1964 (10) TMI 109 - HC - Income Tax

Interest payments not deductible under Section 10(2) - Court decision disallows deductions for land purchase.

The court ruled that the interest amounts of Rs. 17,281/- and Rs. 12,685/- were not allowable deductions under either clause (iii) or clause (xv) of ... - Issues Involved:1. Whether the interest amounts of Rs. 17,281/- and Rs. 12,685/- are allowable deductions under clauses (iii) or (xv) of Section 10(2) of the Income Tax Act.Issue-wise Detailed Analysis:Issue 1: Deductibility of Interest Amounts under Clause (xv) of Section 10(2)The first question addressed was whether the interest amounts payable under the deed of lease and the consent decree, due to the assessee company's failure to pay the purchase price on time, could be considered as expenditure laid out wholly and exclusively for the purposes of the business. The assessee company argued that the interest payments were necessary for the business of printing and publishing, and therefore should be deductible under clause (xv).The court, however, referred to the precedent set in Metro Theatre Bombay Ltd. v. Commissioner of Income Tax, where it was held that interest payable on unpaid instalments for the purchase of a capital asset is not an expenditure wholly and exclusively for the purposes of the business. The court emphasized that the business of the assessee was printing and publishing, not owning property. The interest payments were seen as part of the purchase price for the land, thus constituting capital expenditure rather than revenue expenditure.The court also distinguished this case from State of Madras v. G.J. Coelho, where interest on borrowings for purchasing a plantation was considered revenue expenditure because it was closely connected to the business of running the plantation. In the present case, the court noted that the land was not essential for the business of printing and publishing, as evidenced by the fact that the assessee had already built a press on the leased land and had sub-leased a portion of it.Issue 2: Deductibility of Interest Amounts under Clause (iii) of Section 10(2)The court also examined whether the interest amounts could be deductible under clause (iii), which pertains to interest on capital borrowed for the purposes of the business. The assessee contended that the consent decree created a debtor-creditor relationship, making the interest payments deductible as interest on borrowed capital.The court rejected this argument, stating that the relationship of judgment-creditor and judgment-debtor arose from the decree for specific performance, not from a loan transaction. The decree mandated the assessee to pay the purchase price as a result of the breach of the lease agreement, not as a result of borrowing money. Therefore, the interest payments were part of the purchase price and not interest on borrowed capital.Conclusion:The court concluded that neither of the two sums, Rs. 17,281/- and Rs. 12,685/-, could be claimed as deductions under clause (iii) or clause (xv) of Section 10(2). The answers to the questions referred to the court were both in the negative, and the assessee was ordered to pay the costs of the reference to the Commissioner.Reference Answered:1. Question No. 1 - in the negative.2. Question No. 2 - in the negative.