1983 (11) TMI 55 - HC - Income Tax

Interest payment not deductible under IT Act; No depreciation if assets fully deducted prior year.

Commissioner Of Income-Tax, Tamil Nadu II Versus Sundaram Fasteners Limited

Commissioner Of Income-Tax, Tamil Nadu II Versus Sundaram Fasteners Limited - [1984] 149 ITR 773, 40 CTR 206, 16 TAXMANN 217 Issues Involved:1. Admissibility of interest payment as a deduction under Section 36(1)(iii) of the Income Tax Act, 1961.2. Allowance of depreciation on capital assets used for scientific research under Section 35(2) of the Income Tax Act, 1961.Detailed Analysis:1. Admissibility of Interest Payment as a Deduction:The primary issue was whether the interest payment made by the assessee for the period from August 10, 1971, till the date of repayment of Rs. 5.94 lakhs should be allowed as a deduction for the year 1972-73.- Contentions of the Revenue: The Revenue argued that the assessee did not borrow capital for business purposes but received Rs. 5.94 lakhs as consideration for the intended sale of shares. Therefore, the payment of interest on the amounts returned cannot be allowed as a deduction in computing business income. The Revenue cited several precedents, including Metro Theatre Bombay Ltd. v. CIT, V. Ramaswami Ayyangar v. CIT, Bombay Steam Navigation Co. (1953) Private Ltd. v. CIT, and Madhav Prasad Jatia v. CIT, to support their argument.- Contentions of the Assessee: The assessee argued that the disposal of shares was intended to augment internal resources for business expansion. The consideration received was used for business purposes, and thus, the interest paid should be allowable as a deduction.- Court's Analysis:- Section 36(1)(iii) Requirements: The court noted that for a deduction under Section 36(1)(iii), the following conditions must be satisfied: (1) there should be a borrowing of money, (2) the borrowing should be for business purposes, and (3) interest must be paid on the borrowing.- Nature of Transaction: The court found that the transaction was not a borrowing but a sale of shares. The amounts received were consideration for the sale, not borrowed capital. Therefore, the relationship of borrower and lender did not exist.- Utilization of Amounts: The court emphasized that the deposit of sale consideration into the overdraft account did not convert the transaction into a borrowing for business purposes. The nature of the transaction remained a sale, and the subsequent use of the amount for business purposes did not justify the deduction of interest paid.- Tribunal's Error: The court disagreed with the Tribunal's view that the interest payment for the period after August 9, 1971, was for business purposes and should be allowed as a deduction. The court concluded that the transaction never partook the character of a borrowing, and the interest payment was a self-imposed obligation unrelated to the business.- Conclusion: The court held that the interest payment was not allowable as a deduction under Section 36(1)(iii) and answered the first question in the negative, against the assessee.2. Allowance of Depreciation on Capital Assets Used for Scientific Research:The second issue was whether the assessee was entitled to depreciation on the full value of assets used for scientific research, even though the full value of the assets was allowed as a deduction under Section 35(2) in the earlier year.- Background: In the assessment year 1971-72, depreciation was allowed on assets used for scientific research. The assessee sought to write off the balance in the assessment year 1972-73. The ITO and the AAC disallowed the claim, stating that the provisions of the Act do not permit the outright deduction of the original cost of capital assets in a year other than the one in which it was incurred.- Tribunal's View: The Tribunal directed the ITO to recompute the allowance for depreciation if the assessee succeeded in treating the full amount as a deduction under Section 35(2) for the assessment year 1971-72.- Court's Analysis:- Retrospective Amendment: The court referred to the amendment of Section 35(2)(iv) by the Finance (No. 2) Act of 1980, with retrospective effect from April 1, 1962. The amendment states that where a deduction is allowed under Section 35, no deduction shall be allowed under Section 32 for the same or other previous years in respect of that asset.- Impact of Amendment: The court held that the Tribunal's reasoning that the assessee is entitled to depreciation despite the deduction under Section 35(2) cannot hold good due to the retrospective amendment.- Conclusion: The court answered the second question in the negative, against the assessee, and held that the assessee was not entitled to the allowance of depreciation on the capital assets used for scientific research if the full value of the assets was allowed as a deduction under Section 35(2) in the earlier year.Final Decision:Both issues were decided against the assessee, with the court holding that neither the interest payment nor the depreciation claim was allowable under the relevant sections of the Income Tax Act, 1961. There was no order as to costs.