Interest on Pre-Business Borrowings Not Deductible as Revenue Expense

The High Court held that interest paid before the commencement of business cannot be treated as a revenue expenditure and should be added to the cost of machinery. The court rejected the assessee's claim that the interest payment on borrowed capital should be considered a revenue expenditure, emphasizing that interest can only be charged once the business commences, not during the setup phase. The court dismissed the petition, stating there is no legal basis to support the claim for interest deduction as revenue expenditure.

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Issues involved: Assessment of interest payment as revenue expenditure or capital in nature u/s 36(1)(iii) of the Income Tax Act.

Summary:
The judgment dealt with the assessment of interest payment by a partner in a firm who started a separate business for the manufacture and sale of pumps. The assessee claimed that the interest payment on borrowed capital should be treated as a revenue expenditure, while the Income-tax Officer held that it should be added to the cost of machinery. The Appellate Assistant Commissioner allowed the deduction, but the Income-tax Appellate Tribunal rejected the claim, stating that interest paid before the commencement of production forms part of the actual cost, not a revenue expenditure. The assessee appealed, questioning the disallowance of interest as capital in nature, the Tribunal's decision regarding the business setup, misdirection in applying a previous case, and the continuation of the business from a partnership. The High Court found that interest paid before business commencement cannot be charged to the profit and loss account, and rejected the assessee's claim. The court emphasized that interest can only be charged once the business commences, not during the setup phase, and dismissed the petition, stating there is no legal basis to support the claim for interest deduction as revenue expenditure.

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