municipal tax paid on the purchased plot before the building was constructed was allowable as a business deduction under section 37 of the Income-tax Act, 1961, and the question was answered in favour of the assessee.

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